Thursday, 22 January 2015

China, Russia and the Price of Milk

At last Ministers have begun to wake up to the crisis in the dairy industry. The fear in many rural areas must be that the Tories will let dairy farmers go the way of coal miners.  
Interestingly there is one Conservative MP trying to stop this happening. I have some sympathy for the challenges that Jim Paice is the chair of First Milk, the Dairy Farmers Co-operative is having.
The dramatic changes in world milk prices have created a multimillion-pound cashflow hole in First Milk and for the1,300 farmer members who have been called upon to help bail it out. For these farmers they are tough times having their payments delayed and to be asked for a big increase in capital contributions to the Co-op is a double whammy!
For all dairy farmers the problem is that milk has become a globally traded commodity. Prices went up when new markets opened up in Russia and most importantly in China. With more women working and a series of crises in domestic Chinese supply the door was opened up for the large players to enter the Chinese market.
However what goes up can also come down. The round of price cuts in Europe began when Arla the huge transnational Scandinavian, German and British co-op announced last August it was slashing milk prices because weak prices had been made worse by the retaliatory sanctions that Russia has imposed on the EU.
This is on top of record UK output and the cut throat prices amongst UK supermarkets which often see milk sold at prices cheaper than water. It may seem like a left wing cliché but the crisis in the industry can be traced back to Mrs Thatcher.
Farmgate milk prices used to be set by the statutory Milk Marketing Boards, covering England and Wales and Scotland. The boards established prior to the War bought milk from farmers and sold it to processors and dairies. This perfectly rational system of natural monopolies was destroyed when the Tories, those champions of the countryside, abolished them in the Agriculture Act of 1993 leading to the collection and distribution of milk for processing being deregulated.
Since then global influences have increased. About 10% of the world’s milk is globally traded in the form of milk powders, cream, butter and commodity cheddar. Prices are set in three big producer areas in the US, the EU and New Zealand.
One of the world’s largest co-ops is the New Zealand Dairy co-op Fonterra. It is the worlds leading global milk processor. Processing over 15 billion litres of milk a year in New Zealand together with 2 billion litres from Australia and nearly 3 billion litres from Latin America. 

Fonterra own GlobalDairyTrade which is an auction platform for internationally traded commodity dairy products. Its website says it was “Established in 2008 to provide a reliable, transparent, price discovery platform for globally traded dairy commodities.”  The auctions occur twice a month, bringing together hundreds of qualified bidders from more than 90 countries, with a range of sellers from Europe, USA, India, Australia and New Zealand.

Now the Chinese economy has been slowing reducing the demand for imported milk much of which comes from New Zealand so this has affected the price Fonterra can get for their milk releasing it onto the world market.

Meanwhile the EU price for milk set in Euro’s so farmers have also to be currency speculators then from April 1st the EU milk quota system ends meaning Europeans can increase production just in time for a global slump in the industry.

Dairy farmers now find themselves not knowing how much milk to produce or how much they will be paid. They have to keep their eyes on the weather, the cost of fertiliser and on economic growth in China.

We are self-sufficient pretty much in the UK in liquid milk although we do import around £1.3billions worth of cheese, butter and yoghurt. If we allow theses trend to continue it can only lead to the destruction of more dairy farms and increase the pressure for the introduction of mega-dairies at only knows what cost to animal welfare and the landscape. 

There is a powerful argument that we have abrogated responsibility for our food security to the EU who cares more for the spivs and speculators in international markets. Clearly we need to regain control of our agricultural sector from the EU so we can rationally plan for the future recreating a properly regulated modern milk marketing system.

In the short term British dairy farmers need stronger co-ops. Farmers Weekly recently argued that, “There’s a thought that British farmers don’t do co-ops like their continental cousins, that they take a shorter-term, more individual view.” Well if that is their view it can only lead to their destruction.

Fonterra and Arla co-ops are serious players in the industry; there is surely a lesson here for First Milk farmers get behind their co-op.