Dairy farmers in the rest of the world regard their European - and in particular their Dutch - colleagues with a mixture of disgust and admiration. They consider it pretty smart – and that is what it is – to milk the consumer and tax payer dry without their realizing it. This trick leads to milk prices which are far higher than the world market price. In recent years, the world market price amounted to about 15 euro cents per kilo. The European target price, which is supported by subsidies, is around 30 euro cents per kilo. The European farmer is able to avoid that 15 euro cents price difference for the most part, through Brussels. European farmers dump their production surplus (about 25%) on to the world market. At an average production of 600,000 kilos of milk, a Dutch dairy farmer alone receives an export bonus of more than 22,000 euro. (25% of 600,000 kilos milk is 150,000 kilos milk. This surplus production is dumped on the world market at 15 eurocent per kilo. 150,000 x 15 euro cents is 22,500 euro.)
Non-European farmers are impressed by the number of kilos of milk that can be extracted from a cow here. In large dairy countries such as Australia and New Zealand the annual production per cow remains at a little more 4,500 kilo. In The Netherlands, the average annual production amounts to more than 8,000 kilo, but there are industries where an annual production of 12,000 kilo per cow is no exception. Respect starts to wane when you consider the facts. The high Dutch production rate is based on subsidies and an industrial-styled production method.
A comparison of production at sector level shows a completely different picture. For the Dutch annual production of 11 billion kilos of milk, 37,000 farmers are required. Australia produces 8, 7 billion kilos of milk and only needs 14,000 farmers to do so. In New Zealand, 14,000 farmers produce more than 9 billion kilos. Whereas in Europe production is hindered by restrictions, “the sky is the limit” in Oceania. An increase in production of at least 30% in the next five years is once again on the agenda there.
The destination of this increased production is the world market, where there is still much room for growth. Traditional dairy haters such as the Asians are starting to appreciate the white delicacy. Slowly but surely, Asia is crawling out of a financial economical crisis. The associated growth in buying power will only allow the dairy consumption on that continent to increase. The domestic milk production is not (yet) impressive, so that great chances are open to exporters of dairy products. Certainly when those exporters, such as Australia and New Zealand, are almost only around the corner. Another emerging market is South America, not only as consumer market, but also as producer. Argentina, in particular, is starting to emerge as a true agro-tiger.
The producers outside of Europe, and especially in Australia and New Zealand, not only produce cheaper, generally speaking, but they do that in a cleaner way. ‘Clean and green’ is the trademark with which they wish to conquer the global dairy market. There, the cow’s menu consists of fresh grass, without additives such as slaughter offal, brewers’ grain, or flower bulbs full of pesticides. This is why the milk production per cow is considerably lower. But the quality is higher and the price per kilo is considerably cheaper.
In dairy production as a whole, the world dairy market does not count for much. Most milk is locally or regionally consumed. Of all the milk produced in the world, only about five percent, in the form of butter, powder or cheese, is destined for foreign countries. That relatively small market is of vital importance to the large exporting dairy countries and can make or break farmers’ incomes.
The latter was felt particularly in Australia and New Zealand over the last fifteen years. The United States and the European Union maintained a price policy which was independent of the world market prices. The price difference with the world market was not only compensated by subsidies for the home farmers; the European and American surpluses were dumped on the world market at any price.
The impact of that dumping was and is still felt most in Oceania, where there are no subsidies. This disapproval of subsidies and dumping is, however, not a moral one: it is simply not possible to afford a subsidising regime in relatively small economies. 18 million people live in Australia, not even 3 million people live in New Zealand.
In 1984 New Zealand stopped subsidies radically. The Australians only learned their lesson at the beginning of the Nineties when they became disillusioned by an intervention in their wool production. The wool, at that time produced with subsidies, still hangs as a financial millstone of A$ 1 billion (more than 600 million Euros) around their neck. And it will take until well into the next century before they get some relief.
The Australian and New Zealand dairy industry watches with interest how European dairy will be able to wriggle out of such a tight corner. The subsidising regime for agriculture was introduced at the time to increase production and to make Europe self sufficient. But when that goal had been finally reached, at the end of the Seventies, nobody in Brussels dared to apply the brakes. The Green Front, at that time a closed and influential group, had Europe in a firm grip, and at the same was being ruled in the background by the European Agricultural banks. For them, the policy of support for agriculture was a non-risk gold mine. Investments in the primary sector were financed blindfold by the Rabobank and her European sisters. “How much do you think you need? No problem. Interest and repayment guaranteed by Brussels.” And in this way the European Agricultural Banks built up an immense financing portfolio. In The Netherlands, this was the Rabobank, with a market share of almost 90%; an amount of more than 15 billion Euros was concerned. Those loans are reflected in the cost price of Dutch milk.
More than half of the cost price of Dutch milk is related to financing of production: production rights, land, buildings and machines. Dutch dairy farmers like to see themselves as the most efficiently producing farmers in the world. In Australia and New Zeeland, people have another opinion of this. The Dutch cost price per kilo of milk fluctuates between the 25 and 27 euro cents. Is this efficient? In Australia and New Zealand the cost price is under 13 euro cents. The climate conditions there are such that the cow does not need housing. The land is extremely cheap and the fleet of machinery is much less extensive. The cows are always outdoors and collect the grass themselves.
That cost price advantage will only be more and more exploited by the Australian and New Zealand dairy sector in the coming years. In spite of the American and European subsidies, the collective share of Oceania on the world market grew from 22% to 36% over the past eight years. The European share dropped from 50% to 44%. America went from 12% to 8% and the share of the remaining products dropped from 16% to 12%. In Oceania, production can be increased enormously without requiring a considerable increase in the cost price. On the southern island of New Zealand and in Tasmania, there is more than enough land that can and will be used for dairy farming.
In Oceania people coolly state that large portions of European dairy farmers, with subsidies as bait, have been lured into traps from where there is no escape. Subsidies will further decrease. The cost price will need to follow this trend, but will soon enough come up against the high interest rate and repayments. Return to less capital-intensive and more traditional methods of production – if this possible – will lead to large destruction of capital. The question is who will have to pay for this: the farmers or the banks?
New Zeeland and Australian dairy farmers have a meager consolation for their European colleagues: according as the enormous debts rise, the problem will be mainly for the banks.
In the meantime the situation described above changed drastically in 2007. The prices on the world market for agricultural products have risen so drastically that they now exceed the European guaranteed prices. Drought in Australia and New Zealand has had a disadvantageous influence on the milk production there. Coupled with a steadily rising demand, this has driven the prices upwards. And so the Dutch dairy farmers find that the production restrictions may now be lifted. However, this does not apply to the subsidies attached to production restriction! Agricultural leaders are careful to keep the fact quiet that an expansion of milk production automatically results in three times as much manure production (a cow produces three kilos of manure per each kilo of milk).
Corn prices are also soaring astronomically. This is not only due to drought elsewhere, but also to the demand for green energy. Apparently, corn, in combination with cow dung, ferments extremely well and as huge amounts of subsidies can be made via fermenters, the agrarian West is now concentrating on this. Fuel for machines is being made from food. This drives the prices upwards, so that the now already so hungry part of the world is only growing. Over the past number of years, European corn growers have been requested to reduce their crops in order to keep down surpluses. Needless to say, the crop farmers received a subsidy for this, per non-cultivated hectare. European Ministers of Agriculture now find that all non-cultivated land in 2008 should be replanted. With retention of the subsidies which were then introduced for non-cultivation of those hectares, of course.