AFP, Paris :
Thirty years after introducing quotas to combat the butter mountain caused by overproduction, the EU is on the cusp of freeing up the dairy sector amid growing global demand for milk products.
To see it doesn’t all go sour for producers, Euronext recently announced plans to create futures contracts for several products to help them manage market fluctuations.
Despite introducing the quotas in 1984 to grapple with chronic overproduction, the EU remains the world’s top dairy producer and number two exporter.
Those caps will end on March 31, allowing Europe to tap into growing demand for milk products in emerging markets, in particular in China.
But dairy farmers are worried a quick boom in production could dampen prices and curdle their finances.
Enter Euronext, which said last month it aims, pending regulatory approval, to introduce futures and options contracts for butter, nonfat powdered milk and powdered whey for periods of three or six months or even longer.
Futures contracts are an agreement to deliver standardised goods at a future date at the price agreed upon on the contract. An options contract can be to buy or sell products at a set price on a set date.
These contracts can be useful for both farmers and food processors as they can reduce their exposure to swings in prices.
The Euronext initiative would emulate the Chicago-based CME in the United States, which offers butter, nonfat powdered milk and whey contracts alongside those for several other dairy products.
Euronext said the futures contacts will allow “the European dairy community to hedge its exposure to price fluctuations in this volatile market, just as the milk quotas expire in the European market.”
Michel Portier, head of the Agritel consultancy, said that experience with the end of wheat and maize quotas had shown that farmers became much more dependent upon world prices.
“The end of quotas will lead to a sharp increase in European production, and as Europe is self-sufficient in milk, the surplus will become completely oriented towards export and will thus be more correlated to the world market,” said Portier.
An Agritel study estimated that the production of milk could climb by 30 percent in Germany by 2020.
Joachim Rukwied, head of the German farmers’ federation DBV, said there were no great concerns among his members about the end of quotas.
“In fact the reasonable prices we’ve seen these past months have already resulted in a small increase in production,” he said at a recent news conference in Germany.
“We don’t think that an end of quotas will lead to a sudden rise-there may even be a small drop,” he added.
Rukwied added that Germany has lost three-quarters of its dairy farms since quotas were introduced.
“We don’t think it can get any worse,” he said. “Quotas clearly failed in their objective of preventing structural upheaval.”
Long-term the outlook is good for dairy products as the price of
agricultural commodities has been on the rise since the early 2000s and demand from emerging nations is set to continue growing.
China has been a particularly strong source of demand as Chinese consumers now prefer foreign infant formula following incidents of tainted domestic products.
This helps not only demand for powdered milk, but also for whey, which is the liquid that remains after milk curdles during cheese production, and is used to fortify products such as infant formula and bodybuilding supplements.
Chinese companies have been investing in Europe to increase processing capacity for powdered milk.
Agritel’s Portier called Euronext’s creation of a futures and options market good news “as it provides a set of tools to address the alignment of dairy prices in Europe with the international market at a time when the dairy industry will need to adapt to the end of quotas.”
However Gerard Calbrix, an economist at the French Association of Dairy Processors (ALTA), the country’s largest purchaser of fresh milk, did not share the enthusiasm.
“Industrial dairy producers have not so far shown interest in these types of contracts and I don’t see why they would now,” he said.
He also noted “there is a lot of ambiguity about the types of products presented as primary agricultural commodities when they aren’t-they are finished products for us and they account for only a small part, some 10 to 15 percent, of our output,” said Calbrix.
“It is like proposing to Coca-Cola and Pepsi a term market for cola,” he added.
Calbrix pointed out that Euronext had already tried to launch futures contracts for non-fat powdered milk in 2010.
“Nobody went for it and it flopped,” he said.
“We buy our milk directly from dairy farmers, it is a heavy and very perishable product for which no market is possible. And our finished products, we sell them to supermarket chains,” said Calbrix.
The only firms that Calbrix sees as being interested in such contracts would be food companies that use the products as inputs, such as makers of cookies or infant formula producers.
Thirty years after introducing quotas to combat the butter mountain caused by overproduction, the EU is on the cusp of freeing up the dairy sector amid growing global demand for milk products.
To see it doesn’t all go sour for producers, Euronext recently announced plans to create futures contracts for several products to help them manage market fluctuations.
Despite introducing the quotas in 1984 to grapple with chronic overproduction, the EU remains the world’s top dairy producer and number two exporter.
Those caps will end on March 31, allowing Europe to tap into growing demand for milk products in emerging markets, in particular in China.
But dairy farmers are worried a quick boom in production could dampen prices and curdle their finances.
Enter Euronext, which said last month it aims, pending regulatory approval, to introduce futures and options contracts for butter, nonfat powdered milk and powdered whey for periods of three or six months or even longer.
Futures contracts are an agreement to deliver standardised goods at a future date at the price agreed upon on the contract. An options contract can be to buy or sell products at a set price on a set date.
These contracts can be useful for both farmers and food processors as they can reduce their exposure to swings in prices.
The Euronext initiative would emulate the Chicago-based CME in the United States, which offers butter, nonfat powdered milk and whey contracts alongside those for several other dairy products.
Euronext said the futures contacts will allow “the European dairy community to hedge its exposure to price fluctuations in this volatile market, just as the milk quotas expire in the European market.”
Michel Portier, head of the Agritel consultancy, said that experience with the end of wheat and maize quotas had shown that farmers became much more dependent upon world prices.
“The end of quotas will lead to a sharp increase in European production, and as Europe is self-sufficient in milk, the surplus will become completely oriented towards export and will thus be more correlated to the world market,” said Portier.
An Agritel study estimated that the production of milk could climb by 30 percent in Germany by 2020.
Joachim Rukwied, head of the German farmers’ federation DBV, said there were no great concerns among his members about the end of quotas.
“In fact the reasonable prices we’ve seen these past months have already resulted in a small increase in production,” he said at a recent news conference in Germany.
“We don’t think that an end of quotas will lead to a sudden rise-there may even be a small drop,” he added.
Rukwied added that Germany has lost three-quarters of its dairy farms since quotas were introduced.
“We don’t think it can get any worse,” he said. “Quotas clearly failed in their objective of preventing structural upheaval.”
Long-term the outlook is good for dairy products as the price of
agricultural commodities has been on the rise since the early 2000s and demand from emerging nations is set to continue growing.
China has been a particularly strong source of demand as Chinese consumers now prefer foreign infant formula following incidents of tainted domestic products.
This helps not only demand for powdered milk, but also for whey, which is the liquid that remains after milk curdles during cheese production, and is used to fortify products such as infant formula and bodybuilding supplements.
Chinese companies have been investing in Europe to increase processing capacity for powdered milk.
Agritel’s Portier called Euronext’s creation of a futures and options market good news “as it provides a set of tools to address the alignment of dairy prices in Europe with the international market at a time when the dairy industry will need to adapt to the end of quotas.”
However Gerard Calbrix, an economist at the French Association of Dairy Processors (ALTA), the country’s largest purchaser of fresh milk, did not share the enthusiasm.
“Industrial dairy producers have not so far shown interest in these types of contracts and I don’t see why they would now,” he said.
He also noted “there is a lot of ambiguity about the types of products presented as primary agricultural commodities when they aren’t-they are finished products for us and they account for only a small part, some 10 to 15 percent, of our output,” said Calbrix.
“It is like proposing to Coca-Cola and Pepsi a term market for cola,” he added.
Calbrix pointed out that Euronext had already tried to launch futures contracts for non-fat powdered milk in 2010.
“Nobody went for it and it flopped,” he said.
“We buy our milk directly from dairy farmers, it is a heavy and very perishable product for which no market is possible. And our finished products, we sell them to supermarket chains,” said Calbrix.
The only firms that Calbrix sees as being interested in such contracts would be food companies that use the products as inputs, such as makers of cookies or infant formula producers.
