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The world prices of dairy products and the proposals
made by several UK's NGOs to reform the EU's dairy chain
by Jacques Berthelot, Solidarité
(berthelot@ensat.fr) July
22, 2003
I – The world prices of dairy products are
meaningless
1°) To consider New
Zealand’s dairy prices as the world reference prices is absurd
For the following reasons:
- NZ accounts for only 2.2 per cent
of world milk production.
- NZ is ‘price taker’, that is, its
dairy prices are fixed a little below those of dairy
products exported - with high refunds - by the EU, which remains the
first world’s
exporter (with a world share of 21.2% for butter, 32.5% for skimmed milk
powder and 35.8% for cheese in 2000), even if NZ, 2nd exporter, follows hot on its heels.
- For sure, NZ has a true
competitiveness since it really does not subsidise its producers, but they
enjoy exceptionally favourable ecological and economic conditions for milk
production (cows mainly fed only on grass, with an average yield limited to
3500 kg/year, therefore with few inputs) and large economies of scale (271
dairy cows per farm on average and a quasi-monopoly since 96% of the market is
controlled by a single cooperative, Frontera). But, NZ is exporting already
more than 90% of its production, the latest increase in production has relied
on an increased intensification (notably through irrigation) and the pollution
of the environment is increasing fast. In other words NZ has probably not
significant possibilities to expand its dairy production without much higher
economic and environmental costs. Besides, NZ producers suffer themselves from
the low price they get, particularly the sharecroppers of capitalist farms, and
consumers are themselves paying high domestic dairy prices (Sustain, Land of milk and money, London, May
2003).
2°) The gap between
the farmgate price and the world price is considered by the mainstream theory
as a negative 'consumer's surplus': assuming that consumers are entitled to pay
the world price, this gap is consequently considered as 'subsidies' from
consumers to farmers.
But, if considering this gap as a consumers' surplus could at most be
understandable for a single small country, as long as its share of the world
consumption is negligible, applying this gap to consumers of all OECD countries
(which account for 2/3 of the world consumption, of which 62% for butter and
skimmed milk powder and 84% for cheese), like OECD does, is an unforgivable
error, even for a student in its first year of economics.
Therefore, we cannot follow Maurice Doyon, Nicolas Paillat and
Daniel-M. Gouin (Critical Analysis of the
Concept of the Producer Subsidy Equivalent in the Dairy
Sector (Dairy PSE), GREPA, 13-11-01) when
they write that "The OECD also makes the assumption
that all countries are small countries, that is, no single one of them
has any effect on the world price. This assumption may not
correspond to reality, but it has the merit of simplicity".
No,
simplicity should not prevail over absurdity!
Precisely Doyon et al. are highly
critical of OECD since "The method of calculating PSE from the price of
milk in New- Zealand implies that the gap between the reference and
domestic prices is a transfer from taxpayers
and consumers to the producers. However, as we will now
demonstrate, such is not the case".
The
more so as, to compute the negative consumer's
surplus, the use of the 'world' price is not limited to the share of
traded products in OECD (or world) production(6.4% for dairy products at the world
level, most of it intra-OECD) but to the wholeOECD
(world) consumption. At least the
European Commission was right in writing, in its reply to the European Court of
Auditors' report on milk quotas of October 30, 2001, that "the Commission cannot agree with the Court’s
claim that abolishing protection at the borders of the internal market would
bring consumer prices down to the current world market level, since the world
market price would settle at a higher level, given the size of the dairy
economy in relation to what is a fairly small world market and the importance
of the European Union in the context of that market".
3°) It is clear
that the world price would be completely different of the NZ price in a
free-trade situation
Precisely
Maurice Doyon et al, recapitulating studies made on the world dairy
prices in a
free-trade setting – defined as the situation prevailing after the
elimination
of tariffs, tariff-rate quotas and export subsidies –, have concluded
that the
true world reference prices of dairy products would be the US domestic
prices,
which are almost comparable with EU prices! They quote namely a study
by Larivière and Meilke (1999) who note that “world dairy product
prices increase substantially with free trade,
ranging from 14 % for skim milk powder to 43 % for cheese”.
4°) Therefore OECD
is slipping up three times:
- First, by considering the NZ
dairy prices as the world prices from which to compute the negative surplus of all OECD' consumers.
- While claiming at the same time
that free trade would lead to the most efficient
world prices.
- Then, when it turns that free
trade prices would be higher than those of the most
'competitive' country (NZ), it forgets immediately the sacro-sanct
theory and chooses
the prices of the country having the lowest ones!
Which shows
clearly that,
beyond the sophisticated scientific dressing of its writings, OECD is first and foremost at the
service of Western agri-food industries, and of capital's interests in
general, its main objective being to minimise the prices of their agricultural
raw materials.
5°) The OECD's
PSE's (Producer Support Estimate) indicator portrays the EU as 'subsidising'
its dairy sector by €16.1 billion in 2001 and €19.2 billion in 1999 (the year taken by
Doyon), or 190 euros per tonne of milk in 1999.
6°) But this
concept of PSE is biased in two ways:
- First it treats as 'subsidies'
not merely the actual expenditure on the dairy chain (€2.5 billion in 1999) but
also the negative consumers' surplus.
- So, for 1999, the actual subsidies,
i.e. the €2.5 billion expenditure of the EU's milk Common Market Organisation
(CMO), represent only 13% of the dairy PSE (€19.2 billion), the negative consumers' surplus representing 87%.
Hence, of the PSE expressed as euros per tonne, the subsidies part is worth
around €25 and the negative consumers'
surplus part €165 out of a total of €190.
- Actually, the PSE does not include all agricultural
subsidies since those of the indicator GSSE (General Services
Support Estimate, corresponding roughly to the
collective subsidies included in the green
box of the Agreement on agriculture:
agricultural education and training, extension, research,
infrastructures, etc.) are only
included in the TSE (Total Support Estimate) indicator. For 1999, GSSE's subsidies have represented for the milk
CMO €1.4 billion (by distributing the €7 billion of total GSSE among agricultural
products according to their share in the value of total agricultural production,
which gives 19.7% in 1999 to the milk CMO). However, since the €2.5 billion of
the milk CMO incorporate only a small part of those €1.4 billion because the
largest part is affected to the Rural development part (second pilar) of the
EU's agricultural budget, all that only allows us to conclude that the share of
the negative consumers' surplus in
total PSE's
'subsidies' to the milk OCM is actually higher than 87%. Another conclusion is that, if the PSE overvalue
considerably the actual subsidies by the share of the consumers'
surplus, it undervalues them by the subsidies going to the agricultural general services.
- Second, if the world price is
meaningless - because it is a dumped price below the production cost of almost
every country -, so too is the calculation of the 'consumers' subsidy' based on
it.
- Using
the US price of milk as the true reference price, and using besides the exchange rates based on the purchasing power parity instead
of the bilateral rates against the dollar, Doyon shows that the EU's PSE per tonne
of milk turns out to be not €190 but -€28. On
this basis the EU is taxing its
producers for the benefit of consumers at €53 per
tonne of milk : since the actual subsidies
component of the PSE per tonne is still
€25, a total PSE per tonne of -€28 implies that
the consumers' surplus component
has become positive, at €53 per tonne!
- If the actual EU's dairy subsidies
amount to only €0.34 per cow per day (€2.5 billion divided by 20.4 million
dairy cows and by 365 days), that remains nevertheless still too much, since
more than 2/3 of the milk CMO's expenditure is subsidizing dairy exports.
Indeed for 2003 the Commission has foreseen €1.8 billion for export refunds,
i.e. 67.4% of a budget of €2.7 billion for the milk CMO, without taking into
account domestic subsidies for the production of casein, a good part of it
being exported.
7°) In other words
the EU consumers are subsidised by the EU dairy farmers who do not get the fair
price they should,
at least if one is prepared to consider that the world price should be a
free-trade price, which we do not.
- Because we cannot agree with a
concept of PSE that assumes consumers everywhere are entitled to pay a 'world
price' which is generally a highly dumped price and moreover a highly volatile
one. The more so as the elimination of export refunds and import measures
(tariffs and tariff-rate quotas) does not imply the end of dumping, since
domestic subsidies are replacing them.
- The
more since, when producer prices are lowered to the world price levels – as it
has been the case in the EU for cereals since 1993 –,
consumer do not follow suit: the 'surplus' is appropriated by the agri-food industries
and mass marketing companies, and, eventually, by
their shareholders ! Let us add that the European Commission has been repeating many times, in its reply to the
European Court of Auditors' report on
the milk quotas of October 30, 2001, that "On the heavy cost European
consumers
must pay for milk and milk products because of the current level of
prices, the
Commission does not feel that liberalisation of the milk market on the
same basis as for cereals would, generally speaking, mean lower costs to those
consumers.
Moreover experience has shown that a reduction in the price at producer
level is not
automatically reflected in consumer prices... The price paid to
producers has only a
slight influence on consumers". Thus, Nestlé, 2nd
global agri-food company and the 1st for dairy products (with sales of
dairy products of $13.5 billion in 2001-02) has generated a net return (for all
products) after taxes of 21% on its $15.5 billion shareholders' equity in 2001 and
22% in 2002.
- That explains the complaint of
French milk producers against the dairy industries since they were still paid
the same price in 2002 as they had received in 1989. We also know that the UK
milk producers are in an even worst shape since, between 1999 and
2000, milk prices at the farm gate were below production costs, the net returns
of milk producers having dropped by 26%
(Oxfam, Milking the CAP, 2003).
8°) Theoretical corollaries of these findings
- What we have seen for Nestlé is also
verified for most agri-food corporations, e.g. the net return of Kraft Foods (the
food branch of Altria, ex-Philipp Morris), 1st global agri-food company, reached 15.2%
in 2002 on its $25.8 billion in shareholders' equity.
- If there is no consumers' surplus but only an agri-food corporations' surplus, the
whole theory of agricultural free trade
collapses.
- "Not at all, this does not change anything" the supporters of
the theory reply: total welfare increases if the surplus
of agri-food industries increases more than the drop in the surpluses of farmers and the
government.
- But, since those corporations are
more and more consolidated and globalized, their profits are either distributed to
their shareholders worldwide (notably to US pension funds) or reinvested worldwide.
- And, since the theory of economic welfare (and consumer's surplus) applies at the national level while the surplus
of agri-food companies is dissipated at the global level, the theory actually
collapses.
- The conclusions of econometric models
on the welfare gains deriving from
agricultural free trade are equally irrelevant,
as well as the theoretical approaches which criticize the so-called non-tariff barriers
in agri-food markets: quotas, variable levies, tariff quotas, prices bands at the import
level.
II – The proposals of several UK NGOs to reform
the EU's milk CMO
It is in the context of the previous analysis that we can interpret the
reports made by CAFOD, Oxfam-International and Sustain on the EU's milk
CMO, since they endorse the OECD's PSE indicator.
1°) The CAFOD report on the CAP
CAFOD (NGO of the UK Catholic Church)
writes in its general report on the CAP (Dumping on the Poor. The
Common Agricultural Policy, the WTO and International Development,
September 2002) that "In the EU, the average cow now receives total
support from EU governments of US$ 2.20 a day, more than the income of
half the world's population. EU support to milk production per cow is
16 times more than the average per capita spending on education by all
developing countries… and over 90 times more than per capita spending
on education in the world's Least Developed Countries. EU governments
spend enough money on the Common Agricultural Policy every year to fly
all their 21 million dairy cows around the world – stopping off in
London, Shanghai, Hong Kong, Singapore, Hanoi, Siem Reap, Brisbane,
Auckland, Raratonga, Los Angeles and San Francisco – and still be able
to give them over £400 spending money each. EU governments spend enough
money on the Common Agricultural Policy every year to give all their 21
million dairy cows a two week cruise in the Caribbean or pay for a
month-long walking holiday in the Himalayas".
CAFOD should have used
better its overactive imagination in devising alternative proposals to
the present milk CMO. By the way it contradicts itself blatantly when
it recognises that "The striking thing about the current dairy regime
of the Common Agricultural Policy is that no subsidies are paid to
dairy farmers directly. Instead subsidies are paid only to processors
and exporters… Although dairy farmers often benefit from the level of
support given, the lion's share of benefits are captured higher up the
supply chain [it would have been more appropriate to write downstream
the dairy chain]… and in certain circumstances they are actually losing
out".
CAFOD has nevertheless used again this magic figure of $2.20 per cow
per day in its last press release on the CAP reform of June 26, 2003.
2°) The Oxfam International's report on milk
Oxfam International (OI) writes on the front page of its Briefing Paper
"Milking the CAP. How Europe’s dairy regime is devastating livelihoods
in the developing world" (December 2002) that "European citizens are
supporting the dairy industry to the tune of €16 billion a year. This
is equivalent to more than $2 per cow per day – half the world's people
live on less than this amount".
This figure was used by the chair of the World Bank and appeared on the
front page of Le Monde.
The OI's report is proposing rightly to reduce milk quotas to the level
of the domestic market's needs and criticises rightly too the EU
Commission's proposals (most of them adopted by the Council on June 26,
2003) to reduce sharply the intervention prices and to increase the
milk quotas (which will eliminate the smallest producers), since the
EU's objective remains to become more competitive to export. But OI is
silent on import protection, from which one can infer that it would be
maintained at its present level – which should be approved – because
the intervention prices can clearly be maintained at the present level
only to the extent that import protection remains itself unchanged.
What is not clear however in that report is the constant referral to
the European Court of Auditors' report of October 30, 2001 since,
although it recommends rightly to lower the EU's milk production to the
domestic market's solvent needs, it recommends as well to eliminate the
quotas – which is by the way contradictory with the limitation of
production to the solvent needs in the domestic market – and to lower
milk prices. The European Court of Auditors advocates also an increase
openness to imports, referring itself to the dairy PSE: "For the period
1997 to 1999, the OECD assessed the producer subsidy equivalent (PSE)
as being 54 % of the value of output for milk as opposed to 44 % for
agricultural products as a whole. In other words, EU consumers pay for
dairy products twice as much as they would in a free market". It is
clear that a lower import protection would generate lower domestic
prices which would not induce farmers to stabilise the production level
on the solvent needs of the domestic market. And, since the Commission
has rightly replied to the Court of Auditors, the 20% required
reduction in the quotas' level would imply such an amount of direct
payments (€12.5 billion, on the basis of €100 per tonne of milk for 5
years) that it would be incoherent with the CAP's budget ceiling.
Finally, the Council's decision of June 26, 2003 to lower by 25% the
intervention price of butter, by 15% that of skimmed milk powder and to
increase by 1.5% the volume of milk quotas would translate into a 20%
drop in the milk price at the farm gate by 2008-09, even if direct
payments would compensate partially the drop in producers' income.
Simulations have shown that a 1% increase in milk quotas in France
would reduce the milk price by 4%.
3°) The Sustain's report on the EU's
dairy CMO
The Sustain's (a co-ordination of most UK NGOs working in the field of
agricultural and food policies and their impact on DCs) report of May
2003 ("Land of milk and money?") persists in the same line, stressing
that the milk PSE of €16 billion constitutes "a more accurate measure
of EU support" than its expenditure for the milk CMO "as it includes
indirect support reaching the sector", specifying that the milk PSE
"represents 40 per cent of the value of EU dairy production. This is
the equivalent of US$2.4 per day per cow".
Sustain is however unsettled since it writes immediately after: "Given
such huge support, it is baffling to many why dairy farmers seem to be
failing. In reality, much of this money fails to reach the farmers
themselves. The subsidies largely benefit the dairy processing and
exporting industry". It adds further on that "consumer price, not only
bears little relation to farmgate price, but it is also not a
significant issue in richer countries in the EU".
Sustain makes an enormous mistake when it asserts that "The dairy
sector is already
the most expensive of the individual sectors within the EU". One cannot
be further from the truth, since the European Court of Auditors
underlines (in its report of October 30, 2001) that "The expenditure on
the milk and milk-products sector has decreased from 4285,3 million
euro in 1983 (27% of EAGGF-Guarantee expenditure) to 2601,3 million
euro in 1999 (6,5% of EAGGF-Guarantee expenditure)". And the Commission
itself confirms that "The quota system has in this respect been a major
instrument of control over expenditure. The Commission would state once
again that the cost of the dairy sector to the taxpayer has fallen
sharply and that the price paid to producers has only a slight
influence on consumers". The more so when we know that the income from
milk represents 14% of the EU farmers' income.
Sustain's proposals to reform the milk CMO are inconsistent. If we
fully agree with its objectives of refocusing the production on the
needs of the domestic market, hence excluding dumping, and within
environmentally and socially sustainable farming systems, the means to
get there are inconsistent or vague:
First it is said that the "new
system would require an element of border protection based on costs of
production, level of Producer Subsidy Equivalent (PSE) and food,
welfare and environmental standards achieved". The first part of the
sentence "an element of border protection based on costs of production"
is as logic as the intrusion of the words "level of Producer Subsidy
Equivalent (PSE)" is incomprehensible and underlines the extent to
which Sustain does not understand much the meaning of this concept
(incidentally PSE means Producer Support Estimate since 1999). On the
other hand it would make more sense to base the level of border
protection on food, welfare and environmental standards 'aimed
at' rather than 'achieved'.
Second, it is said that "The new policy
would be based on an anuual grassland direct payments replacing price
support and intervention. It should be based on environment, animal
welfare standards and occupational health and safety standards".
Sustain proposes to fix this payment at €200 per hectare and "Given the
current coverage of EU dairy production (17 million d'hectares)… the
payments could amount to €3.4billion/year for the EU compared to the
current estimate of $17.3845billion (€11.3bn) through price support via
consumer prices and other measures. The financing would be via the CAP
budget i.e. taxpayers, rather than through higher consumer prices". We
see that Sustain is again mixing actual subsidies (€3.4billion) with
the PSE, whose largest part represents the negative consumers' surplus
(and in fact the positive surplus of agri-food industries and mass
marketing firms), suggesting that those 'subsidies' would drop strongly
with its proposed policy. Comparing its proposal with the present cost
of the milk CMO (€2.7billion foreseen for 2003), we see that this cost
would be higher, not lower. The more so as, in proposing to maintain
the import protection at its present level or even to increase it
(which would result from basing it on higher "food, welfare and
environmental standards"), the negative consumers' surplus not only
would not drop but would even increase.
Third, "To ensure supply and
demand are matched, direct payments could be combined with a new system
of supply management, based on allocations, replacing the current,
flawed, system of quotas… Allocations would be made on a regional
basis…which would eliminate surplus". This supply management is
excellent but, if the British system of free market of milk quotas has
lead to such abuses (7370 non-producing quota holders hold around 10%
of the total UK quota, among which Manchester United Football Club)
that it demands profound changes, the new allocations are nothing but
another type of quotas which do not admit their name!
Finally it is
said that "Prices would not be set but given the set of measures both
in the new regime, with changes in world prices following CAP reform,
and with stronger competition rules, [they] would reflect the cost of
production plus realistic additional income".
The least we can say is
that those analysis and proposals are not themselves very 'realistic':
- How can we say that "prices would not be set" when the import
protection and supply management measures would cover the costs of
production and good "food, welfare and environmental standards"?
- How
can we write that "The new policy would be based on an annual grassland
direct payments replacing price support and intervention", that "The
financing would be via the CAP budget i.e. taxpayers, rather than
through higher consumer prices" when import protection is the most
obvious and efficient form of price support?
- How can we be sure that it
would be enough to eliminate the export refunds to increase the world
dairy prices to such a level that it would not be necessary to maintain
a high import protection in order to cover production costs? If the
'fair' prices stemming from the import protection and supply management
measures cover already production costs internalising external effects,
how then is it necessary to add a direct payment of €200 per hectare,
the more so for all dairy farms (only organic farmers would receive an
additional payment)?
4°) To conclude, which reform of the milk CMO
should we promote?
Of course, there are plenty of good proposals in the preceding reports
to improve the present milk CMO, even if I have focused on the
limitations of those reports. I will limit myself here to make some
major lines to follow for a better milk CMO:
Milk quotas shall be maintained but reduced by about 25 million tonnes:
10 million for products exported with dumping and 15 million tonnes for
subsidized products consumed on the EU's market, notably for the
skimmed milk powder fed to calves.
Once fed directly by their mother, their welfare would improve much as
well as consumers' welfare.
As to subsidies to increase the domestic
human consumption of dairy products, Sustain is right in underlining
the danger for human health of such subsidies. Consequently the bulk of
the present milk CMO expenditure would disappear. In order to promote a
sustainable CAP, and not only for the milk CMO, quotas should be
considered as a user right – not a property right – granted by society
to farmers during their agricultural active lifetime. This implies that
the reduction by 21% of milk quotas should weigh on the largest
producers and give rise to compensatory payments only marginally when
the reductions would affect also the small producers. The EU should at
least maintain its present level of import protection or even increase
it slightly if necessary to allow the dairy farmers producing 50% of
the EU milk production, situated in the most favoured areas and in
sustainable family farming systems, to get a fair income only through
prices, without direct payments. Only the too small farms of the
favoured areas and the family farms of the deprived areas would be
eligible to direct payments to complement their farm income, within a
ceiling per employed person. All farmers with a milk quota, and
benefiting or not of direct payments, would have to comply with a
reinforced conditionality not only for the protection of the
environment, food safety and animal welfare, but also at the social
level. Production ceilings would be imposed to dairy farms because,
above around 100 milk cows, external effects are very high since it is
then almost impossible to feed cows only on grass.
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