Stephen Cadogan: Money for less milk but longer term solutions needed
The measure was needed because FrieslandCampina had insufficient processing capacity until mid-February, due to stronger than expected milk supply.
They paid €14.1m to the 60% of their farmers who participated.
It was a successful scheme, because the dairy cut its milk intake by about 34 million litres in the six-week arrangement.
Soon, dairy farmers across the EU will be offered cash to reduce their milk supply, in the never-before-used, temporary Article 222 scheme announced by EU agriculture commissioner Phil Hogan.
Allowed only in cases of severe market imbalance, it is the EU’s response to about ten member states which proposed voluntary or mandatory supply control to ease severe dairy market difficulties, which cannot be solved by measures such as public intervention or aids for private storage.
It will be interesting to see if FrieslandCampina volunteers for this scheme.
Its processing facilities are still stretched, and it is based in the Netherlands, where farmers increased milk production by about 831m litres last year.
Only Ireland got near to matching that, with about 752m extra litres.
The dairy industry will be watching from around the world to see how the Dutch and Irish react, because they are responsible for much of the 2.3% EU milk production increase in 2015 which is blamed by many for helping to keep dairy markets in a depressed state worldwide.
But this voluntary scheme is unlikely to be considered in Ireland.
ICOS, representing the Irish co-ops, has said it makes no sense for European farmers to reduce supply whilst the rest of the world is free to produce.
It warned against converting this voluntary scheme into compulsory measures if the market gets bad enough.
Or worse still, applying a levy to Irish expansion to compensate farmers who want to reduce in other member states.
It may be that they see it as a clever political move by Commissioner Phil Hogan to stave off EU member state complaints until dairy markets recover.
After all, for every processor group that might adopt milk reduction, there may be another whose expansion-minded dairy farmers will only be encouraged to ride out the market slump.
That’s why only mandatory supply management, like the quota system that was scrapped last year, can be guaranteed to lift markets.
But mandatory supply management would also return EU dairy processors to gradual annual loss of market share on world markets.
With mandatory supply management, or a longer term voluntary supply management, banks would be much less willing to lend to dairy farmers, knowing that farmer borrowers could arbitrarily be told by their processors to restrict their milk deliveries, without warning.
Processors and retailers would be much less willing to pay premium prices if they could not rely on stable supplies.
CAP reform expert Alan Matthews has questioned the cost-effectiveness of a programme designed to lift EU milk prices by reducing supply.
He has also pointed out there are better ways to combat milk price volatility, saying dairy farmers and processors must come together together to increase the use of forward pricing contracts between dairy farmers and processors. These require active futures markets to allow processors to hedge their risks.
Mr Matthews said the MilkFlex loan introduced by Glanbia is a good example of a variable rate loan with flexible repayments geared to the milk market, helping dairy farmers cope with downturns.
National tax arrangements would help also by allowing farmers to build up tax-free surpluses in good years and draw them down in poor years.
Mr Matthews said insurance-type schemes allowing farmers a given profit margin in return for an annual premium should also be explored.
Commissioner Phil Hogan supports such measures, and perhaps will gain some leeway to move them along with his Article 222 move.
