Dairy farming is a bit like the old Jaws film. Just when you thought it was safe…not so much to go back in the water, but to hope prices might improve early in the new year, hopes have been dashed again.
Problems continue in the global market, despite milk production falling in key production areas, if not in Europe. That analysts are reluctant to forecast when markets might improve is a big worry.
If there was a computer programme to scan words used this year by farm leaders, politicians and journalists volatility would be in the top 10. Volatility, it seems, is here to stay and it’s moving higher up the agenda of the farm commissioner, Phil Hogan. As it does, get ready to see a new acronym being used in Brussels. That is FI, standing for financial instruments. He sees these as one of the main tools to tackle volatility, along with an effective European futures market for dairy products.
The idea of futures trading is not fresh thinking, but Mr Hogan’s enthusiasm for FIs is.
What this is about is the use of funding from the European Investment Bank (EIB) to offer what would in effect be soft loans to agriculture, with the debate, for now, focussed on the dairy sector. This EIB funding is part of a wider financial rescue plan for the EU put in place by the European Commission president, Jean Claude Juncker.
Mr Hogan wants to see this used in agriculture, and his thinking for the dairy sector is around four key objectives. These are that loans should be long-term, probably 15 years, and at an interest rate well below commercial rates. What is new is that repayments would be linked to the milk price and the loan would be secured on future milk production, rather than fixed assets such as land. This is a riskier lending model, but then that’s what the EIB rescue package is meant to be about.
This might look a good idea, but there are many stumbling blocks and it will take a big drive by Mr Hogan to make it happen. The obstacles include resistance from commercial banks and problems with national compliance rules and shared securities. Another issue is securing member state support by making this part of their rural development programmes. Without a buy-in from member states to amend programmes to include FI it can’t happen. On top of that, Mr Hogan must convince the EIB that his is a viable funding model, even for a bank that accepts the need for higher risk strategies.
On that basis it’s tempting to dismiss this as a good idea, but a non-starter. However, there’s a stick to the Hogan suggestion as well as a carrot. He’s warned that the recent 500 million aid package for agriculture, agreed in September and now being paid out, was a one-off. Farmers thought it should have been more generous, but this aid was only possible because Mr Hogan secured a share of the 800m of superlevy fines in the final year of milk quotas. That will not be available again and his view is that farmers need an alternative to seeking emergency support from Brussels.
He is advocating FI as a key part of that change and is making clear that it might be the only show in town. That would apply to an even greater degree if he put FI and other ways of tacking volatility at the centre of plans for the next CAP reform in 2020, which is entirely possible.