When the milk market turned sour | Business| Economy and finance news from a German perspective | DW | 27.05.2016
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When the milk market turned sour

Not long ago, European dairy farmers built out their operations with dreams of worldwide export. But demand has shrunk, and millions of cows are now producing milk that nobody wants. Farmers are paying the price.

To grasp how serious the situation has become, it is worth taking a look at the recent course of the EU's intervention system, meant as a safety net to keeping prices from plummeting in times of crisis. If the cost of milk drops below 20 cents, the government would step in and buy up to 109,000 tons of powdered milk off the hands of dairy producers.

"Until now, nobody took any interest in the program," said Eckard Heuser of MIV, an association of German dairy producers. But this year is different. The EU had bought out the limit by April.

It then doubled the limit - and then quickly reached it again, piling up 218,000 tons of powdered milk in its possession. That's more than 2 billion liters of milk, or 1.5 percent of Europe's yearly production. Yet prices continue to sink.

The problem is systemic, and it won't be easy to fix. Cows are loyal workers. They can't work part-time or go on vacation. They eat and they give milk. And in the European Union, they're more productive than anywhere else.

Why is there so much milk in Europe?

Farmers are like all other entrepreneurs. They seek to grow their business and export their products. And not too long ago, it seemed like a great time to do both. Milk quotas, which had capped production in Europe for decades, were being dismantled, and the export market was calling. From the Middle East to China, a thirst for milk and a hunger for cheese seemed to be growing.

"People were consciously overproducing," said Andreas Gorn, a dairy expert with AMI, a German agricultural market research firm.

But economic crisis struck around the world, with incomes falling along with demand. The trade embargo with Russia chipped away at the market further. European exports still grew, though not as much as its production. There are 23.6 million cows in European barns now, with each producing around 10,000 liters of milk per year.

Why don't the farmers just produce less?

BDM, an association of German dairy farmers, estimates that production costs amount to about 40 cents per liter of milk. In May, German farmers were getting an average of 25.8 centers per liter. And Andreas Gorn expects the prices to spiral further.

Since farmers are losing money with each liter of milk they produce, it would seem reasonable to expect them to simply reduce their output. But the solution isn't that simple.

"Farmers need liquidity," explained Jutta Weiss, a spokeswoman for BDM. They have to buy feed, pay rent, service credit. Fresh money only comes in when milk is sent out. So if a farmer stops milking, he or she will immediately go bankrupt. The others continue milking against time, hoping to scrape by until prices recover.

An absurd situation ensues. Because the return isn't high enough, farmers send off as much milk as possible, trying to scrape together enough money to get by, which of course adds to the glut and presses prices down even further. Dairy farmers are trapped in "a vicious circle," as BDM calls it. And not only those in Europe.

How is the milk price worldwide?

"Around 80 percent of the local price is determined by the global price," estimates Holger Theile, director of IFE, a German research institute that analyses the milk market. This applies to butter, cheese and powdered milk - all methods for transporting milk without it perishing. Powdered milk is the most ideal: Packed in sacks, it can last for years and reach every corner of the world.

Demonstrators spray milk at police during a 2012 protest in Brussels against EU agricultural policy

Demonstrators spray milk at police during a 2012 protest in Brussels against EU agricultural policy

Around a third of the cheese and skim powdered milk that is traded worldwide comes from the EU. It makes no difference to a chocolate producer in the US whether its milk comes from Europe or next door. What matters is the price, which means that farmers from Bavaria are pitted in direct competition with farmers in Brazil or New Zealand. If prices tumble in one corner of the world, they tumble everywhere else, too.

What can be done?

Only one thing seems to be agreed upon: No one in Europe wants the government to impose quotas again. But how else can the situation be brought under control?

"We have to do something about the volume," urges the MIV association. It argues that farmers should be compensated for producing less milk, around 30 cents per liter, so that as many farmers as possible take part as quickly as possible.

But Michael Lohse from another German farmer association, DBV, believes "that doesn't work - the markets are open and should stay open." He argues that if Europe produces less milk, then other regions will simply produce more. DBV calls for binding agreements between milk farmers and the dairy producers who buy from them. Until now, producers have had to buy all of the milk that the farmers deliver, even if it the demand isn't there.

The thought of fallow farms and abandoned villages is also haunting politicians. Last autumn, Brussels put together its first aid program, amounting to 500 million euros ($558.7 million), which many saw as just a drop in the bucket. Smaller, family-run farms are already starting to fail, and Robert Habeck, a politician with the German Green party, warns that in five years, half of the dairy farmers in Germany could disappear.

The farmers associations agree. "Whoever wants there still to be farmers has to do something," Lohse said. "Otherwise the industry will go abroad, as happened with textiles."

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