Markets

European stockpile proving harder to disperse

By Dairy News

Amidst the up-again down-again commentary on international dairy markets in the last few years, one of the most commonly discussed influences is the ‘European stockpile’.

The almost-380,000 tonnes of skim milk powder (SMP) amassed by the European Commission as part of its attempts to smooth out market forces and keep the farmers of the 28-member European Union in business and off the streets.

For those of us a bit more used to letting the market ‘do its thing’ (even if grudgingly), the whole concept is intriguing to say the least.

A comprehensive history of all of this could take up a year’s worth of this entire publication, but in short, the stockpile has come about by way of the European Commission’s Public Intervention (‘Intervention’) tool.

This is one of the market mechanisms the Commission uses to help fulfil the broader dairy policy objective of creating stable market conditions for EU milk producers and processors.

It’s part of what’s commonly referred to as the ‘safety net’, intended to protect the sector from ‘serious market imbalance’.

Intervention allows the Commission to purchase up to 109 000 tonnes of SMP, and 50 000 tonnes of butter between March 1 and September 30 each year at a fixed price, and additional volumes by tender thereafter.

When conditions allow, the product is sold back onto the market via a tender procedure.

Intervention has been around in some form or another since the 1960s, and helped create the notorious ‘mountains’ of butter and SMP accumulated during the 1970s and 1980s.

At its peak in 1976, the stockpile of SMP exceeded 1.1 million tonnes. Reforms that included the 1984 introduction of milk production quotas, as well as lower intervention prices, ultimately helped manage the issue, and for large parts of the 2000s, there was no SMP in public storage at all.

The scheme did successfully accumulate and subsequently clear stockpiles of 200–300,000 tonnes twice between 2002 and 2012, but in 2015 the elimination of milk production quotas removed one of the key balancing mechanisms that had allowed the system to work.

European producers had plenty of time to prepare for quota removal and in many of the more efficient producer states, milk production surged.

In the midst of the unrelated geopolitical crisis that saw the Russian market closed to European sellers and the bursting of the Chinese milk powder bubble, this deluge of new milk came at a bad time. By the end of the 2016 campaign, around 350 000 tonnes of SMP was in storage.

As commodity prices recovered in the second half of 2016, the Commission began offering product for sale via tender, however to date only around 6,000 tonnes has been sold.

This contrasts sharply with the additional 30 000 tonnes that was purchased during the 2017 campaign.

Whilst far from the historical peak, the size of the current stockpile is overhanging the market and forms one of the factors keeping SMP prices subdued where other commodities have seen a relative recovery since 2016.

The initial hardline approach to sales by the Commission has gradually given way to a perceived sense of urgency as the stock ages, and it could be argued that this in itself is weighing on the market.

And as other commentators have explained in these pages, supressed SMP prices have also helped create the butter shortage that caused all manner of consternation late last year.

So what’s to be done? With no easy answers to the question of disposing of the stockpile, the Commission’s initial focus for 2018 has been to prevent it becoming larger.

To achieve that, a temporary change to the operating regulations has been effected which changes the fixed price volume (normally 109 000 tonnes) to zero.

In other words, any and all SMP purchased into Intervention will be via a tender process, allowing the Commission absolute control over volumes, whilst preserving the intended ‘safety net’ function for use if required.

Numerous proposals have been put forward to dispose of the existing (and rapidly ageing) stocks. Some of these are relatively straightforward, including the current tender process, enhanced usage in animal feed channels, and allocation to the EU’s ‘deprived persons’ schemes.

Others range to the absurd; highlights include using the excess SMP for fish feed, biogas or even burning it. The ultimate outcome will likely involve a mix of the more sober suggestions, many months (if not years) and a great deal of expended wealth on behalf of European taxpayers.

And whilst some of the measures being advocated are as unlikely as they are ridiculous, they do underscore the increasing pressure being placed upon the Commission to solve the problem.

Perhaps ironically, a drag on farmer (and taxpayer) finances created by the very market support scheme intended to protect them.

• John Droppert is senior industry analyst with Dairy Australia.