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  1. Analysis
January 19, 2009

Tension mounts over EU dairy subsidies

In the face of plummeting prices on the global market for dairy commodities, Brussels has announced that it will reintroduce dairy export subsidies in order to shore-up the European dairy industry. European dairy groups have roundly welcomed the news. However, the move looks set to cause waves internationally. Katy Humphries reports.

In the face of plummeting prices on the global market for dairy commodities, Brussels has announced that it will reintroduce dairy export subsidies in order to shore-up the European dairy industry. European dairy groups have roundly welcomed the news. However, the move looks set to cause waves internationally. Katy Humphries reports.

The European Commission has taken the first steps to reviving a system of export refund subsidies, providing governmental support to help the EU’s struggling dairy exporters better compete on the depressed world market, Europe’s farm chief said last week (15 January). 

In June 2007, during a period of sustained high dairy prices, Brussels set export subsidies for all dairy products at zero.

However, increased world supply and reduced demand have caused prices to fall, EU Agriculture Commissioner Mariann Fischer Boel indicated during a media conference in Berlin last week. 

“I certainly do not underestimate the economic difficulties in which some farmers are finding themselves, which is why I am taking action,” Fischer Boel said.

Over the past six months, the current financial crisis and rising food costs have prompted European consumers to reign in their spending on dairy goods.

Meanwhile, demand from key markets for EU dairy exporters, such as Russia, has been hit by the devaluation of local currencies, making European goods more expensive in relative terms.

This situation has been compounded by the credit crisis, which has taken confidence out of the market and made it harder for dairy exporters to raise credit, Fischer Boel suggested. 

Indeed, figures published by DG-Agri indicate that the average EU milk price for October 2008 was EUR34.56 per 100kg – down 7.2% year-on-year from an average price of EUR37.22 per 100kg in October 2007.

“Dairy prices are very low at the moment. We have certain things that we can do to stabilise the market and the Commissioner has decided that now is the right time to intervene,” EU agriculture spokesperson Michael Mann tells just-food.

In looking to support European dairy manufacturers, three options are open to the Commission, Mann says.

Firstly, the reintroduction of EU export subsidies for butter, cheese and skimmed milk powder (SMP); secondly, increasing the amount of dairy goods purchased by the EU through a series of regular tenders and trade bids; and, thirdly, a rise in the level of funding given to private companies who remove dairy goods from the market and put them in storage.

EU member states will be asked to approve an increase in the maximum amount of butter and SMP that can be bought into public intervention stores via regular tenders, Mann confirms.

Currently, the EU’s annual intervention ceiling is set at 30,000 tonnes of butter and 109,000 tonnes of SMP. Brussels purchases these at pre-determined prices – for butter, the price paid is EUR221.75 per 100 kilograms and, for SMP, the price is EUR169.80 per 100 kilograms.

The Commission has also proposed increasing the frequency of these tenders from once to twice a month.

With the EU preparing to set levels of support later this week, representatives of Europe’s dairy industry have cautiously welcomed the news.

“This is a good first step but the Commission needs to back it up with action on Thursday when they determine the level of support to be provided,” Dairy UK’s Sam Fortescue tells just-food.

“The scheme will act as a safety valve – when producers are unable to export at a viable rate export refunds will kick in,” Fortescue continues.

Indeed, according to European Dairy Association (EDA) secretary general Joop Kleibeuker, without this “safety value” in operation the outlook for the European dairy industry is rather grim.

“We are clearly facing a situation where the market is quite bad for the industry. Without sufficient intervention, the poor market conditions could result in serious financial problems for primary producers – farmers – and dairy processors,” Kleibeuker tells just-food.

Kleibeuker says that the subsidies and other forms of market support could act as a lifeline for European dairy farmers and processors.

“While dairy processors and exporters are able to claim support, with this kind of subsidy farmers were in the past and will again be the primary beneficiaries. The subsidies allow processors to pay higher prices for raw milk, allowing farmers to operate sustainable businesses,” he says.

Tension has been mounting between European dairy farmers and processors as a number of dairies, including the likes of Arla Foods and First Milk, have slashed the prices they pay their farmer-suppliers, citing low prices on the global commodity markets.

However, the international dairy industry has criticised the move and accused the European Commission of introducing protectionist policies that will ultimately depress global dairy prices further.

New Zealand Trade Minister Tim Groser says that the reintroduction of governmental support for the dairy industry is “disappointing” news.

“In recent years we have seen the Europeans take some very positive steps forward in reforming their Common Agricultural Policy, which we have welcomed, but this announcement represents a major step backward,” Groser says.

“The European move means it’s now even more urgent that we complete the Doha Development Round in the World Trade Organisation. The agreement by WTO members to eliminate export subsidies in agriculture is one of the most important potential gains from the round,” he continues.

As part of the Doha round of world trade talks, the EU pledged to eliminate export subsidies, provided that other countries took similar action.

However, with no Doha agreement in sight, the EU can legally use export subsidies to help domestic producers.

The US dairy industry has also hit out at the move, which, it claims, will further depress global dairy prices.

“On a broad level, the reactivation of the EU’s large subsidy program will again depress world dairy prices, prolonging the down cycle in which the world’s dairy industry currently finds itself and significantly delaying natural market recovery,” Tom Suber, president of the US Dairy Export Council, says.

“Specifically for the US dairy industry, it will perpetuate a lopsided playing field, undercutting recent hard-fought export market gains made by US dairy suppliers. US suppliers will be hard pressed to compete in a market in which the biggest dairy export bloc in the world, supported by massive government handouts, can sell product for hundreds of dollars less per metric ton than suppliers from other countries,” Suber continues.

Responding to international condemnation, the EU’s Mann emphasises that not only are these measures legal, they are also similar to actions taken by the governments of other dairy exporting countries. 

“The US support their dairy industry through a variety of export enhancement measures… [including] the extension of export credit to producers and the use of food aid… Australia and New Zealand have their dairy monopoly boards… It would be stupid of us not to use legal tools to stabilise the market and support our exporters at a time when our trading partners are taking similar measures,” Mann says.

However, Mann continues: “This is not a change in overall policy – we still want to get rid of export subsidies by 2015… This is a temporary measure and it will remain in place for as long as necessary.”

Nevertheless, while stakeholders in the European dairy industry have welcomed this additional financial support at a time when they are facing falling prices and rising input costs, it could well prove a bone of international contention – and a further stumbling block holding up the sluggish progress of the WTO’s Doha talks.

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