1. 1 The current milk crisis: lessons for the future BVLE Conference: the recent milk crisis September 29, 2009 Marc Rosiers, Boerenbond Pieter Verhelst, Boerenbond

2. 2 Overview EU ambition with the dairy sector Market prediction versus market reality Lessons from the current milk crisis Ideas to overcome the current milk crisis now and in the future

3. 3 EU ambition with dairy sector Milk production for local and world wide consumption Protect a reasonable level of self sufficiency Competitive export Versatile production Maintain dairy production in LFA Develop dairy farms in top regions to world players Versatile production Diversification at farm level Diversification at processors level No revolution but evolution

4. 4 Milk production for local consumption… Protect a reasonable level of self sufficiency Keep import tariffs up Improve efficiency o Investment fund o Extra modulation: restructuring of the dairy sector o Art. 68: idem EU-price butter2,37 World market price1,59 Import tariff1,900,57 Import price3,492,16 Protection147 %91 %

5. 5 … and world wide consumption Invest in more competitive export Create the opportunity for cost reduction through economies of scale o Abolition of quota system and more efficiency from export support to stimulating export o No export restitutions: distorts price signal o Export promotion o Export guarantees?

6. 6 EU-share in world dairy market

7. 7 Versatile dairy farmers Maintain dairy production throughout Europe In LFA: extra support o LFA policy o Art. 68 –Dairy production for local consumption In the most favorable EU regions for dairy production: no extra support o Only direct payments => discussion on redistribution of direct payments is crucial –Dairy production for world wide consumption

8. 8 Versatile dairy processors Diversification at farm level Farm sale, tourism,… Gaining a non-agricultural income Diversification at dairy processors level Coping with fluctuating world markets o Butter and milk powder react instantly o Cheese reacts with some delay o Fresh dairy products react late –A diversified processing installation is well equipped to build in the necessary reaction potential to instability and create some stability in farm gate prices

9. 9 From predictions…

10. 10 … to reality

11. 11 Food security respecting societal demands Market correction Specificity of agricultural sector Sector initiatives Future initiatives to cope with market volatility

12. 12 Some findings Food prices in Europe (COM(2008) 821) Supply shortages in 2007 were followed very rapidly by supply surpluses in 2008/09 EU Commission finds problems in the functioning of the food supply chain o The asymmetry in bargaining power between farmers and the rest of the chain keeps farmers margins under pressure o EU Commission proposes a roadmap to –Promote competitiveness of the food supply chain –Ensure a vigorous and coherent enforcement of competition and consumer protection rules –Improve access of new players –Better inform the market via European monitoring system of food prices –Discourage speculation 12

13. 13 Some findings Dairy market situation 2009 (COM(2009)385) EU Commission questions price transmission and the distribution of value-added Solutions o Enhance market transparency and helping a fairer market operation o Encourage farmers to work together to improve the efficiency of their operations by increasing their economies of scale and scope o Develop a European-wide code of conduct o Organize processor cooperatives –to adapt their members' milk supply to existing and future demand –to increase their countervailing power vis-à-vis processors and retailers. o Create inter-branch organisations – involving all the actors in the dairy food chain – that could foster a useful dialogue between all the players active in dairy markets 13

14. 14 Some findings Dairy agreement of 02.07.09 Financial effort by retail sector Cost efficient agricultural production System of fair trade for local products Inter trade agreements within a European framework Advise Belgian Competition authority Dairy agreement complies with anti-trust law o Competition is not reduced, neither between farmers, neither between retailers o As there is no government intervention, there exits no discrimination between Belgian and foreign farmers and retailers o All parties are allowed to study – together with the authorities – sustainable solutions for the issue 14

15. 15 Members of FEDIS Controled by BIRB Processors 14 ct 2 ct/liter Farmer Belgian milk agreement: July – December Consumption milk (225 mio liter)

16. 16 The market plays a central role However, the market is not perfect Volatility of prices Market price does not cover costs (price level) Some ideas 16

17. 17 Solutions Price volatility o Explanation = characteristics of farming –Production cycle –Climate o Proactively – Systematic, reliable information on demand and supply, today and tomorrow (forecasts)  price observatory o Reactively – market stabilisation instruments (strategic stock management, alternative use of surpluses, insurance systems, …) Some ideas 17

18. 18 Solutions Price level o “Sweep before one’s own door” –Strive for cost efficiency (economies of scale and scope) –Storage, export or alternative use of surpluses »EU = limited safe net »Specialisation »Separation between the internal and external market, realistic ? Some ideas 18

19. 19 Solutions Price level o Asymmetric bargaining power –Code of conduct –Enhance the position of farmers within the sector and throughout the supply chain »Producer organisations en cooperatives »Agreements within the supply chain »Systems of certified quality products Some ideas 19

20. 20 Solutions Price level o Code of conduct –Buy at a too low price –Coupling with purchase obligations of inputs –Control on quality requirements –Maximum deduction of tare –Duration –Required guarantees –Terms of payment –Silent extension –.... Some ideas 20

21. 21 Solutions Price level o Asymmetric bargaining power –Enhance the position of farmers within the sector and throughout the supply chain »Producer organisations en cooperatives »Organisational advantages »Market advantages »Financial advantages »Advantages in logistics »Need for a European framework Some ideas 21

22. 22 Solutions Price level o Asymmetric bargaining power –Enhance the position of farmers within the sector and throughout the supply chain »Agreements within the supply chain »Inter trade agreements, »specific agreements between buyers and producer organisations, »Agreements between buyers and producers »Legal basis (Belgian law on competition of 15.09.06) »Need for a European framework Some ideas 22

23. 23 Solutions Price level o Asymmetric bargaining power –Systems of certified quality products »Condition = price supplement »Mutual recognition »Sneaking increase of (product- and process) standards without price compensation »Need for a European framework Some ideas 23

24. 24 Quota cost and efficiency Estimate 2009 200720082009 Average return36,9930,3425 Variable costs12,3514,85Estimate Fixed costs6,887,59 Total costs19,2322,44 Balance24,3415,399,39 Income17,767,901,90

25. 25 Dairy farm income (source: FAN Boerenbond)

26. 26 Changes in investments Investments1990- 1997 1998-20052015 (estimate) Quota31%43%0% Land23%13%30% Infrastructure21%20%40% Machines21%18%20% Others4%6%10%

27. 27 Average quota in Flanders 88/8998/9908/092016 Number of farms 19.09110.8646.4614.000 Quotum100.279173.035304.829550.000 -827 farms/year +7.250 ltr/year X 1,7 - 383 farms/year + 13.394 ltr/year X 1,6

28. 28 Know your cost structure! Cost including income must be below 25 cents! Production cost FAN = 20 cent Fodder costs12 cent Cattle/energy/environment3 cent Fixed costs 5 cent Balance available for income =5 cent STANDARD: 1 FTE = 30.000 EUR producing 600.000 Ltr milk with 80 cows!! This means 200 ltr/worked hour (average FAN = 120) Remark: where did the quota cost go??

29. 29 Questions and discussion