Wednesday, April 10, 2019

A tilted market is the normal market

The image of the market with two equal partners making a fair deal is just a dream, with no grounding in reality. Regardless if we like the market economy or not, we are better off if we realize the flaws in the claims of fairness and see the shortcomings of it.  

Oxfam in Belgium, SOS Faim the European Milk Board (which is an independent association of milk farmers) and Mon lait est local (My milk is local) are currently running a campaign against the exports of European milk powder to West Africa. They have produced this video explaining the problem. 

Huge European dairy companies have expanded aggressively into West Africa. Over five years, they have nearly tripled their exports of milk powder to the region. Since 2008, EU exports of fat filled milk powders (see below) to Ghana have almost tripled (from 4,370 tons to 18,828 tons). Had the increased “milk” consumption been met by local sources, this could have given rise to some 318 new dairy enterprises with an average herd size of 100 head.  This would also have stimulated local feed production and preparation. This stands in sharp contrast to the 8 jobs created by Arla’s recent investment in Ghana, according to EPAMonitoring.

"People who live from milk are struggling," Adama Ibrahim Diallo, the president of Burkina Faso's milk producers and mini-processors union told Politico in August 2018. He said farmers in his region are gradually giving up, explaining that his processor receives 200 liters of milk a day where once it took 300. Diallo warned that the problem is aggravating the security situation in the Sahel. "The sons of pastoralists become jihadists — not out of conviction but because there are no jobs."

The formula for success is to skim the cream from the milk, the cream and butter market in Europe is still good. Then, instead of the cream, you add palm oil (!) and some sugar and you get the product “fat filled milk powder”, made from skimmed milk, buttermilk, palm oil and sucrose. Then you export the stuff to developing countries, such as Senegal, Burkina Faso or Nigeria. Of course in the marketing, the replacement of expensive butter fat with cheap palm oil is expressed as a health benefit.

The locally produced milk doesn’t even compete with milk, but with a product that would not be allowed to be marketed as milk in the countries of origin. “ ’Milk’ means exclusively the normal mammary secretion obtained from one or more milkings without either addition thereto or extraction therefrom” as is stated in an EU regulation from 2013. 

The export of milk powder to West Africa is not new, but it gained new momentum in conjunction with the milk crisis of 2014-2016. It’s root cause was global overproduction and falling prices. It hit European dairy farmers extra hard through a combination of the abolition of milk quotas in Europe and a Russian embargo in the aftermath of the Russian annexation of Crimea.  In order to deal with the crisis the European Union took a number of measures, including special support packages to farmers as well as buying huge quantities of milk powder to lift the pressure on the market. As a result of EU interventions, EU exports of skimmed milk powder increased with 59%, despite a 50% decline in global prices.

It is not a new story though, or unique for dairy. Consumption of poultry meat, in Sub-Saharan Africa (SSA) increased 99% between 2004 and 2014. However while domestic SSA production has increased only 57%, imports have increased a massive 209%. Often the exports are of the less desirable parts of the chicken which are hard to sell in Europe.

It is frequently argued that these are examples of unfair trading practices. And of course they are unfair.

Unfair is normal when it comes to trade, and the more so the bigger difference in scale and abilities there are between the trading partners. The successful actor will use its strength. To have conducive policies in a country is essential for competitiveness, which is expressed by politicians and businesses alike. To be big is also a success factor and European dairy companies are very big. Danone annual sales are bigger than the total economy of Senegal. Big companies will get favorable credits and preferential treatments by governments. A successful actor will innovate, e.g. by replacing butter with palm oil and pack their products in tiny disposable plastic bags affordable and easy to use. Successful actors will seize opportunities and “beat the competition“.

The sales of fat filled milk powder in West Africa are not the result of market failure or market distortions, they are the result of the normal workings of markets as we know them. The image of the market with two equal partners making a fair deal is just a dream, with no grounding in reality. Regardless if we like the market economy or not, we are better off if we realize the flaws in the logic and the shortcomings of it.   

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