Support for dairy market necessary as long as there is no upturn in global demand

16 July 2009

As a result of the global economic crisis, the European dairy and dairy farming industries are struggling to climb their way out of a deep trough. FrieslandCampina is very concerned about the impact of low prices and the trend in selling prices for dairy products and about the impact on the guaranteed price it pays its members. “A global upswing in demand is necessary to restore prices. In the meantime, it is crucially important that the European Commission continues with effective crisis support to the dairy market for as long as necessary,” says Kees Wantenaar, chairman of the Executive Board of Zuivelcoöperatie FrieslandCampina.

Dairy farmers are currently suffering financially. Sybren Attema, Vice-Chairman of Zuivelcoöperatie FrieslandCampina, however, does not see a role for FrieslandCampina in financing distressed companies. “The cooperative ensures revenue. Not the income of its members. It is the cooperative’s prime task to jointly market the milk and to bring out its value.” Attema supports the call by LTO Nederland to bring forward the payment of 2009 rights to August to improve the liquidity position of the dairy farming businesses.

Decline in demand
In 2008, raw milk prices were high owing to the strong international demand for dairy. Wantenaar: “The economic and financial crisis has led to a substantial decline in the global demand for dairy products. As a result, prices have fallen sharply, particularly for globally traded basic dairy products such as milk powder, butter and foil cheese. Unfortunately, the sharp decline in prices for these products, which virtually all dairy companies throughout the world are experiencing, is leading to unprecedentedly low raw milk prices.”

Unfortunate concurrence of circumstances
According to the chairman of FrieslandCampina, we are witnessing an unfortunate concurrence of circumstances. He points out that European politicians opted years ago to reduce the protection of the European dairy sector. As a result, prices within the European Union are strongly mirroring those in the global market. “After years of gradual price declines, at the end of 2007 there were sudden unprecedentedly sharp price rises owing to the global demand for dairy. In mid-2008, these high prices led to a decline in demand, which was unfortunately compounded by the financial and economic crisis. An improvement in the global economic situation will ultimately also benefit the demand for dairy.”

FrieslandCampina supports its member dairy farmers in taking positions in this volatile market. Wantenaar: “We are therefore focussing on a strong geographical spread, diversification across product groups and strong brands. This makes us less sensitive to milk powder and butter prices, for example. But we are also operating in markets that are under considerable pressure, so for us the marker is no longer just over EUR 0.36 per kilo of milk, as it was last year, but is currently already around EUR 0.25 per kilo of milk. Of course it is inherent in our spread and product range that we have sales channels with good revenue levels, but we also make powder, butter and foil cheese. We can’t change the basic level in these markets.”

That doesn’t mean to say, however, that FrieslandCampina is looking on passively, emphasises Attema. “Far from it. We’re doing everything to get the highest possible milk price for our members. We ask a lot of our employees. FrieslandCampina invests continuously in cost control and efficiency improvements. The closure of Oud-Gastel is an example. It meant job losses, but we’re doing it in the interests of our members.”
Processing and sale of all milk from all countries
Owing to the liberalisation of the European dairy market, FrieslandCampina is supporting the choice made by the European Ministers of Agriculture to abolish the European milk quota from 1 April 2015. In the run-up to this change, gradual quota relaxations have already been planned and implemented. Wantenaar: “In a more liberal dairy market, with obviously less market support, the milk quota is not an effective way of keeping prices high. In addition, the milk quota system only operates in a limited number of countries; most EU countries produce less milk than their quota allows.”

Wantenaar: “The Board has discussed it again at length. We continue to believe that as a cooperative dairy company, we stand for the processing and sale of all raw milk supplied by our members. Each individual member dairy farmer decides how much milk to supply. FrieslandCampina plays absolutely no role in controlling the supply of member milk and in this way facilitates the business development chosen by individual members. It is not up to the cooperative of FrieslandCampina to interfere in individual business decisions of a member dairy farmer. FrieslandCampina cannot therefore take responsibility for the individual dairy business or the individual income of a member dairy farmer.”

Wantenaar and Attema believe it is important that the Board discuss and reconfirm these benchmarks with the members at the regular member meetings this autumn. Attema: “Our member dairy farmers have been actively engaging us for decades to process and sell all their milk. That’s what we were there for when times were calmer, including two years ago when prices reached unprecedented heights, and it’s what we will continue to be there for in the future, when the EU milk quota is abolished. For our members, who all have their own dairy farming businesses with their own specific circumstances, we’re the common link to the international market. Particularly in times such as these, it is vital to discuss and support these fundamental issues with one another.”

Good outlook
Wantenaar is convinced that the longer term outlook for the dairy market remains good, even though the reality dictates that a favourable long-term outlook does not mean that prices will be on average at a permanently higher level than in the past. Wantenaar: “Worldwide, dairy is seen as a versatile and rich staple. Not only for direct consumption but also for use as a semi-manufactured product. Owing to the growth in the world’s population and the rise in per capita consumption, experts are convinced that the demand for dairy will rise in the longer term. In our area of Europe, we’re in a very good position to respond to this demand. Not only in the dairy farming business, but also in terms of sales. And outside Europe as well, FrieslandCampina has been operating for many decades in Asia and Africa, for example, where people like to buy our products.”

Attema does not see the milk price recovering in the second half of 2009. “Unfortunately, we’re not seeing any signs of a sustainable recovery yet.” Attema is not as pessimistic about the long term. “Doom-mongering doesn’t get us anywhere, it only makes things more difficult. Don’t underestimate the resilience and innovation of the sector. The dairy industry will climb its way out of this trough.”

Targeted support
As long as the end to the global economic and financial crisis is not in sight, the European Commission must provide targeted support to the dairy market, according to Wantenaar. “The European Commission has taken considered and prompt measures to support the dairy market in this exceptional situation and in doing so has prevented dairy prices from falling to even greater depths. We are calling on the European Commission to continue this support for as long as necessary so as not to choke any green shoots of recovery.”

FrieslandCampina is arguing for realistic solutions. Huge quota discounts in the short term are not an option according to Wantenaar. “That’s not in line with the path Europe has outlined. Furthermore, most Member States are already way below their milk quotas. And under these circumstances, too, the milk price is low.”

FrieslandCampina certainly wants to help devise measures that could lead to higher milk prices for dairy farmers. At the same time, Wantenaar does have some concerns. “If the European countries start to take their own measures, there is a significant chance of market distortion. And that’s not in the interests of the members of FrieslandCampina. Don’t forget, three-quarters of our milk is sold in a large number of EU countries.”

You can download this interview in PDF here.