This article is taken from our IEG Vu platform dated 27/04/20.

The European Dairy Association (EDA) applauded the announced measures but highlighted that this is only the first step in mitigating the effects of a crisis that has the potential to be the dairy industry's largest in decades.

The EDA added that in the present, more than difficult situation, the dairy industry is still operating - collecting the milk of around 700,000 farmers in the EU and keeping a committed workforce of 300,000 people - though does so 'largely at a loss'.

It called for the immediate implementation of measures and said, 'the EU support must be ramped up to the scale of this crisis and to the importance of the dairy sector'.

The EDA said: "The announced EUR30 million scheme for Private Storage Aid (PSA) for skimmed milk powder, butter and cheeses can only be the first step - a first small step financed by unused funds under the existing DG AGRI budget.

"EU agriculture and EU dairy, with its - recognised - essential societal role today and its future role in the recovery phase, especially in rural Europe, cannot be the only sector in the Union where support is limited to residual budget funds and to today's pre-COVID Multiannual Financial Framework," it concluded.

EMB slams proposed measures

At the same time, the European Milk Board (EMB), which had already called for support measures to be implemented as soon as possible, said that the Commission settled on the 'wrong scheme', adding that the announced measures should be unconditionally combined with a voluntary volume reduction scheme - including a cap on volumes.

The EMB said that private storage already failed to stand the test as an EU crisis instrument, after it was used in the crisis of 2015-2017 and 'did nothing' to stop the fall in prices on the milk market.

Sieta van Keimpema, EMB vice-president, said: "[…] It is evident that the voluntary volume reduction scheme co-ordinated by the Commission on an EU level is already a tried and tested instrument. That is why it also has to be applied now in addition to private storage with a stricter cap. But it has to be activated quickly, otherwise the crisis would already be too far advanced and a compulsory reduction in volumes necessary for every producer."

With a voluntary volume reduction scheme at EU level, the pressure on the milk prices could be reduced effectively.

"The producers would have to be given enough compensation per litre of milk not produced to be able to face the economic consequences, said Erwin Schöpges, EMB president.

He added: "Without this compensation, farmers would have to bear the bulk of the impact of the corona crisis in the sector on their own, which they are simply incapable of doing in the crisis-ridden milk market."

Irish industry urges changes to PSA scheme

The Irish Co-operative Organisation Society (ICOS) has made a submission to the Department of Agriculture outlining its concerns regarding the proposed PSA measures for the dairy industry.

In particular, ICOS has drawn attention to the inadequate proposal for fixed storage aid rates for butter and SMP, which have been halved in comparison to 2014 levels, despite the substantial increase in the cost of storage since then. Prices have reached new historical levels the last few months since the outbreak of Covid-19.

ICOS is seeking for these support levels, for SMP and butter, to be raised, to ensure the scheme provides some level of meaningful support and for the support to be targeted where it is most needed. In addition, ICOS has criticised the unfair allocation of just 2.1% of the cheese storage quota to Ireland. Ireland produces 5% of EU cheese and therefore at a minimum it asked to be awarded 5% of the quota.

Furthermore, ICOS has highlighted that the allocation of the cheese quota by the European Commission on the basis of total cheese production unfairly penalises Ireland.

"Up to 50% of EU cheese production is fresh cheese, which is not suitable for storage. Including these cheese volumes in the calculation of national allocations provides certain EU countries with a disproportionally large allocation in comparison with their production of eligible cheese types and leaves countries like Ireland, where our production of cheddar is very suited to storage, with a disproportionately low allocation," ICOS said, calling for an urgent review of Ireland's cheese quota allocation in the proposed regulations on this basis.

The industry body said that 'it is a major disappointment' draft regulations propose a very short time frame with an end date of June 30, as it is still very uncertain whether there will be any market improvements by this time, especially in terms of foodservice.

"In addition, at that point Ireland will be just coming off our peak production and will still be producing, and therefore will likely need to store significant volumes of product," it added.

ICOS is therefore asking for an extension of the scheme until the end of September, so as much as possible of the current production season can be covered.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.