EU dairy farms need major surgery, not sticking plasters

A graph of EU milk prices since 2001 illustrates the impossible fluctuations dairy farmers have had to deal with.

It doesn’t tell the full story, because it’s the profit margin that matters to the farmer, not the milk price.

The price has yo-yoed nearly every year. On average, it fell from 2001 to 2007, but stuttered from 36c in ’01 to under 30 in ’02, back over 32c in ’03, down to 28c later in ’03, up to 32c, back under 28c in ’04, and recovering to over 31c, before falling to nearly 27c in ’05, recovering to 31c, and falling to nearly 24c in ’06.

Then the fairground ride speeded up, with the average milk price paid to farmers across the EU shooting to over 39c in the ’07-’08 winter, slumping to 33.5 in late 08, and recovering 1p before plummeting to nearly 24c early in 2010.

Fairly steady price progress followed to nearly 35c entering 2012, slumping a bit later in the year, but then picking up again fairly steadily to reach 40c about 21 months ago.

Then it was time to fasten the seatbelts again for the descent to current prices just under 30c. The graph comes from the blog, in which CAP expert Alan Matthews has been examining the market experiences of EU dairy farmers, and he highlighted that the out-of-control EU milk price affects farmers even worse than one would imagine from looking at the milk price graph.

He examined data for 2013 and 2014, when neither the milk price nor the milk production cost on farms varied by more than 20% over 24 months — yet the milk profit margin varied by a factor of more than 100%.

This happened because EU dairy farmers are, on average, highly borrowed, leaving relatively narrow profit margins after operating costs are paid. Therefore even small changes in milk prices or unit costs are amplified into much larger changes in margins and income, says Matthews.

He says margin and income volatility are not exceptional events but a fact of life for dairy farmers, and the industry has been slow to address this fundamental characteristic of dairy farming and to come up with institutional arrangements to help dairy farmers manage this risk.

Dairy farms, which are mostly family businesses, are providing the raw material for a huge EU industry, but are left trying to cope with huge annual milk price cuts, averaging about 20% over the past year.

That 20% average figure over 28 countries hides huge variations.

Matthews’ analysis shows that reductions ranged from 15-16% in Austria and Italy to 28-29% in Latvia and Estonia, the hardest hit by the Russian ban on EU food imports.

It beggars belief how even the average EU dairy farmer copes with wildly fluctuating milk prices. But it is even tougher if you are at the wrong end of another EU graph supplied by Matthews, showing the 2011 costs per tonne of milk produced, which vary from a low of €240 in Ireland to €400 in Denmark.

In Germany and France, which together account for 40% of EU milk production, costs in 2011 were around €330/t.

Earnings per tonne also vary across countries, being highest in the Nordic countries and Italy.

Figures supplied by Matthews for the same year show Italy, Ireland, Spain and Portugal heading the net profit margin per tonne league, with €181, €90, €80, and €73, respectively.

At the bottom of the league, both Denmark and Sweden had negative net margins, even in 2011, an average year for dairying.

Even within the EU-15, producers can be profitable at very different price levels, according to Matthews, who says that situation is likely to lead to some relocation of milk production from high-cost to low-cost regions, now that milk quotas are gone.

The problems which dairy farmers took to Brussels last Monday get even more complicated and hard to fix when you realise the least efficient dairy farmers in any EU country earn a profit about one third less than the most efficient, about 17% less than the average

In short, the industry is so dysfunctional that it needs decades of work to get back on the rails, and major surgery rather than the sticking plasters issued last Monday.


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