Dairy systems, here and there

A documentary shows that subsidies have played a part in the dehumanisation (debovinisation?) of the dairy industry in Europe.

Photo by Suvrajit 💭 S on Unsplash

One of the work duties that I’ve picked up this year is covering the dairying sector. I’ve done it a few times before over the years, so it’s not too much of a culture shock for this townie. In any case, where an economist can hopefully add some value is not in telling farmers how to grow grass, but in providing some insights about the global market that they’re working within.

As I’ve been reading up on things, I came across a documentary called The Milk System on Netflix. (I actually found it from a list of films that are leaving the service soon - you have until 20 June if you’re interested.) It’s a German-made film from 2017, and is largely focused on the specifics of the European dairy industry. The filmmaker grew up on a traditional family farm, and in some ways the film is a personal lament for how things ain’t what they used to be. But overall, I think it does a decent job of grappling with the forces that have driven the industry in this direction. (Though I wouldn’t imagine that it’s completely accurate and unbiased.)

One of the first things that struck me was that, if you’re used to the typical image of a dairy farm, with cows standing around in rolling fields of green, it’s kind of confronting to see how things are done over there. European dairy farmers - at least in the film’s telling - have moved heavily towards the US-style feedlot system. Cows are kept cooped up in huge sheds and supplied with endless piles of feed (often with imported grains from non-sustainable sources). The high concentration of animals also means a huge concentration of manure that needs to be constantly removed. Being housed indoors means that milk production is no longer beholden to the seasons; but year-round milking takes a physical toll on the cows, and they’re typically no longer viable after a few years.

These sorts of practices mean that farmers can run much larger herds than they did in the past, allowing them to gain economies of scale. And in a commoditised market, it’s the most efficient producers that determine the market price; smaller family-run farms are increasingly having to adopt the same practices in order to survive.

Curiously, in an exploration of the globalised dairy market, the film doesn’t once mention New Zealand. I think that gave it an extra layer for me as a viewer though: in part, European farmers are having to adopt these practices in order to remain competitive with New Zealand milk, even if they’re not individually aware of it.

It is worth reflecting on why indoor, year-round dairy farming hasn’t developed here as well. No doubt that part of it is distaste for those kinds of practices, though I’m not sure that would remain a barrier over the long term if there was money to be made from it. So I think the answer is that a true accounting would show that a pasture-based system is genuinely more cost-efficient, when that pasture is readily available.

While the film doesn’t address the New Zealand industry, it does touch on China. Clearly some European farmers feel that they were fed a line on the Chinese market - they were supposedly told that it was so large that demand would always exceed whatever they could supply. But China was never going to be satisfied with being so dependent on imports, and has been rapidly growing its own dairy industry in recent years. Chinese milk processors are huge, modern and extremely efficient. It’s producing the milk itself that is still relatively high-cost, even with economies of scale (and some of these farms are massive - as many as 10,000 cows, all housed in barns or tents).

Towards the end, the film hones in on one of the key villains: agricultural subsidies. Under the Common Agricultural Policy, the European Union transfers over €50 billion each year from taxpayers to farmers - I couldn’t find a recent figure for how much of that goes to the dairying sector, but in 2010 it was around €5 billion in direct payments, plus other support mechanisms. The results of these subsidies are just as you’d expect: overproduction and depressed prices, with the consumer ultimately capturing the benefit rather than the producer.

The oversupply of milk then prompts dairy companies to find, or create, new markets for it. One way is to keep developing new products based on some fairly borderline claims about the health benefits of dairy. (Legally, they can’t directly market their products this way in Europe. But they can certainly make insinuations about whether you’re “getting enough” from other foods.) One slightly horrifying detail for me was the company that not only produced infant formula, but also showed some suspiciously similar-looking cans of ‘senior formula’, which they claimed helps people to maintain muscle mass as they get older. The ‘senior’ range included a product for ages 40+; apparently I’m old enough to be fed like a baby again.

The other avenue is to turn it into long-lasting products like milk powder and sell it cheaply overseas, often to developing economies. That’s a plus for the Senegalese consumer, but not so much for the Senegalese farmer or their community.

The film’s interviewees are quite open about the fact that subsidies now account for almost the entirety of farmers’ profits in Europe. As one points out, they’d be OK without the subsidies if only consumers were willing to pay another 50 cents a litre. But the thing that would bring about such a price rise would be a sharp reduction in supply. In other words, some farmers would have to cut back their production, losing their economies of scale which would further squeeze their margins, and some may end up being forced off their land altogether. So not surprisingly, even those who acknowledge the harmful nature of the subsidies aren’t going to fight too hard to get them removed.

It’s worth noting that over time, the EU has moved somewhat away from subsidising farmers based on volume. But in a way, the policy mix has become even worse. Until 2015, the subsidies were at least partly counterbalanced by national production quotas, which were aimed at preventing the build-up of the ‘milk lakes’ and ‘butter mountains’ that were seen in the past. When the quotas were removed in 2015, European milk production surged into what was already a depressed global market; milk powder prices fell to the lowest levels we’ve seen in the past decade, and have arguably never fully recovered since.

The film notes that when the agricultural subsidies were originally introduced in the 1960s, they were justified on the grounds of creating food security for Europe. As costly and inefficient as they were, there was a reasonable case to be made for this: food shortages lead to social unrest, and Europe had some still-recent experience of where social unrest can lead to.

But that justification has long since ceased to hold up. There’s no question around Europe’s ability to feed itself; today those subsidies go entirely towards underwriting an export industry. There’s a lesson in here - a fairly standard one in economics - about the slippery slope of industrial policy. And at a time when we have people cheering on the rise of protectionism under the guise of ‘national security’, we should be under no illusion that that’s as far as it will go.