Europe’s hidden milk lake threatens fragile market

Brussels bought up a huge amount of milk to try to boost prices. The danger is that these stocks are now forcing prices down.

HERSTAL, Belgium — Milk lakes and butter mountains were meant to be a relic of Europe’s past.

Massive EU intervention in the dairy market is back, however, and its price-distorting effects are coming in for some of the same scathing criticism as in the 1970s and 1980s, when Brussels became a byword for reckless intervention.

In an attempt to prop up prices in the teeth of a dairy crisis, Brussels has been buying up milk since 2015. A lot of milk. The European Commission has used public money to buy some 380,000 metric tons of skim milk powder. That’s slightly more than a big dairy powerhouse like France produced in 2016, for example.

Stockpiled in warehouses — mostly in France, Germany and Belgium — the sacks of milk powder conspicuously failed to stop the price hemorrhage. In fact, the EU strategy is in danger of doing exactly the opposite. Milk farmers and traders fear that the very existence of these quantities is already dragging down prices, in the expectation that they will one day be sold back.

“This powder is the problem,” said Romuald Schaber, chairman of the German dairy association. “It’s the sword of Damocles hanging over us all.”

Europe’s giant stores are the consequence of Agriculture Commissioner Phil Hogan’s attempts to keep milk farmers in business during a devastating market crisis that began in 2015, when milk farmers were hit by a perfect storm. An end of production quotas and Russia’s import ban of fresh EU foodstuffs triggered a milk glut. The crisis shuttered thousands of farms and forced the Commission to hand out over €1 billion in aid, spread across different schemes.

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Some €640 million went toward buying skim milk powder at a fixed price from farmers — a policy known as “intervention” — until officials reckoned the market had recovered. However, Brussels has sold only about 2,000 metric tons of the total sum and many argue that the policy was stillborn or that, at best, it kicked the can down the road.

Skim milk powder prices crashed disastrously from €3,240 per metric ton in early January 2014 before the crisis to €1,720 by the same time in 2016. At the beginning of this year, prices had slumped still further to €1,400. Raw milk prices, on the other hand, dropped below 30 cents per liter during most of 2016 but are now back up at around 37 cents.

On Monday, EU agriculture ministers agreed that the bloc’s purchases would have to stop. In a statement, the ministers conceded that stocks of almost 400,000 tons risked “severe pressure on the market, with a negative impact on dairy prices.”

“There is now a very clear risk of oversupply in the marketplace in the EU,” Hogan said at a press conference Monday, adding, “and this is coming at a time of having 380,000 [tons of] skim milk powder in storage.”

‘All to do with stocks’

Klaudia Feurle, an economic and trade adviser at the dairy traders’ lobby Eucolait, pointed out that was a lot of pressure on milk powder prices over the past months. “It has all to do with the stock situation,” she said. She added that although the powder is not on the market per se, the volume sitting in warehouses across Europe was enough to affect the market, even though it is not for sale.

POLITICO visited one such warehouse on the outskirts of Herstal, an industrial town in the orbit of Liège, in eastern Belgium. Thousands of 25-kilogram sacks of milk powder are stacked there in a vast, gray depot that houses some 12,500 metric tons overall. A Walloon government official present at the site explained that it cost his government about €120,000 a month to pay for storage.

Erwin Schöpges, a member of the European Milk Board, a lobby that arranged the visit, complained: “This is an example of how [Commission President Jean-Claude] Juncker, Hogan and the member states manage crises.”

He added that the stores were not only hurting prices but threatening livelihoods. “When you see this, as a farmer, you drop dead,” he said, referring to the thousands of milk powder sacks.

A European Commission spokesman said that 2017 was in fact “a rather positive” year for EU dairy because of the opening of new export markets but also warned that the way milk production is evolving in the EU poses “more immediate potential risks” than powder stores. He added that Brussels would handle sales responsibly.

Milk, sweat and tears

Still, the Commission knows that it has a severe problem.

It can typically buy up to 109,000 tons of skim milk powder at €1,698 a ton between March and September in a year, to keep the market balanced. During the crisis, however, Hogan raised that ceiling to 218,000 tons — and then later to 350,000.

“It was seen as a safety net,” said Feurle, who explained that the policy allowed farmers to at least pocket some money when the market wouldn’t deliver.

In March 2016, Joost Korte, deputy director general of Commission’s agriculture department, told lawmakers that Brussels’ efforts to manage the market hadn’t worked. “The situation is not good. There’s no need for me to beat around the bush,” he said at the time. Korte did add, however, that buying milk powder in huge volumes was appropriate given the scale of the crisis.

As a last ditch measure that July, Hogan offered money to farmers prepared to voluntarily cut milk production. Some argue that he should have pursued this avenue from the get-go. The market finally began to recover around the fall of 2016.

Schaber said he was not against intervention as a tool — but that the Commission had run amok. “This is an example that really shows you how politics should not be organized,” he said, adding that only voluntary reduction had worked.

A European Commission spokesperson said that buying up milk was “actually part of the solution to the crisis faced by dairy producers in 2016.”

Whatever the background, the problem for Brussels now is that it can’t empty its milk lake.

It’s rejected most offers for the milk and only in January managed to sell more than a paltry amount at a price it deemed fair. The Commission sold some 2,000 metric tons at a minimum price of €1,190 each — representing a loss of about €500 a ton.”If you’re a company director and you work like this … you’d have to ask yourself some questions,” Schöpges said. A Commission spokesman said that the price was in keeping with a two-year -old product, however.

Skim milk powder can keep for years but its quality gradually deteriorates — so that after a while it’s only really fit for animal feed — and the Commission knows that it must sell in the long run. Hogan told agriculture ministers last October: “I now have to be quite blunt: The product has to be sold and operators need to come up with bids that are in keeping with market reality.”

Many have set their hopes on selling the powder on world markets. EU skim milk powder exports grew 39 percent from January to November 2017 compared with the same time the previous year, for example.

However, this revives another traditional criticism of the CAP — that it dumps cheap produce on developing markets. West African dairy farmers complain that this is exactly what’s been happening with milk powder.

“When large quantities of milk powder from the EU — from intervention or directly from processors — are sent to West Africa, our local milk producers have to shoulder the burden,” said Bocar Diaw, president of the Senegalese dairy association FENAFILS.

Thierry Kesteloot, an agricultural policy adviser at Oxfam, agreed. “The solution has not been to manage supply but to find new export markets,” he said, pointing to fragile West African dairies.

Feurle said that it remained highly uncertain whether Brussels would be able to shift its milk, with officials searching for innovative options such as using it as fuel. She added that what is certain, however, is that it’s hurting the market.

“In this situation, it’s smart in light of the future of the CAP to rethink the whole system.”