European farmers have launched a delivery boycott in protest at the falling price of milk and rising production costs. However, with dairy companies, retailers and consumers all feeling the pinch from rising energy and food costs tough negotiations could be in store. Katy Humphries reports.

A strike that began in Germany last week has spread across six countries as farmers unite in the call for an increase in milk prices.

While the precise demands made by farmers in Germany, the Netherlands, Belgium, Luxembourg, Switzerland and Austria may differ, they all carry the same message: farm-gate milk prices do not cover the cost of production, European farmers are going out of business and European milk production is not sustainable at current levels.

The price of milk in the EU has fallen by about 30% in the past six months, while production costs have risen by around 8%.

“The market is not in balance; supply has not adjusted to demand,” says Sonya Kovspeter of the European Milk Board (EMB). “The reasons for this are firstly political – the EU’s milk quota is too high – and secondly economic – the dairy companies pressure farmers to increase milk supply.

“The balance of power in the EU dairy industry is out of kilter. For example, in Germany you have three or four big supermarkets and dairies and thousands of unorganised farmers who have been unable to push for higher milk prices.”

However, as Kovspeter points out, this is changing, with farmers uniting in protest both nationally and across borders. “There is now a high level of cooperation between farmers throughout Europe,” a spokesperson for the Dutch Dairymen Board (DDB) confirms.

According to the EMB, 50% of Switzerland’s milk supply has been withheld, 60% of farmers in the Netherlands have joined the protests, and in Austria the dairy union, IG Milch, has urged its members to supply dairies with only half the quantity of milk they are contracted to deliver. Milk deliveries in Germany have dropped by between 30% and 50%.

European dairies maintain that the rules of supply and demand are keeping prices down and farmers simply have to accept the realities of a free market.

“The German dairy industry has arrived in the free market – we need to follow the rules of supply and demand,” Godja Sönnichsen of Nordmilch tells just-food. “The dairy business is seasonal in nature. In the spring more milk is produced and the price drops. In the second half of last year retail prices for milk, and the prices paid to farmers, were very high, which led to a fall in consumption. Additionally, a strong euro against a weak US dollar means exports have suffered.” A spokesperson for Dutch group Friesland Foods takes a similar view.

However, dairies and the farmers believe that retailers and, ultimately, European consumers should be paying more for milk and dairy goods. ““Retailers don’t pay enough to dairies so they can’t increase farm-gate prices. We want retailer contracts to be renegotiated,” Kovspeter says.

“We want a totally different system to determine milk prices,” the DDB adds. “At the moment dairies agree a price with retailers, take out their costs and profits and what is left goes to the farmers. We believe this should be the other way around. Negotiations should start with the cost of milk.”

In a highly competitive market where challenging economic conditions are forcing consumers to curtail spending, retailers are reluctant to accept price hikes. And the buying power of Europe’s largest supermarkets means that they are able to bring considerable pressure to bear on dairies.

“In pricing negotiations, there is always the ultimate fear that if you press too hard for a price increase you will lose the listing,” one dairy insider tells just-food. “With the larger retailers, this can be a significant blow.”

To some, including EU policy makers, the solution lies in increasing exports to non-EU countries. At the end of last month EU production quotas were raised 2%. Brussels says that gradually increasing dairy production quotas – scheduled to be abolished by 2015 – will support the sustainable growth of the EU’s dairy industry.

The Agriculture Ministry has predicted that EU milk consumption will grow by almost 6% by 2014. “Further gradual increases to quotas are a strong option,” Agriculture Commissioner Mariann Fischer Boel said at a ‘Lacto Summit’ in Brussels earlier this month.

While highlighting “growing market opportunities in Asia,” Fischer Boel added that existing concerns about protecting weak dairy production sectors in some member states could be met through relaxing rules on direct payment subsidies, allowing them to help any food sector facing problems.

Dutch dairy company Campina agrees that increased exports will ease the oversupply situation. “Part of our plan for strategic development is increasing the importance of international markets to our business. As exports from European dairies to countries where domestic production does not meet demand – such as Asia, the Middle East and Africa – increase, the price of milk will be driven up,” a spokesperson for Campina tells just-food.

However, the EMB says that exporting “low-value” dairy goods to emerging markets is not an option. “Increasing export isn’t the answer,” says Kovspeter. “This just moves the problem to another place. If we increase exports of milk solids to Africa and it becomes cheaper to buy European imports of milk powder local farmers will suffer. We believe export should focus on high-value products.”

The high-profile strike has already succeeded in bringing farmers, dairies and retailers to the table in Germany, the Netherlands and Switzerland. Yet one industry source close to the talks believes finding an agreement that all the stakeholders are happy with is unlikely. “It will be very difficult to find a solution that will please everyone. The only hope is compromise,” the source states.

Having just won a court order forcing the dairies to enter price talks and agreeing to end the blockade of factories in the Netherlands, the DDB remains optimistic that the dispute can be resolved. “We are very hopeful that we will be successful, not only in Holland, but in Germany and the rest of Europe,” the farmers’ group says.

With Swiss farmers winning an agreement to increase milk prices by CHF0.06 (US$0.06) per kilo of milk, perhaps this optimism is well placed. “The higher price will be maintained for six months, then negotiations will determine a new price depending on market conditions,” the Federation of Swiss Milk Producers (SMP) says. While it called for an increase of CHF0.10 per kilo, the SMP says the increase is “a step forward”.

The situation in Germany is more worrying, with farmers, frustrated at their association’s failure to secure a price increase, illegally blockading factories. “We understand the sentiment propelling militant action but it is clear to us that the way forward is through legal methods and negotiation,” a spokesperson for the BDM, the farmers’ lobby group in Germany, says.

Getting the various parties around the table may be a good first step but finding consensus will not be easy. In spite of their collective strength, it is by no means certain that farmers will be able to secure the price increases they are demanding, and with cost inflation set to continue, turbulent times lie ahead for the European dairy industry.