Many of Europe’s dairy farmers have one last chance to save their livelihoods.
They are banking on the infusion of another €500 million from the European Commission, set to be announced later Monday, to rescue them from one of the worst crises they have ever seen.
Europe is simply awash in milk. Producers across the continent are locked into a vicious cycle of overproduction that has forced prices far below the cost of making milk and pushed thousands out of business. Triggered by three debilitating shocks — the end of milk quotas last year, the Russian ban on EU food imports and plunging oil prices — the Commission has spent nearly a year scrambling to solve the crisis. The shift away from national milk production quotas, a system that stabilized European market for decades, was supposed to allow farmers to turn gradually toward the open market and grow their businesses. Instead, they started producing oceans of milk, slashing prices and profit margins.
The human toll has been severe: Thousands of farms have already closed across the bloc, and in France, campaigners say hundreds of farmers commit suicide every year. The Commission’s €500 million infusion in September has done little to ease farmers’ losses. The landscape of Europe’s milk industry — the bedrock of the continent’s prized cheese industry as well as its raw milk supplier — could change forever.
“This is the worst crisis we have ever had. It is a price crisis without precedents,” Basque dairy farmer Andoni García said. “It means family dramas, personal dramas.”
Tight budgets, anger at the amount of money the EU already spends on farmers, as well expectations that the Commission should spend more on the refugee crisis, have all made the new aid package politically sensitive. Agriculture Commissioner Phil Hogan said as late as May 17 that talk of more aid was “premature.”
Succumbing to months of pressure, the commissioner said in June he would be “in a position to present” a new support package for dairy farmers Monday. The Commission has given very few hints about the content of its aid package, but a group of powerful EU countries has been advocating a common position. France, Germany, and Poland — the so-called Weimar group — have coalesced around the idea that Brussels should release a new tranche of aid money, but only for producers who will limit production.
Of the new aid package, €150 million will go toward “voluntary reduction of EU milk deliveries,” the Commission said. The remaining €350 million will be distributed to member countries. While precise details are still pending, the document notes that all farmers across the EU will have access to the money under equal conditions.
The path to crisis
The EU is home to 23 million cows and milk is the single most important agricultural commodity produced on the continent — accounting for about 15 percent of all agricultural production. Big countries such as Germany, France the U.K., and to a lesser extent Italy, the Netherlands and Poland, dominate the trade.
Overproduction was a problem in the EU’s early days too, until the Commission in 1984 brought in milk quotas — caps — as a way of stabilizing ballooning production. A wave of market-oriented reforms in EU agricultural policy over years committed the bloc to ending them. In 2003, the Commission said it would lift milk quotas in 2015 — in theory leaving farmers ample time to adjust their business models.
But geopolitical events wrecked those best-laid plans. By the end of the quota system in March 2015, the Russian food embargo — retaliation for EU sanctions enacted after the annexation of Crimea — had already been in place for five months.
Russia bought 13 percent of EU milk exports before the ban, according to Commission data. For milk products such as cheese and butter, the EU’s stake in the Russian market was far higher: The country bought 32 percent of EU-produced cheese, and 24 percent of butter, before the ban.
“A huge market … was literally wiped off the grid,” European Council of Young Farmers President Alan Jagoe said. “It turned a problem into a crisis.”
Almost simultaneously, the U.S. shale-gas boom accelerated oil production and triggered a decline in crude-oil prices. In a remarkable example of economic interconnection, this has a major effect on milk yields. Animal feed costs fall with dropping crude oil prices, said David O’Neil, director of dairy commodity trading house Dansko Foods, and low feed costs encourage farmers to add use more feed — which leads to larger milk yields.
“The flip side of this is that the major oil-producing countries have less buying power as their GDP falls, therefore they buy and consume less dairy products,” O’Neil said. “This leads to an oversupply, lower-demand scenario which leads to a lower milk price.”
Some of the EU’s biggest export markets this year for milk and milk-based products were oil producers Saudi Arabia, Algeria, Oman and Nigeria, according to Commission data.
This cocktail of market forces spurred EU milk producers into a spiral of overproduction last year. Production of skim milk powder — which market analysts often use as a metric because it can be converted into fluid milk or butter — rose 15.3 percent between April 2015 and April 2016 across the EU.
Outsized production caused a milk glut that pinned prices to the floor. The EU’s average milk price was 26 cents per liter in May — 14 percent lower than a year earlier. Production costs can be as high as 40 cents a liter in some countries. Most dairy farmers are churning out milk at a catastrophic loss.
“In the Baltic states, I know some young farmers receiving 13 to 14 cents per liter,” said Jagoe, who added that it still costs an average 30 to 40 cents to produce a liter of milk.
García, whose native Karrantza Valley in the Basque country depends on dairy farming, said his village had already lost five farms. “There are no other alternatives to this business. People can’t just move to produce something else,” he said.
Isabel Villalba, a dairy farmer from Spain’s rain-soaked Galicia region who is also a secretary general of the Galician Peasant Union, said Europe was locked in a “milk war,” with producers at each others’ throats and aggressive buyers preying on vulnerable businesses. Some 222 dairy farms have failed in Galicia since January this year alone, she said, out of a rough total of 9,000. Of those, only 2,050 are being paid above 29 cents a liter. Villalba added that some milk buyers flatly refused to buy from smalltimers, prompting producer price wars.
It’s a common story across the EU: Recent statistics show that one in 10 dairy farmers in England and Wales had gone out of business in the past three years too.
Seeking policy solutions
National governments have piled intense pressure on the Commission to act. Brussels responded by doling out €420 million directly to governments in September on the understanding they would use the cash to prop up dairy farmers.
Problems have plagued the implementation of September aid package. Eight governments, including France — which received €63 million — still hadn’t spent the money by June, citing administrative and planning difficulties as reasons for the delay. Dairy farmers hemorrhaged money in the meantime, spurring demands for yet more aid.
So in March, Hogan announced another raft of support. These included long-term measures — such as commissioning studies on how to improve farmers’ weak position in the supply chain — as well as more immediate responses such as raising state-aid limits and removing set quantities from the market.
The Commission has also promoted school milk schemes, pledged to donate large quantities of milk to Syria, attempted to develop new export markets and started examining how to use the European Investment Bank to finance struggling farms.
“I believe that this is a package of measures which, when taken with the full implementation of the September solidarity package, can have a material and positive impact on European agricultural markets and it should now be given the chance to succeed,” Hogan said in March.
The flagship emergency measure from March — activating Article 222 of the Common Market Organization — was to waive competition rules and allow producer organizations to temporarily join up to reduce milk production, thereby raising prices and giving farmers breathing space.
Many describe the voluntary measure as a flop.
“We need mandatory production caps,” García said. “Everything else is insufficient and useless.”
Jagoe said broader issues must be addressed too: Buyers are generating a profit just as farmers are losing money.
“We need to fundamentally address the supply chain,” Jagoe said. “An aid package will help but it’s only temporary.”
While there is widespread sympathy for the position dairy farmers find themselves in, there is also tension in some quarters over continually bailing out agriculture when other areas of the economy cry out for help.
“Clearly the farmers want more,” said Bernd Kölmel, an MEP from the Parliament’s Conservative group who sits on the budget committee. “But we must feel at the moment there are a lot of problems, like migration [to spend money on].”
He added that he was “OK” with a new aid package given the severity of the situation, however, he said the dairy sector should be weaned off the Commission eventually: “I think we must be clear that there are the same rules of the game for all sectors.”
Jakob Hanke contributed reporting.
This story was updated to reflect Commission proposals for new aid to farmers, including milk producers.