Commission may face market regulation U-turn - USDA

By Neil Merrett

- Last updated on GMT

Related tags: Dairy products, Milk, European union, Usda

As dairy processors and farmer continue to fret over declining profitability in their operations, the European Commission may be forced to reconsider its position on loosening regulation of the market, says a new report.

After prices paid for raw milk spiked during the middle of last year, they have since began to fall continuously through 2008 with the Commission yet to intervene at either internal or external level, say the United States Department of Agriculture (USDA).

“The situation may change towards the beginning of 2009,”​ stated the USDA, as part of its latest Foreign Agricultural Service report on dairy. “Growing supplies, lower competitiveness of European dairy products on the world market and stable domestic consumption will put strong pressure on the EU authorities to build intervention stocks, subsidize consumption, or re-introduce export refunds.”

Deregulation moves

Last June, the decision was taken by the EU’s dairy management committee to temporarily revoke subsidies on all exported dairy products for the first time in the export refund scheme’s 40 year history, amidst record payouts for the products from processors.

While the decision was always potentially regarded as a temporary measure during the enactment of wide-sweeping Common Agricultural Policy (CAP) reforms to deregulate the market, the report’s conclusions could indicate a setback to free trade.

Despite fears over production and prices, some trade associations believe that deregulation must continue, despite potential hardships facing milk producers and processors alike, as a means to ensure long-term profit sustainability.

EU Production hikes

According to the USDA, milk production in all 27 EU member states is expected to increase this year as a result of a two per cent hike in the bloc’s production quotas and growing consumption rates.

However, from next year, the same findings suggest that the rate of this increase will slow as milk price and dairy product costs fall on a global basis.

Farmer fears

The price falls have already seen continuing protests from farmers groups across Europe who earlier this week assailed the a health check meeting of the CAP reforms taking place in Luxembourg to complain over declining income and higher input costs.

This may further increase pressure on governments to address policy on milk prices in order to protect ingredient supply for processors and consumers.

While the report claims that European dairy herd sizes are already beginning to decline, genetic improvements and higher cow yields have all been found to result from current market policy.

“Growing milk production and higher domestic consumption of all dairy products, except butter, is expected to increase output of dairy products in 2008 and into 2009,”​ stated the report.

“Production of cheese is expected to grow in 2008. However, competition from other products and a slow increase of exports is slowing the growth of cheese production more than originally predicted.”

Butter and milk powders

In terms of butter production, the USDA reported that higher output from within the bloc, combined with more stable consumption levels and declining exports has led to growth in private stocks.

By contrast, higher global demand for whole dry milk had risen from the export levels of 2007, with a large number of supplies going into cheese production. The profit margin on non-fat dry milk (NFDM) production was found to be lower than that of whole dry milk, said the USDA.

“However, the worsening world market conditions for EU exporters of dairy products is forcing the industry to partially switch to products with a longer shelf life, such as butter and milk powder,”​ the report stated.

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