Kiwi dairy industry should have seen EU subsidies coming

When the EU agricultural commissioner announced the reactivation of dairy export subsidies the usual suspects were quick to gnash their teeth – but the New Zealand dairy industry, led by Fonterra, may have to bear its share of the blame.

Commissioner Mariann Fischer Boel announced last week that export subsidies were all but unavoidable due to the astonishing fall in dairy prices, caused by lowered demand worldwide and overproduction from New Zealand – Fonterra, responsible for 94% of our production, controls nearly 40% of global trade.

The measures, introduced in 1968, were suspended for the first time in 2007 as part of the EU’s common agricultural policy (CAP) reforms, and in response to record high dairy prices (nearly $US5000MT for milk powder).

That price now sits at around $US1800-2000MT, well below EU intervention levels of around $US2900.

After pressure from French and German farmers, Mrs Boel said she was forced to lift the suspension to stabilise her domestic markets.

Fonterra has expressed disappointment with the decision amid fears it would distort the global dairy market.

But the co-operative’s former managing director of global trade, John Shaskey, believes Fonterra’s lax sales attitude has flooded the market with product, a problem set to worsen as the northern hemisphere’s production comes online.

“Now that Fonterra’s sitting on a large percentage of production that it should’ve sold already there will be customers out there assuming the price still hasn’t found a floor,” he said.

Fonterra’s executive team assumed that there would be continuing demand for its product. Its business plan wouldn’t have factored in any return of EU subsidies, he said.

Fonterra’s online dairy auction platform, GlobalDairyTrade has also been blamed by Fonterra’s competition for adding too much transparency in a troubled commodity market.

The last trading event posted an average trading price for all products of $US2017.

The EU dairy export subsidies could in the region of $US1000 a metric tonne, but the bottom line is that there isn’t one, Mr Shaskey said.

“The Europeans can choose to do exactly what they want to do.”

The EU’s decision will add more uncertainty to a market already “hanging back” to see what happens, hurting prices.

NBR asked George Cunningham, charge d’Affaires of the European Commission Delegation to New Zealand, whether the move was hypocritical given its pledge to lower agricultural trade barriers by 2013 at July’s WTO Doha development round in Geneva.

“For the moment there is no agreement on the Doha round and the situation in the EU dairy sector is exceptionally difficult. This is why the Commission decided to take action. The reactivation of the export refunds is temporary until the market situation is stabilised. In any case, it goes without saying that all the current WTO commitments (Article 9 of the Agreement on Agriculture) will be fully complied with,” he said.

While the specifics of the measures have yet to be revealed, the EU Management Committee for the Common Organisation of Agricultural Markets met on Friday to set the rates and destinations.

The refunds will be put to tender next week, and the frequency will be increased from fortnightly to weekly, he said.

Given the US Department of Agriculture has been increasingly falling back on its CCC (Commodity Credit Corporation) to buy back milk powder, the rise of recession-excused neo-protectionism is already well underway.

Reliance now goes on high level government negotiation by new agriculture and trade ministers, David Carter and Tim Groser, who have already expressed outrage at the announcement.

Another trade commentator told NBR that this will be difficult, and a price resurgence or recovery of the Doha rounds will be the only way to fix the problem.

“The problem with making those 1980s ‘our farmers have no support’ free trade arguments all over again is that quite simply, our farmers have been making a pile of money over the past few years. It just won’t wash with the Europeans,” he said.

 

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