As Dr Charles Nicholson from California Polytechnic State University said this week to the US Dairy Industry Advisory Committee (DIAC), the US equivalent of the High Level Dairy Group in Europe, on the subject of market volatility, “there is an issue, there is a problem”.
At the same time, the European Council of Agricultural Ministers was signing up to the recommendations of the European High Level Dairy group, which contained recommendations to nurture means of coping with market volatility. Meanwhile, Paul Campbell, strategy manager from New Zealand processor Fonterra, argued in a speech to a group of UK farmers this week that, “there would be increasing volatility though the next five years”.
With world production set to increase by over 20% in the next 10 years – driven by increases in production in India, China and South America (and probably Africa), compounded by the effects of climate change, population growth, urbanisation, market liberalisation and shifts in trade balance – frankly, it would be a miracle if volatility were not to increase.
So what should be done about it? Most economists would suggest that if markets are left to their own devises, they’ll develop mechanisms to cope. For example, the launch of another futures market by NYSE LIFFE for Skimmed Milk Powder on 18 October. I have also been frequently amazed just how price-responsive farmers around the globe can be if the price is right.
In fact, the trouble with high-level groups and committees of ministers and their administrators is that they have to be seen to act. In the US, three measures are being considered:
which would seek to manage increased production across the industry.
In Europe, we’ve seen the French and the Germans fighting a rearguard action to question the abolition of quotas and ensure guarantee of farm incomes. While all of these policies are no doubt driven by worthy socio-economic arguments and political reality, until there is some certainty of how the market will operate, it’s difficult for companies to develop commercial strategies to mitigate risk.
The attendance at the seminar I’m chairing this week in Amsterdam for Zenith International, which has engaged considerable interest from the commercial sector across Europe, is evidence that the commercial sector is dealing with the issue.
The real risk, as highlighted by Dr Charles Nicholson, is that government intervention in one part of the supply chain will leave produce surplus stocks that overhang the market and make the process of managing risk more rather than less complex.
Let’s hope the politicians develop solutions that support the current commercial efforts rather than undermine them.
Kevin Bellamy directs Zenith International’s wide-ranging activities in the dairy industry. You can contact him here.
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