Too much SMP in Europe? Here’s a solutionThis article is powered by Dairy Markets
EU warehouse doors opened a little wider this week, with sales of over 1,800 tonnes of intervention-stock skimmed milk powder. It was a dramatic increase on previous tender rounds, but begs the question: are sales even of this size going to be enough?
The sales of 1,864 tonnes, largely from Dutch intervention stores, was made possible by the bold move by Commission officials to substantially drop the minimum price they would accept.
The new minimum is EUR1,190 per tonne.
This is well below current SMP food-grade prices of around EUR1,340 per tonne, and closer to feed prices, with the official Dutch feed average this week at EUR1,290 per tonne.
The new price certainly sets the tone for the next round of tender bidding in a month’s time.
But how long, even this rate, will it take to shift the now 369,000 tonnes that must eventually be offered to buyers. Is it at all likely that sufficient volumes will be sold this year to make a difference to the market?
What if we were to magic it away? Or more realistically, find a way to dispose of these stocks … one that would not compromise the market?
Dairy analyst Robert Schorsij offers one solution: convert the SMP to biomass.
Not enough demand
Schorsij’s argument is that there is simply not enough demand to absorb current stocks. Either within the EU or outside it.
And the SMP is not getting any younger. He estimates that – even given a higher rate of take-up - SMP over two-years-old will have grown to close to 300,000 tonnes by June.
Increasingly ageing SMP will, he says, will become less attractive to buyers – certainly not attractive enough to deliver the returns the Commission needs to at least to cover the EUR1,698 per tonne it spent in the first place.
Converting the SMP into biomass – essentially sending it up in smoke – would yield some returns from energy companies, but not, he concedes very much. And it would amount to a “massive devaluation of the value” – he estimates around EUR650 million.
Who pays for all this?
Such a loss to EU funds to prop up just one agricultural sector is not politically feasible. The Commission would, so to speak, just not buy it.
Schorsij believes the answer is for the dairy sector to agree to a voluntary levy on all sales of SMP once a regulation disposing of the EU’s powder comes into force.
With a levy of at least EUR50 per tonne, he estimates it would only be nine months for the industry’s ‘debt’ to the Commission to be paid in full.
And the gains to the sector would be much bigger.
“The impact on the market the moment EU announces such a regulation will be strong, with prices for commodities jumping up,” he said.
There is a major flaw in his plan, he admits: the ethical objection to disposing of food on such a large scale.
The analyst, who works for dairy ingredients firm Greenmark, counters with the argument that the powder is well past its best.
“One may ask if two-year-old powder can still be considered food,” he said. “There are no producers in the EU or outside that guarantee shelf lives of over two years.
“In fact, often it’s only 18 months or even one year. In general, SMP past its guaranteed shelf life is routinely re-classified as feed.”
This would therefore rule out one mooted option: of supplying the powder cheaply to developing countries. It would smack of offloading ‘unwanted’ powder on the world’s poor. Another ethical minefield.
Schorsij says he has positive feedback from EU officials, but recognises that they would be unable to implement such a plan without industry support.
Eucolait, the organisation that represents dairy exporters, importers and wholesalers, described the idea as a “valid contribution” to the debate on what to do with the SMP stocks, but they echoed the author’s own “ethical concerns”.
Latest tender: details
101,061 tonnes of SMP in EU stores was on offer in the latest tender round.
Up until the latest tender only 220 tonnes had been sold
Bids were lodged in six member states: Belgium, Germany, France, Lithuania, Netherlands, Poland.
The total quantity applied for was to 25,764 tonnes
Offered prices varied between EUR700 and EUR1,350 per tonne
Of the 1,864 tonnes purchased, Dutch buyers bought the most (800 tonnes), followed by Belgian buyers (588 t); German buyers (216 t); French buyers (172 t); and Polish buyers (88 t)
The next deadline for the submission of bids is February 20, with a vote at the CMO Committee on February 22.
However, the industry body representing processors, the European Dairy Association, is reluctant to entertain it as an option. It sees cost as being more of an issue.
In a statement, EDA secretary general Alexander Anton told IEG Vu: “Selling SMP stocks on the market via tenders is the normal way to deal with the stock situation.
“We basically do appreciate all innovative ideas on how to deal with today's SMP stocks. But for us, charging a levy from the industry for their daily work is clearly not an acceptable path.”
Schorsij believes the EDA has not given the idea sufficient consideration.
“It has never been a problem to charge farmers with a super levy for their daily work. Why is that principle all of a sudden a problem?” he told IEG Vu.
He says he has had a more favourable hearing in discussions with the CEOs of major cooperatives and private companies.
The consensus is in favour of such a scheme, but a sticking point has emerged. Who would pay?
“One of the arguments is that, as the whole dairy industry has benefited from intervention, why should only producers of SMP have to pay a levy?”
This may be a deal-breaker, or not. But one thing is certain: as the months go on, radical solutions are going to be needed to remove what one CEO has described publicly as a "shadow on the dairy market".