Faint signs of recovery in dairy?

I am going to be brave and say it.

There are faint signs that dairy markets are finally bottoming out. These green shoots of recovery are fragile, but I am not alone in crossing fingers for better times ahead. Industry commentator, Ian Potter, once the king of quotas, has said the same – and the well respected Rabobank analysts are also suggesting the worst might be over in Europe. A further positive is that the most recent Global Dairy Trade (GDT) auction in New Zealand delivered another small increase – with the market sentiment suggesting this reflected a slow recovery as production and demand begin to move back towards some sort of balance.

We have of course seen a lot of false dawns in the dairy industry, but people will be hoping that this time it is for real. That will include the EU farm commissioner, Phil Hogan, who is trying to get around having to deliver another emergency aid package from funds he does not have. He is under pressure to do so. But if later this month, at the farm council, he can justify claims that markets are strengthening and supplies easing he may get away without having to do anything beyond continuing to support the European market with relatively free access to intervention.

What Hogan really wants to see is an easing of the pressure for him to make the milk supply reduction programme compulsory, rather than voluntary. This is because the Commission is against any move that would suggest it was wrong to end milk quotas. A further problem is that it does not have the funds to support a compulsory programme, and member states are not showing any great enthusiasm to do so. This is a difficult issue, but if markets are recovering there is a danger that a supply reduction programme would be tackling yesterday’s crisis, just as markets are beginning to settle. The problem with all such programmes is the lag before the drop in production is felt. Having got through the peak milk production period the Commission will almost certainly want to gamble on the market solving the crisis, with some help from intervention.

Germany is the only member state to have opened its coffers to dairy farmers. This is partly because it has regional elections looming in September and with migration a huge issue politicians need to gather all the support they can. It has offered 100 million euro in aid, via tax relief and reductions in some social security and other payments. It has suggested this needs to be linked to moves to curb production, but crucially it has not linked it to the voluntary supply reduction scheme.

Germany is also pressing for further aid for the dairy sector from Brussels, and along with France will be meeting the Commission next week to press that case. The Franco-German alliance is talking about a billion euro aid package from Brussels. But it is not giving any answers to where that funding would come from when the CAP and EU budgets are already stretched to the limit – in the case of the EU budget because of the mounting costs of the migration crisis.

In this whole debate the Rabobank is a voice of stability. It is suggesting that the post-quota increase in milk production across the EU has peaked and will not happen again – although it is suggesting Ireland and the Netherlands need to be watched. It is taking comfort from the fact that the increases in the two biggest dairy players – Germany and France – have been relatively moderate at around 1.5 per cent.

In its words the increase in production over the past year, while damaging, is not the opening of dairy floodgates to even more production. It believes the problems that have hit Europe so hard have been less to do with over-production alone, and more to do with poor demand in China, the closure of the Russian market and farmers seeking to maintain cash flow by producing more milk in the face of poor prices. It believes that with the post-quota production catch-up easing, global supply and demand moving back towards balance and farmers focussing more on reducing costs than increasing output stability is returning.

If this is right it will be the best possible news – and certainly when he is resisting pressure to throw money at the problem Phil Hogan will be using the positives of the Rabobank and other reports to strengthen his arguments.