Wednesday, September 23, 2015

Milk: the global market works as it should - but we don't like the results

I think most readers are aware of that the there is a "milk crisis" going on. It is not a crisis of milk shortage, rather the opposite; it is a crisis of oversupply and falling prices. It is described in terms of catastrophe, of being exceptional (sometimes it is blamed on Putin, but the Russian ban on imports from the EU plays a role, but a very small role). It is indeed severe, but overall the situation is just a peak of a development that started more than hundred years ago, an increasingly global market for food, fueled by cheap transportation, efficient logistics and de-regulation.

New Zealand accounts for about one-third of global cross-border trade in dairy products, but only account for a little over 2% of total world milk production. This means that the so called world market price is determined at the fortnightly auctions of Fonterra, one single actor. Considering that only seven percent of the dairy products produced are actually sold outside of the country of production and that the volume traded by Fonterra is in the range of two percent of the global production it is a remarkable achievement – or a scary expression of globalization – that dairy farmers all over the world will sleeplessly await the results of Fonterras auctions. And not even the farmers in New Zealand, the "market leaders" earn any money from milk at the moment. Milk is so important for the economy that the milk crisis throws the whole economy in a slump.

The EU Council and the member states grapple with the crisis and make one after the other proposals. One suggestion is to increase the exports of milk from the EU (the EU is already a big net exporter) to other countries, but then European farmers will just prey on their colleagues in other countries, which is noted by the European Milk Board (the EMB), the European Milk producers lobby. The EMB suggests a compulsory milk Market Responsibility Programme, which they describe as "an extremely market-oriented instrument". It seems to me that it is a call for re-regulation of the market, but with new instruments.

By and large, the milk crisis is a reflection of how global markets should work (after all, increased competition is the main function of free trade) and why farmers are stuck in a treadmill. This is how I explain the treadmill in Global Eating Disorder. By and large farmers are stuck on a treadmill. They are forced by competition to increase productivity, and the increased productivity leads to lower prices. The fact that ’people will always need food’ is a small comfort for the farmer who cannot compete. Vanguard farmers will constantly develop and improve and mostly increase in size, at the expense of their less successful col­leagues. They will establish a new level of costs and prices each time racking up the notch for the minimum efficiency needed to stay in business. For farmers who cannot participate in this stiff competition there is no way out except to get out! Some production disappears all together. 

In some parts of the world the available natural resources clearly limit the possibilities for large-scale farming. Compare for instance the conditions for a farmer growing grain in a traditional agriculture area of Europe. The landscape is varied and roads, rivulets, hills, settlements and cultural and archeological remains mean that fields cannot be expanded. Because of land scarcity, land prices are also high and not primarily determined by agricultural productivity. The farmer will end up with a small farm and the size of machinery he or she uses can never be the same as on the Great Plains. Those farmers cannot produce grain at the same price as their competitors in United States, Russia or Argentina, even if they can intensify production and get higher yields per hectare.

The same obviously applies to the relationship between huge farms in rich countries and small holders in developing countries. The use of fossil fuel by big farms has increased their productivity tremendously, i.e. it lowered the costs and thus the product price. The same cheap energy also radically increased the level of competition, as transport costs today are a small part of the final product price. Farmers all over the world compete in the same market. Even if small farmers' labor cost are set at zero, they can not compete as their costs of production (seeds, transport, soil preparation, credits, and fertilizers) are mostly higher per unit. Under those circumstances low labor cost is no competitive advantage. Millions of smallholders operate far below their ability to renew or invest in their farms. That is the reason why more than 80% of the farmers in sub-Saharan Africa and around half of the farmers in Asia and Latin America still farm manually.[i] Agriculture historians Marcel Mazoyer and Laurence Roudart conclude that such farmers would have to devote all their monetary income over a whole life to upgrade to ox-plowing.[ii] However, they are still, mostly, (just) above the threshold of survival, which mean that they will continue to farm as long as there are no more promising alternatives beyond agricul­ture.[iii] But it also means that, apart from producing their own food, they will prefer other income-generating activities to agriculture.

The treadmill is driven by specialization and – in turn – it drives further specialization, filling each area with just one or two crops or huge livestock operations. The economic and social implications are huge, but the environmental implications are even bigger. Large-scale landscapes are stripped of variation and biodiversity. They no longer produce the required ecosystem services which have to be produced elsewhere at high costs. In, addition these forms of production also cause direct and indirect damage to nature which have to be compen­sated for. This specialized, industrial, model of agriculture is replacing more and more local and varied regenerative systems. It is a key reason why agriculture produces cheap food but is also the chain that ties farmers onto the agriculture treadmill. Unlimited competition in agriculture will never be sustainable, ecologically, economically or socially. It only leads us further away from sustainability.

Order Global Eating Disorder for a 10% discount at: using the code: GWDZZD8D. 

The remedies against the milk crisis will largely be in vain unless this underlying problem is addressed. 

[i]            Mazoyer, M. and L. Roudart 2006 A History of World Agriculture: From the Neolithic Age to the Current Crisis Monthly Review Press.
[ii]           Ibid.
[iii]           Ibid.