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Thursday, August 30, 2007

Rising Milk Prices Require More Subsidies?

What's the most powerful special interest group in America? Probably not Big Oil, or the pharmaceutical industry, or the NRA. My guess is the farm block. Government subsidies to farmers have distorted both the national and the international food markets for decades.

Rising milk prices have been a issue in the headlines all year, as I noted in Milk Prices at Record High. This is not just a U.S. problem: it's global.

An opinion piece in The Guardian by French writer Agn├Ęs Poirier notes the increase in milk consumption by the Chinese.

China alone shows a 25% year-on-year increase of its consumption of diary products. ... The Asian demand for milk has set the market alight. The problem is that the European Union is the world's biggest producer of milk, but our production has been decreasing, while the next biggest producers, Australia and New Zealand, have seen production stall because of droughts. Besides, we have no more reserves. With the introduction of quotas in 1984, reserves have shrunk from a gargantuan 1.28 million tonnes in 1986, to a laughable 16,000 tonnes this year. As a result, in the last few months the price of milk has rocketed by more than 50% on the world market (and that of butter by 40%).


To make matters worse, with the moves to cut subsidies to milk and butter producers over the last few years (they were removed all together last May), the number of milk producers has begun to dry up: in France they have gone from 928,000 in 1969 to 103,000 last year. The situation looks even worse in Britain, with only 13,000 milk producers today. We could of course produce more, but to do this Brussels would need to scrap milk quotas, and reintroduce subsidies to farmers which were ended in 2003.

Wait a minute? Prices are rising so you need subsidies to get farmers to produce more milk? Isn't this the exact opposite of what economic theory would suggest?

Yes it is. And fortunately a host of comments on that article make that point forcefully, along with correcting a great many other mistakes Poirier makes. She does respond with a comment that EU quotas disrupt normal supply and demand economics, which may be true but she offers no figures to back her up. And she doesn't explain at all why subsidies would be necessary if quotas were scrapped, as she suggested.

The growing demand for milk is a worldwide issue. Governments will need to cope with increased demand for exports. It's an opportunity, however, not a crisis. I wish Poirier could understand that.

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