EU fails to respond to booming global dairy market

The EU has largely failed to respond to a booming global dairy market. Milk deliveries actually fell by 1.5 per cent in 2006 despite an increase in quotas. All sorts of explanations are being trotted out such as the threat of high super-levy penalties and even the expiry of the transitional period in the A10 countries (this allowed for domestic marketing not to comply fully with EU criteria).

An alternative explanation is that the quota regime has ossified the structure of the dairy industry in the EU, holding back the more efficient and protecting more marginal farmers (which indeed is one of its intentions). Quota can be transferred in some countries (the rules differ), but despite the existence of an internal market, it cannot be transferred across national borders. The consequence is that the EU's dairy processing industry has been handicapped in responding to new opportunities on the world market.

What is driving these opportunities? The key factor is increased demand from the emerging economies. As people become more affluent, they consume more products that make use of milk. The increased demand for milk powders, for so long the sump of the industry, illustrates the fact that the major force underlying the price boom is increased demand for processed food ingredients.

Moreover, as demand expanded particularly in fast-growing Asian economies, exportable supplies were limited by drought in Australia and strong domestic consumption in the US and EU. The EU market is likely to be dominated by the expanding demand for cheese. Projections by the European Commission suggest that EU-27 cheese production is likely to increase by a total of 10 per cent during the 2005-13 period and will be likely to use nearly 85 per cent of the additional increase in milk expected to be delivered ober this period.

Can the price boom last? The OECD is relatively optimistic. Even though current exceptionally high prices are unlikely to be sustained, it is confident in its 2007 Agricultural Markets Report that milk powder and dairy product prices are likely to stay at relatively high levels at least until the middle of the next decade. Over the 2007-16 period it expects prices to remain at about US $50 to $100 per 100 kg (milk equivalent) higher as compared with the previous decade.

Compared to the level of average prices in nominal terms over the period 2001-5, world butter prices are preducted to increase the most, rising by 42 per cent. It wasn't so long ago that 'ageing' butter was being sold off from EU intervention stores to grateful Soviet consumers, a trade that made the intermediaries a lot of money. Skimmed milk powder prices are expected to rise by 33 per cent.

Much of the new output needed to meet demand will not come from the OECD area where production is expected to remain relatively stable, with the main production gains coming in Oceania and the United States. The OECD expects India, China and Pakistan to account for more than 50 per cent of the likely global milk production gains.

The one caveat is the quetion of economic growth. If economic growth continues at the rate predicted by the OECD, an average of 4 per cent for Asia, South America and Africa, then increased consumption and high prices will persist. Any faltering in growth would leave large quantities of milk from developing country producers looking for a market which would have a big knock on effect on the EU.

Why are British dairy farmers still in trouble? For historical reasons relating to imports from the British Commonwealth, the UK market is still dependent to a larger extent than elsewhere on the liquid market. This is still very price sensitive in the sense that supermarkets in practice treat milk as a 'loss leader' (whatever they might say to the contrary). However, they have been increasing prices to farmers recently, although input costs have also been going up.

Quotas are to be phased out, not before time, as they made it difficult for new entrants, despite special schemes in a number of countries. The UK in particular had insufficient quota to meet all its potential production needs. A freer market should benefit both producers and consumers.

Fischer Boel seduced by food security rhetoric

Experts on agricultural policy are often asked why the 'farm lobby' has been so successful although, of course, at EU level its influence has declined over time. In part this has been because it has been losing the debate and has often shown insufficient flexibility in responding to new framings of issues.

Nevertheless, one should never understimate the ability of producer interests to use new concerns to their advantage. In the past, for example, British farmers used concerns about the balance of payments to justify the subsidies they received. Food security concerns were significant during the formation of the CAP with recent experiences of food shortages in the minds of decision-makers. These concerns were reinforced by arguments about what might happen if the Cold War got a bit hotter.

With world supply and demand being tighter than it has been for some time, farming journalists and others have been trying to propel food security back on to the EU policy agenda. They appear to have scored at least a partial hit with farm commissioner Mariann Fischer Boel.

She said that Europe was producing enough to meet its own needs but had to keep one eye on growing demand around the world and discuss the question of 'food security'. 'It is obvious that the whole discussion on energy security started when suddenly the Russians cut off the pipelines. And it is obvious that we would want to think about food security. We can discuss buffer stocks just as you have for oil today.' EU rules require countries to keep three months' supply of oil in storage.

The analogy with energy security is an imperfect one as there is no one country with a pipeline of food on which Europe depends that it can turn off to great effect (although the moratorium on exports being operated by Russia and the Ukraine has had an impact on world prices).

Let's hope that just when we thought that intervention buying was fading away, it won't be rejuvenated as 'buffer stocks'. One of the greatest weaknesses of the CAP was always the creation of a risk free market through the purchase of surpluses by government agencies.

Giant energy plants to transform UK countryside

The British countryside will be transformed through the planting of tall energy crops, the BA Festival of Science in York heard yesterday. Fields planted with miscanthus (or elephant) grass, 3-4 metres high, will look like Caribbean sugar-cane plantations.

The Rural and Economy Land Use programme (RELU) estimates that 15-20 per cent of Britain's agricultural land may have to be devoted to growing biofuels to meet international obligations to reduce carbon emissions and improve energy security. [The writer is a grant holder in the RELU programme].

The two main candidate crops are willow coppice, harvested every three years, and miscanthus, a fast-growing Asian grass harvested annually in late winter or spring. Farmers would grow those on poor quality arable land, said Anglea Karp of Rothamsted Research, RELU energy crops coordinator. 'The impact on agricultural land and food production is a big concern,' she said. 'Because the energy crops recycle their own nutrients and do not need fertilisers, they will not need to be planted on the best agricultural land.'

RELU has attempted to assess the public acceptability of a landscape dominated by giant energy crops. They conducted a survey using photographs of existing miscanthus and willow plantations. Surprisingly, two-thirds said they would not mind the triffids growing within sight of their home, although this figure fell when participants were told that more local power stations would be needed to produce energy from their crops.

Environmental surveys are particularly suspect because people feel a need to give the 'correct' green answer. When it comes to behaviour, NIMBY attitudes come to the surface.

Nevertheless, RELU supremo Philip Lowe seized the occasion to urge the government to 'take a more strategic approach to land use in rural areas.' The well connected Newcastle University professor said the government needed a strategic vision for balancing the growing pressures on home-grown food supplies with the need to grow energy crops.

The good professor turned words into action when he bought bananas as a healthy energy boost for the participants waiting for my panel at York.

Sarko changes French stance on CAP

Observers like Jack Thurston have picked up signs of a change in the French stance on the CAP for some time. But now President Nicholas Sarkozy has promised to initiate a fundamental debate about its purpose next year when France takes over the EU's rotating presidency. Using words never used by a French president before to a farming audience, he told farmers at a cattle fair near Rennes that they had to learn to make a living from market prices rather than subsidies.

It's a change from the days when Jacques Chirac was de facto farm minister, but before we get too excited a reading of his speech suggests that he envisages the continuation of subsidies by other but more legitimate and acceptable means.

He framed a partly free market message with a demand for more EU wide protection for a sector he described as 'an essential pillar' of the French economy. The EU should set a goal of 'stabilising markets' in agricultural goods, one that, of course, it has had since the Treaty of Rome. It would do this by re-establishing the principle of 'community preference', although he did not spell out what this would mean in practice.

He said that a reformed CAP would need to meet four objectives: ensure food security for Europe (groan); contribute to a growing global demand for food; preserve rural economies and landscapes; and help combat climate change.

OECD blasts biofuel subsidies

Governments need to scrap subsidies for biofuels as the current rush to support alternative energy sources will lead to surging food prices and the potential destruction of natural habitats, argues the OECD in a report leaked this week. The OECD argues that politicians are rigging the market in favour of an untried technology that will have only limited impact on climate change. [The writer is a member of the BBSRC Biofuels Panel but the views expressed here are entirely his own].

The survey says that biofuel would cut energy-related emissions by 3 per cent at most. The study estimates the US alone spends $7bn a year helping make ethanol, with each tonne of carbon dioxide avoided costing more than $500. In the EU it can be almost ten times as much.

There could also be negative environmental externalities. The report states, 'As long as environmental values are not adeuately priced in the market, there will be powerful incentives to replace natural eco-systems such as forests, wetlands and pasture with dedicated bio-energy crops.'

The survey puts a question mark over the EU's plan to derive 10 per cent of transport fuel from plants by 2020. It says money saved from subsidies phasing out should fund research into so-called second generation fuels, which are being developed to use waste products.

Not surprisingly, the NFU has sought to play down the impact on food prices. Their energy and climate change adviser Jonathan Scarlock said, 'The current high prices of commodities are more down to harvest problems in key exporting countries rather than the relatively small proportion going into biofuel production.' While the price of cereals may have doubled this year, the impact on the retail price of food is likely to be about 5 per cent. However, bread prices in the UK have already gone up more than that.

There is a certain amount of triumphalism among farmers' spokespersons at the moment about the fact that the era of cheap food is over. They point out that the proportion of income spent on food in advanced countries has fallen dramatically.

That's so, but many families with young children are on very tight budgets and with fuel prices going up and nursery fees high have little room to absorb food price increases. They may trade down in product quality. Also, supermarkets operating in a competitive environment will try to hold back prices.

Special issue of Food Ethics

The autumn issue of Food Ethics focuses on EU farm policy. I wrote an introductory article and there are a number of interesting articles by academics and practitioners including Jack Thurston on where the subsidies go. You can read a sample of the material at Food Ethics