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The future of the milk sector

Ricardo Migueláñez. Agricultural Engineer. @rmiguelanez

Official data about the performance of cow's milk production in the first few months of the 2015/2016 season has been limited to the presentation of mandatory (albeit provisional) statements on stockbreeders' deliveries to the initial buyers (intermediaries) in April, the first of the new season.

Unofficially, and according to certain professional organizations, during this period there is the feeling, and the fear, of a territorial relocation of milk production in Spain, from Galicia and the area along the Cantabrian coast to production zones closer to large consumption regions such as Madrid, Catalonia, Valencia and Andalusia, with lower transport logistics costs.

It's probably still too soon for this situation to be confirmed, although where there's smoke, there's generally fire. With the removal of milk quotas, certain aspects of competitiveness in the sector have come to the fore which, for the most part, had not been visible or even considered previously.

For example, some thought that, since one-third of milk production in Spain has been concentrated in Galicia in recent years, the region had historical rights to production. And now this situation, with farmers no longer holding any stock, has really exploded.

Processing companies are going to purchase milk not only where there's volume and quality, but also where it is less expensive for them to pick it up and transport it to stores for sale to consumers. That is to say, they're going to go where they obtain the greatest margin and profitability, even if that means paying a higher price to the stockbreeder.

Farms, which are more isolated (depressed and mountainous areas), more difficult to reach, have greater problems in terms of transport logistics, and which also depend very little on grass to feed their animals will have to see if the numbers add up and they remain profitable, not only in terms of the price they receive for the milk they produce, but also with regard to any direct payments, coupled or otherwise, they might receive under the new Common Agricultural Policy and other aid from rural development programs for which participation is optional.

Lines of action

Several lines of action have been proposed through the Ministry of Agriculture in accordance with the Spanish stockbreeding sector's current situation, which won't resolve weak point-of-origin milk prices themselves. There are many discrepancies among regions, with 0.18-0.20 euros/liter paid to some farms in Galicia and the Cantabrian coast, and almost double that, around 0.36 euros/liter in Andalusia, and a national weighted average of 0.31 euros/liter (April data), i.e. below production costs, which are around 0.34-0.36 euros/liter.

The measures announced include an awareness-raising campaign aimed at stockbreeders regarding mandatory milk supply contracts, as set out in the "Milk Package" regulation; and drafting a model which allows for producer margins and production costs to be set in a more up-to-date way, so that the information can be used to develop benchmark indices for milk purchase and sale contracts.

There are also plans this year to particularize support for producer organizations in more than one autonomous region of Spain in line with the framework of the 2014-2018 National Program for Rural Development and to coordinate, with the regions, aid from their regional rural development programs to improve the effectiveness of rural development subsidies for plans applied in the milk sector.

There are also plans to offer discounts on farm insurance to stockbreeders who are part of producer organizations.

The Ministry of Food, Agriculture and the Environment's General Directorate of the Food Industry is considering designing a campaign to promote milk consumption, which will be coordinated with actions implemented by the interprofessional organization InLac; maintaining the plan coordinated with regional governments to analyze packaged milk sold at especially low RRP; and implementing a cheese control plan to analyze possible label fraud (e.g. the weighting of types of milk in mixed milk cheeses).

Additionally, a new milk consumption program will be rolled out in schools to avoid the dispersion of aid.

AICA and Infolac

The Agency for Food Information and Control (AICA) detailed for the sector aspects of the official control plan in compliance with Law 12/2013 on the Food Chain, having commenced 177 trade inspections in the sector for abnormally low milk RRP, and reporting 43 sector claims for "sales at a loss" to regional governments.

There are currently two proceedings under way due to sector claims of non-compliance with the Milk Package regulation (Royal Decree 125/2015), for which reports have been completed and an initial inspection is planned to gather more specific information, for which there is a six-month deadline, followed by another six months to draft the corresponding penalization report, if any.

Although the sector views AICA's work as positive, it considers inspection and sanction periods to be too long, lasting up to one year, which benefits the potential offender. There are also many doubts about the measures to be applied when supply contracts include very low prices for stockbreeders.

The end of the quota system has also eliminated the requirement that authorized buyers inform on milk deliveries, and a new information system called Infolac has been launched in its place.

This software, which experienced a few problems with data entry during its roll out, allows the initial buyers to enter information about the milk they purchase from farmers as well as data on the average price and quality (percentages of fat and protein).

Those issues have led to an unfortunate delay as the data was not available at a time when supply contract management is very challenging, especially for farmers and small cooperatives that do not do their own processing, as they must deal with sliding prices and even the possibility that their milk won't be picked up due to excess production that the market can't absorb and a situation whose accuracy cannot be confirmed.

In accordance with provisional data from April, the first month of the 2015/16 season, there are 304 initial buyers who confirmed deliveries of over 595.1 million kilos from 16,994 farmers, i.e. around 5% more than in April 2014, with a weighted average price of 0.311 euros/liter, 4% lower than in March and almost 16% lower than the average in Spain in April 2014. Galicia (barely 0.288 euros/liter) is the region with the lowest price, 20.2% less than one year ago, whereas Andalusia (0.359 euros/liter) has the highest price, despite that figure being almost 9% lower than in April 2014.

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