MILK DUD

Jun 04, 2008

Listening to the debate, you wouldn't know who to believe. On reflection, it would seem that they are all misleading us with incomplete information and that we shouldn't believe anyone. At the bottom of the chain are the milk producers, who say they are compelled to sell milk at a significant loss to processors. Major milk processors in the Baltics claim that they are barely staying afloat and are being squeezed by heavy-handed retailers. Finally, grocery chains are insisting that they only add their set markup to the wholesale price and that the processors are to blame for the runaway shelf price of milk and dairy products. Processors respond by pointing to rising energy and labor costs, a familiar song.

All this, and at a time when global prices for food have reached unprecedented heights. In Latvia alone food inflation is 22 percent, the second highest in the EU. Prices for milk and cheese have increased by a third in Estonia and Latvia over the past year, and nearly as much in Lithuania, which is inconsistent with each market's output potential. As a commonsensical person would expect, there is plenty of blame to spread around for the Baltics' dairy woes: inefficiency, lack of competition, an ill-conceived system of subsidies, and, of course, poor economic leadership.

First, there are too many small dairy farmers in the Baltics. In Latvia alone there are some 18,000 farms making milk, with an average four or five cows. There is no way they can expect to compete with large German and Nordic milk producers who benefit from economies of scale. Consolidation is long overdue. As it is now, Latvia's cow farmers now sell milk at 0.17 lat (0.24 euro) per liter, far lower than last year's peak, and far less than they need in order to cover costs - which include interest on loans for modernization (required to meet EU norms).

Second, Baltic milk processors are notorious for "cooperating" among each other - i.e., agreeing on purchase prices. The government and security agencies should do more in aiding the competition council in probing alleged price-fixing and cartel arrangements.
Third, the system of subsidies for exports, established by the European Union, misconstrues market forces. In a recent interview, the CEO of Valmieras Piens, a dairy producer, said that of Latvia's annual milk output - or 800,000 tons - half is exported to non-EU members such as Russia at below-Baltic market prices. To compensate, he explained, Latvian milk processors are forced to raise prices at home. The EU used to compensate dairy exporters for their losses on these exports, which allowed to keep the shelf price lower. But Brussels abolished the system last year, leaving exporters to their own devices. Faced with a mounting economic catastrophe, Latvia's Agriculture Minister Martins Roze has requested that the subsidies be reactivated.

This is a bad idea. If exports don't cover costs, they shouldn't take place at all. Period. There's no reason why EU taxpayers - or to the point, Latvian consumers - should have to pay for someone in Pskov to munch on Valmiera cheese. If we take loss-making exports out of the equation, then Latvia will have 400,000 tons of extra milk. Which is a glut. Bankruptcies will follow left and right, but this will lead to consolidation, increased effectiveness, and lower prices. To prevent processors and retailers from gaining the upper hand, the government should allow small farms to sell milk, even non-pasteurized, directly to consumers.




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