Change has been the name of the game for European dairy producers this past year with the abolishment of the quota system, Russia’s embargo and months of low milk prices. Many Dutch dairymen like Nils den Besten faced a steep learning curve as they switched from a decades-old quota system to a free-market system almost overnight.
It’s been a year full of lessons, some of which den Besten took the time to share with attendees at the Western Canadian Dairy Seminar this past March in Red Deer, Alberta.
History and background of the Netherlands’ quota system and dairy industry
The European Union’s (EU) original system began just after WWII, when memories of the winter of 1944-1945, better known in the Netherlands as the “Hunger Winter,” were still fresh in everyone’s minds. They never wanted to experience that kind of starvation again.
“The vision was: If we provide farmers a good income and a certain level of certainty on their income, then the production will rise and we will have cheap, available, safe food,” den Besten said.
“It will be a necessity, and it will be the basis of our economy. That’s how the management system started.”
As the EU’s milk production increased over the years, the system adapted to include import tariffs in addition to the minimum price and, eventually, export restitutions.
In 1984, 25 years after the start of supply management, the quotas started because they had too much milk in Europe, and the EU was essentially dumping milk outside of its borders. This is how the system worked – until it was abolished last year.
Today, the Netherlands, which is 240 times smaller than Canada, has a population of 17 million people, 17,000 of whom are dairy producers. Before the quota was abolished, they were producing 12 billion kilograms of milk per year. Today, they produce even more milk.
Like Canada, producers in the Netherlands face animal welfare and regulation challenges. They do, however, trade within the EU for free, which is an important market for them.
Even prior to the abolishment of the quota, the Netherlands was already export-focused, since it has to export 80 percent of the milk it produces.
If that system was so good, why abolish it?
The quota system came to an end for a number of reasons, den Besten said, including:
- The EU started with only six countries; now it has 28. The differences between those countries are huge. It was no longer logical to have one system that covered all of them.
- It is experiencing a general trend towards more liberalization.
- It faced societal pressure from a lot of rich, spoiled consumers who no longer wanted to spend money on farm subsidies. Europe had some of the cheapest prices for food in the world.
People only spent 8 percent of their income on food plus 2 percent on subsidies. Den Besten said this pressure was because children and their parents (and grandparents sometimes) do not remember the great hunger during the war.
Overall, den Besten still thinks the quota system was a good deal for consumers, but now that it’s gone, he does not see it ever coming back.
So what happened after the abolishment of the quota?
Although the quota wasn’t abolished until last year, the system itself was abolished in 2001 with the lowering of the import tariffs and the minimum price.
During those 15 years, the EU was essentially trying to balance on a one-legged table, den Besten said. By lowering the import tariffs and minimum price but keeping the quotas, European dairy producers had more costs without the benefit of protection from low milk prices.
Since the quota was abolished, Europe has only increased production by 0.5 percent. While it plays a role in the milk market, the economic situation and the high milk price of a few years ago are more important factors.
First of all, the Netherlands should have had a soft landing, den Besten said. Initially, the goal of the abolishment was to have a soft landing, and it did in the other 27 EU countries – but not in the Netherlands. In the last year of the quotas, Dutch dairymen spent 134 million euros (roughly CA$200 million) on super-levies.
They called the day they abolished quotas “liberation day.” Many dairymen built barns and kept their youngstock. There was too much of a bump, and now manure regulations say they are not allowed to produce any more manure, which is quite a challenge with the larger herd size. Had they managed for a soft landing, den Besten said their problems would’ve been smaller.
Second, market focus is extremely important. Instead of neglecting the abolishment of the quotas, Dutch dairymen invested in the markets. They were used to investing in the market because they’d already been exporting milk for the past century.
However, you also have to invest in markets yourself, den Besten said. Producers need to set themselves up for success and produce high-end products because this leads to greater profit.
He advised producers to always be investing and trying new things because in order for the return to come back to the farm, producers have to invest in it themselves.
Some Dutch dairymen are able to manage under the new system because they have a lower cost of production, since they no longer need to buy quota and super-levies. Some, on the other hand, can’t manage for it because they don’t know how to cut costs.
What can Canadians take away from this?
According to den Besten, there are a few things Canadian producers can learn from the EU situation:
- Producers need a safety net to allow for variables like weather.
- The quota shouldn’t be abolished. Instead, it should be phased out. That way, when it is abolished, it doesn’t affect producers as much.
It is almost impossible to manage for such a big moment, and producers can’t really know what to expect.
- Have an A-to-B pricing system in place. This way, when the country expands its milk production, the producers who are willing to expand the most are not affecting the high milk price of the producers who may not want to grow.
- Producers need to understand and implement risk management. Producers in the Netherlands are still learning this. They weren’t ready for it.
When the milk price was high, they bought new tractors and built new barns. Now they have to learn to manage on an open market. This means saving money when the price is high to make sure they can still pay the bills when the price drops.
- Take the time to set up producer organizations. This gives producers more power in negotiations because they can come together as one voice.
- Make sure to invest in a strong value chain and in the cooperatives.
Bottom line, while the abolishment of the quota system in Europe definitely created many new challenges for producers, den Besten said it also opened up several new opportunities for them. They just have to learn how to manage for it. PD