Wednesday 28 September 2016

French farmers would vote to leave the EU if given the opportunity

Kevin Bellamy

Published 27/07/2016 | 02:30

Inimitable militant French style: French farmers protest
Inimitable militant French style: French farmers protest

I was with a group of French farmers a couple of weeks ago when one of them told me that "if they could, French farmers would vote to leave the EU tomorrow."

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At the time the comment stunned me. I've always thought that the whole point of the Common Agricultural Policy (CAP) was to support French Farmers.

The comment, however, gave an indication of the level of frustration which has built up over the perceived mis-management of the removal of milk quotas.

The French claim they have taken the 'responsible' route of implementing supply contracts which limit the over-supply of milk to the market. They feel only when Europe's milk supply is 'managed' will prices be sustainable.

The French view, of course, is not universally held. The polarised arguments in putting together the latest €500m support package for farmers are further demonstration of the difficulty which EU Agriculture Commissioner Phil Hogan and his cabinet face in trying to reach a solution.

Faced on one hand by the strong logic of the Irish industry that quotas have held milk production in Ireland at well below the competitive capacity, and on the other hand the French, who are by no means alone, in their wish for a return to the days of a more managed market.

On this basis last Monday's announcement can probably be considered a victory for the Irish in that only €150m of the package will be devoted to limiting supply and that the scheme, when the details are finally announced, will be a voluntary one.

Certainly the market remains over supplied, the Russian embargo will now extend to the end of 2017, low oil prices continue to dampen demand and the Chinese, while returning to the market in 2016, are not likely to repeat the buying spree of 2014.

But production in Europe has continued to grow across the continent with annual production until May up 3.6pc year-on-year and 308,000 tonnes of skimmed milk powder bought into intervention in 2016.

The decision to extend the intervention and public storage aid schemes beyond September is certainly a good one.

Since most of the extra milk causing the oversupply has been produced in Europe, perhaps it is fair that the EU tax payer foots the bill for removing the surplus.

World markets

But the GDT Auction in New Zealand and global commodity prices in general closely follow (in US dollar equivalents) the €1,698 level set by the commission for buying skimmed milk powder off the market. It is the world market which the commission is supporting rather than just European milk prices.

That is the flaw in the French argument.

Unless we return to the protectionist approach of building a high tariff barrier around Europe and manage supply tightly we are now part of the world market.

Such an approach will maintain the inefficient and prevent the young farmers from entering and those with the competitive position to supply world markets from doing so.

Without restricting trade, the commission's attempts to manage supply are attempts to manage Europe's supply onto the world market and therefore the world market price.

Although the details have yet to be announced, the word is that the scheme will be targeted at paying farmers who produce less in the fourth quarter of 2016.

By that point the impacts of low milk prices around the world are likely to have dragged further on global production levels while sustained demand from US and European consumers will combine to reduce the surpluses available for export.

Since the Commission by law cannot sell the intervention stocks back onto the market in a market distorting way, it seems likely that the world dairy market will in any case tighten later in the year and prices would have risen in 2017, with or without further measures to reduce supply.

In short the Commission's attempt to manage supply may bring extra cash to some who would probably have reduced supply in any case, will not prevent those who want to from expanding it and may accelerate market tightening that probably would happen anyway. If only they could make the French happy too.

Kevin Bellamy is a dairy analyst with Rabobank

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