Royal FrieslandCampina has shaken up the dairy industry with a temporary measure to pay dairy farmers to rein in their milk production.
The world’s sixth largest dairy company, with annual revenue of €11.3bn, it offers €2 per 100 kg to farmers who keep a temporary lid on their milk supply, because the company’s processing capacity will be insufficient for the expected milk volume until the middle of February.
In other countries, a different course of action might have been taken.
In New Zealand, Fonterra has been in the courts for dumping more than 3m litres of buttermilk and 150,000 litres of raw milk, in 2013.
In the US, dairies in the north east dumped 31% more milk than usual last summer.
Many Chinese farmers dumped milk in 2015, using some of it to irrigate crops.
In one month last summer, about 800,000 litres of milk were poured into slurry lagoons in Canada.
So there is a limit to global milk production — set by the economics of investing in extra processing capacity for a volatile and not always profitable product.
One has to conclude that farmers in these countries were over-optimistic in their expansion plans.
At least, the FrieslandCampina suppliers have co-operative power behind them.
It is one of the world’s largest dairy co-ops, with over 19,000 member dairy farmers in the Netherlands, Germany and Belgium .
They delivered about 6.4% more milk in the year 2015 than in 2014.
FrieslandCampina made heavy investments in extra processing capacity, but not enough to cater for milk supply suddenly accelerating from last November.
With all processing capacity in use, and other dairy companies unable to take the milk, the Board of FrieslandCampina has appealed to dairy farmers to rein in production until February 11, at no more than December weekly deliveries.
The bonus offered is the equivalent of a 5% income bonus.
FrieslandCampina has also cut its January guaranteed price from December’s €30 per 100 kg, to €29.25.
On the farmers’ side, the chairman of the Dutch dairy producers’ union, a FrieslandCampina supplier, said farmers are being forced to produce more milk to make ends meet. He said ending EU milk quotas last April was an ‘historic mistake”.
Dairy farmer groups gathered under the European Milk Board umbrella said unchecked growth in EU milk production has driven many dairy farmers to ruin.
They urged EU politicans to follow the FrieslandCampina example, by stipulating a market volume that enables prices to cover producers’ costs.
The Irish dairy industry has resolutely opposed any move in this direction, interpreting it as the return of a quota system.
However, EU figures indicate rising milk production, from 135.2m tonnes in 2008 to a forecast 149.4m t in 2015, and an estimated 150.8m t in 2016.
Production grew by 2% or more annually in 2010 and 2011, but the stand-out figure is a 4.7% increase in 2014, while EU quotas were still in place.
Why production jumped while EU quotas were still in place is explained by CAP expert Alan Matthews in his latest analysis for the capreform.eu blog.
Milk prices reached record-high levels in 2014, but what really counted was that EU milk production costs fell from 2013 to 2015, resulting in record high profitability per litre — and the single largest ever year-on-year increase in EU milk deliveries.
During 2014, EU milk deliveries jumped 5.8% in non-quota constrained countries, and 3.8% in quota-constrained countries (such as Ireland, where many dairy farmers were doing so well that they risked a superlevy fine, which eventually totalled a record-breaking €71.2m).
The lessons for Irish dairy farmers: stick to expansion as in the milk supply agreement, or your co-op could be in trouble.
Watch costs as well as prices when trying to predict the market.
And bear in mind the example of the world’s sixth largest dairy company, which is getting to much milk and seems unwilling to build extra processing capacity, for the time being at least.
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