Sep 24, 2009

Milk Market crisis in Europe

Last Saturday I found out in the news of a dairy farmers protest in Plainpalais. Their target was Migros. Yesterday I kept reading about angry farmers dumping milk all over Europe (from the Netherlands to Spain). Why this waste? What is going on? The reason lies within three facets: distorted policy and the global economic crisis.

The dairy market is and has always been characterized by either restriction to production, or price support programs, or both. The effect of those systems is generally a a very price- inelastic supply curve, and a market price heavily influenced by demand fluctuations.
In the past years, due to several concurring factors, the price of milk increased rapidly, so rapidly (due to global higher demand) , that, for example, the EU decided to abolish their export subsidies, while allowing a gradual increase in production quotas. The combined effect would have been to bring prices closer to the "world market" level, and so to kick start a process of gradual liberalization of the dairy market. What happened in between, we know now, is the global crisis, which provoked an unprecedented drop in worldwide prices due to a collapse in demand. The situation is that, in sign of protest and to prevent the price from falling further, some farmers have decided to dump milk. At the same time, some of them blame the big distribution chains (like Migros in Switzerland) of starving them by imposing a market price which, they say, barely covers the cost of production.

Temporary solutions are being proposed to stop the protests, but the idea of the EU commissioner is to maintain the stated objective of gradual liberalization of the market by 2014. One option under study will be to improve on existing market based mechanism to prevent prices from fluctuating so heavily, like for example, strengthening the market for milk futures. Like to say, we need more market, less state intervention for this not to happen again.

1 comment:

Pierre-Louis said...

In Quebec we also have milk subsidies that result in over production and falling prices when demand is hit...and we also have milk sprayed all what is our solution: massive advertising! The milk ads on TV and billboards are probably the best in Quebec...I remember one about 2 skeletons escaping a biology lab at night to go feast on chocoltae milk in the cafeteria...and making out after!