Modest reduction in EU milk

Cows need to take at least three strides through the treatment bath
Cows need to take at least three strides through the treatment bath

There are a few inescapable facts in economics.

One is that if you restrict supplies you drive up prices. As dairy prices plunged in 2016, partly driven by a big increase in production after quotas ended, a hotly debated subject between farmers was whether cutting production was the best way back to higher prices. Based on figures from the European Commission for its milk supply reduction scheme, it seems the answer to that question is yes, but not necessarily because of the scheme.

The figures from the Commission show that across the EU around 48,000 farmers took advantage of the milk supply reduction scheme. This was fewer than the Commission hoped, and it was left with an under-spend of the 150 million euro allocated to it. The average reduction per farmer that took part equated to 18 tonnes, and the total volume removed in the final quarter of 2016 compared to 2015 was 861,000 tonnes. That sounds a lot, but in relation to the overall EU milk supply it is modest.

The Commission is patting itself on the back for the scheme, pointing to a 30 per cent increase in milk prices by the end of the year as evidence it delivered. This is despite some in the Commission, including the farm commissioner, Phil Hogan, resisting a supply reduction programme for much of 2016, arguing that the market and poor returns were already driving down production. That was certainly right, and rather than driving a cut in production, the scheme compensated many farmers for decisions already made to reduce production because of a lack of profitability. This is how all markets work, but the problem with agricultural markets is that while they are volatile they are slow to correct themselves from a drop in production. This is partly because having expanded, farmers are understandably reluctant to cut production, because doing so does not immediately cut overheads.

What can be said for the Commission scheme is that regardless of how it was achieved a 30 per cent increase in milk prices by the end of the year was welcome. If Brussels wants to take credit for this, by making more of its supply reduction programme than is justified, it would be churlish to deny them the opportunity. In terms of gain this programme probably delivered more per euro spent than the blanket aid scheme put in place at the same time. Even if it was the market, and not the scheme, that drove down production, it did make farmers across the EU think about the consequences of increasing production without considering markets for the end product.

Those for and against the milk supply reduction programme will go on discussing whether or not it worked. However this is a largely academic debate, since the Commission is unlikely to ever introduce a similar scheme. It did so in 2016 under enormous pressure, justifying it because it was part of the readjustment to the removal of quotas. In the future, supply management will be down to farmers. This is why Brussels is encouraging officially recognised producer groups, which can operate outside competition rules, to manage production and prices. It sees this as a way to offset farmers’ weak position in the supply chain. The Commission also wants to see a fully functioning European dairy futures market, which could help manage risk and volatility.

It is clear from this what the direction of travel will be for the EU-27 dairy industry. However with Brexit, a bigger issue is what will happen in the UK. It is difficult to envisage the government moving away from its belief that the market is the solution to supply problems. It will have to decide whether, like the EU, it will allow officially recognised farmer producer groups to operate outside competition rules. That seems unlikely. At the same time there is the issue of support for the dairy industry. Export refunds are long gone, but there is still intervention buying for milk powder – and the European Commission has a huge stock from the 2016 crisis – and annual private storage aid to manage the butter market. While the UK is a net importer of dairy products the prices farmers receive will be driven by events in the EU. The UK needs a post-Brexit dairy policy to tackle volatility, not blinkers and self-delusion about a booming retail sector where UK products can be substituted for imports.