Council supports voluntary milk reduction scheme

Yesterday, the Agriculture Council agreed on a package of 13 measures to bring relief to agricultural markets in difficulty. Most attention has focused on the Commission’s willingness to invoke Article 222 of the CMO Regulation to permit producer organisations and recognised interbranch organisations in the dairy sector to introduce voluntary measures to reduce milk supplies, financed by member state funds. This attention is due more to the unusual nature of the measure rather than an assessment of its likely effectiveness.

The measure was put forward by Commissioner Hogan in his address to the Council. The agreement is summarised here in the Presidency Council conclusions and here in this DG AGRI press release following the meeting.

The legal basis

The legal basis for the measure will be Article 222 of the CMO Regulation which refers to agreements and decisions during periods of severe imbalance in markets. It permits the Commission to derogate from the normal competition rules which prevent producers from cooperating to influence supply and market prices under certain conditions. Before this Article can be invoked, the Commission must already have taken exceptional measures to stabilise the relevant market, including the use of public intervention or aids for private storage. The measures permitted can include “temporary planning of production taking into account the specific nature of the production cycle”. Agreements can be valid for periods of up to six months, but with the possibility of renewal for a further six months

The full modalities of this measure will be finalised by the Commission in the coming weeks. The Commissioner has stated that producer’s organisations, co-ops, and private companies can all be involved if they wish.

There is nothing to prevent a co-op or processor paying its suppliers to reduce deliveries at the moment (FrieslandCampina recently did this for a six week period when it faced a shortage of processing capacity to cope with the additional volume of milk being delivered by its suppliers). What is new in this scheme is that the funds to compensate farmers for voluntarily reducing deliveries can come from member states. Specifically, the Commissioner has highlighted that member states can use the targeted aid provided in the aid package last September or a provision to allow member states to grant temporary state aid up to €15,000 per farmer per year. (This second source is separate from another proposal which was included in the Presidency conclusions to double the de minimis ceiling for state aid allowable per farm from €15,000 to €30,000. However, this is not mentioned in the DG AGRI press release which simply notes that getting approval to increase the de minimis ceilings would be a lengthy process).

The Commissioner’s position

For the Commissioner, proposing the scheme was a no-brainer. Since taking up the position, he has repeatedly emphasised that he must work within the framework of the legislation agreed by the Council and Parliament in the last CAP reform. Usually, he makes this point to emphasise the constraints that he faces, for example, the limited size of the agricultural crisis reserve. But he has also said that he is prepared “in the interest of EU farmers, to use all instruments that the legislators have put at our disposal as a short-term measure.” And since the legislators agreed to Article 222, it would be difficult to argue that it should not be implemented.

But the key point from his perspective is that implementation does not require any further recourse to the EU budget and, in particular, does not touch the agricultural crisis reserve. It will be up to the member states to find the funding, possibly using the targeted aid which they have previously been allocated, or making use of the greater flexibility around the provision of state aid.

Examples of voluntary supply reduction in practice

As already mentioned, at the end of 2015, the Dutch dairy FrieslandCampina cooperative introduced a voluntary scheme paying its farmer members to limit dairy output to the same level or lower from January 1, 2016. The dairy group found it could no longer handle the rapidly increasing volume of milk being delivered, and it was forced to dispose of milk it could not process at a spot market price which had slumped to below 15c/kg. Producers were paid an extra 2c/kg of milk if during the period from 1 January to 11 February 2016 they did not increase their milk deliveries over and above a reference volume, specified as the average daily supply during the 13–27 December 2015 reference period.

According to the cooperative, around 60% of producers accepted the offer. In six weeks around 35 million kg less milk was delivered and €14.1 million was paid in bonus payments to milk producers, which works out as an attractive bonus of just over 40c/kg. The scheme ended after six weeks when the cooperative announced that it now had sufficient processing capacity available. The scheme was not intended to raise the milk price as such.

In February 2016, the largest Swiss milk processor Emmi offered its direct suppliers a bonus of SFr 0.1/kg (9.4c/kg) for each kg less of milk they delivered compared to the same month 12 months previously. The measure is limited to the months of March and April 2016. No compensation is paid to a producer who is exiting production and the maximum amount of bonus that Emmi will pay is limited to 50% of the producer’s delivery in the same month in the previous year. In this case, the purpose of the scheme is to reduce supply to increase the milk price, and the cooperative supports the call from the Schweizer Milchproduzenten producer organisation for a supply reduction of 3% in order to strengthen prices on the domestic market.

In the US, an industry-sponsored voluntary supply management program – Cooperatives Working Together (CWT) – was initiated in 2003 by the National Milk Producers Federation (NMPF), the largest US dairy producer organization. It was a herd retirement programme specifically aimed at removing cows from the dairy herd in order to reduce supply (although it also provided subsidies to processors to provide export assistance to dairy products).

Farmers bid into the programme to indicate their willingness to retire their milking herd. Progressively higher bids were accepted until the desired target volume of milk reduction was reached, subject to geographical limits to prevent too much milk being removed in any one region. Once the bids were accepted, the cows were removed from production and slaughtered. Participating dairy farmers paid a levy on the volume of milk marketed, and approximately 70% of US dairy farmers voluntarily contributed/participated either through their cooperatives or as individual producers. One evaluation study, funded by the programme itself, found that the herd retirement in 2009 (the largest year of the programme) increased the US milk price by 7% in that year. The programme was terminated in 2010 due to a lack of full participation and because it was determined that the export assistance program was more effective in the long term with helping to preserve family farms.

Effectiveness of a voluntary milk supply reduction programme

In my previous post, I questioned the cost-effectiveness of a programme designed to lift EU milk prices by reducing supply. I highlighted three issues:

• The size of slippage. To what extent would participants in a voluntary supply management programme be farmers who were planning anyway to reduce production?
• The value of the price elasticity of demand for raw milk (or, more exactly, its inverse) which tells us what percentage increase in price would result from a one percentage point reduction in supply.
• The supply response of expanding producers in the light of the higher supported milk price.

These issues all remain relevant in assessing the impact of the Commission’s latest proposal. But to these, we can add another, arising from the decentralised nature of the proposed scheme.

First, it is up to individual member states to decide whether to participate or not. This gives rise to a free rider problem because some member states may decide not to participate, yet their producers will benefit from any increase in the EU milk price due to voluntary supply reductions in other member states. For example, the Irish Minister for Agriculture has made clear that Ireland will not be introducing a voluntary scheme to reduce supplies. The Commissioner has admitted that this is indeed a weakness of the scheme.

This will make the scheme unattractive in particular for smaller member states, which could find that they are compensating their own farmers to reduce supply but without any noticeable effect on the milk price being paid . What will determine the impact of national schemes is the extent to which national markets for dairy products remain fragmented. The less integration there is between national markets, the greater the impact of a purely national supply reduction scheme.

Second, even in a member state which makes funds available to compensate producers who voluntarily reduce supply, it is not clear to me whether all processors, whether co-ops or private companies, can be compelled to participate. If a processor has invested in new drying facilities for milk powder, for example, it may not want to see a reduction in deliveries if it is to make optimum use of its new plant, and may not want to facilitate its suppliers to enter a scheme to reduce deliveries.

Conclusions

For these reasons, it is easy to understand the conclusions of the European Milk Board (EMB)’s press release after the Council meeting. The EMB is in favour of volume management of the milk market. Its conclusion was that “to ensure a sustainable recovery of the European dairy market, a legal framework has to be created at EU-level. The implementation of the same must be undertaken by the EU Institutions and cannot be delegated to dairies”.

It also pointed out that “production cuts will have the desired effect only if milk deliveries at European level are capped in parallel, as proposed in the bonus-malus model of the EMB Market Responsibility Programme”.

However, as I argued in my previous post, mandatory supply reduction brings a whole different set of issues to the table, most importantly, the long-run negative impacts on the competitiveness of the EU dairy industry and on the expected average price received by dairy farmers over the cycle. It is clear from yesterday’s Council meeting that member states are not prepared to take that step.

This post was written by Alan Matthews

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