Market Responsibility Programme (MRP)

Published 9 March 15

What is the MRP?

The MRP is a proposed system to tackle periods of low prices through early identification of EU market surpluses and the management of milk supplies.  The core idea is for farmers to cut production levels, either on a voluntary or compulsory basis, to help move the market into better balance. The aim is to be able to quickly respond to a market “crisis” to limit the overall impact on farmer margins. It is a system proposed by the European Milk Board.

How would it work?

The MRP would work by reducing EU milk production to return farmer margins to pre-crisis levels. A Market Index would be developed to be used as the basis for deciding when prices have reached “crisis” levels. It would incorporate information on dairy product values, milk prices and production costs, which would be reported through a central agency such as the Milk Market Observatory.

When the Market Index falls below 100, it indicates that milk prices are lower than production costs. If the shortfall is significant enough, the MRP would be put into operation.  There are three types of support proposed, depending on how serious the crisis is seen to be. All measures would be removed once prices returned to levels that covered production costs.

Early warning (Market Index falls by 7.5%)

This is a ‘light touch’ period where product could be placed into Private Storage and incentives to use more milk (such as fattening of heifers on milk) are introduced.

Crisis (Market Index falls by 15%)

A reduction in milk production would be promoted through bonus payments for voluntary cutbacks and fines for continued increases.

Obligatory cutback phase (Market Index falls by 25%)

Legal requirements would be imposed to reduce supply for a defined period.

 In all cases, production would need to fall from the level the farm produced in the “reference period” – defined as 12 months before the crisis was officially recognised. Hence, if a farm is required to cut production by 3% under the obligatory cutback phase, production would need to fall to be 3% lower than it was 12 months ago.

Pros & Cons of the system

Pros:

  • Matching supply to demand could potentially reduce the length and magnitude of a market downturn.
  • It provides some additional confidence to farmers that margins may be more stable if prices can be made less volatile.
  • The establishment of a central agency to collect market information, if independent, could improve market transparency.

Cons:

Effect on competitiveness and exports

  • Restricting production will limit efficiency, for instance by discouraging farms who could reduce costs through expansion of their herd from doing so.
  • The EU will have less ability to take advantage of growing global export markets if production is curtailed regularly.
  • The system is only likely to work if export refunds exist. If a net exporting country reduces it’s production, the first reaction of the market in that country will be to reduce exports to fill the gap rather than increase prices – and hence the cut in production will only have the impact of handing part of the export market over to foreign competitors. Export refunds would encourage exports to continue – as they will gain a higher price than selling domestically – and EU prices would need to rise in order to correct the shortfall. However, export refunds may also be expensive to fund.
  • The system also requires significant import tariffs to be maintained. Without these, the market will just look to bring in supplies from outside of Europe to plug the gaps in supply. Import tariffs keep the price of imports high and hence discourage this type of activity, meaning that domestic prices should react to the cut in production.

Practical concerns

  • The existence of stocks will mean that it could take a significant period of time for cuts in production to affect prices. For instance, a supply in the cheese market is effectively set 6-12 months in advance when the maturing period starts. As a result, it will not be until after that period that a cut in production will start to affect prices.
  • Dedicated dairy supply chains are set up in order to ensure that a retailer gets all of the milk that they need for their customers. If the retailer believes that milk production per farm may be cut, they may recruit more suppliers into their pool and hence potentially over-supply in periods where a crisis does not exist.

Disproportionate impact on farmers

  • The system may disproportionately affect those who have invested money in expanding their business in the last 12 months in an effort to increase efficiency and lower costs. This is because they would not just have to reduce their output by a percentage of the production level achieved 12 months ago – they would also need to reduce it by the amount it increased during the subsequent expansion period.
  • With a wide range of production costs existing throughout Europe, some farms may still be making positive margins during a declared crisis period. By forcing these farmers to cut production, their ability to competitively expand will be reduced and they will have been penalised for running a particularly efficient business.

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The proposal does not appear to be a viable option for the future of an industry looking to take advantage of global growth in demand. The system would probably fail to be effective unless exports and imports are controlled appropriately and could create significant practical issues for parts of the industry.

 

Disclaimer: While the Agriculture and Horticulture Development Board, operating through its DairyCo division, seeks to ensure that the information contained within this document is accurate at the time of printing, no warranty is given in respect thereof and, to the maximum extent permitted by law, the Agriculture and Horticulture Development Board accepts no liability for loss, damage or injury howsoever caused (including that caused by negligence) or suffered directly or indirectly in relation to information and opinions contained in or omitted from this document.