The €57 million investment in the dairy sector has helped it to survive the changes brought about by EU membership, but it now faces new risks that investment alone might not smooth over.

A study by Philip von Brockdorff and Gaetano Buttigieg for the Institute for European Studies, noted that funds will be available for the sector until 2020 through the EU’s Common Agricultural Policy.

“However, the possible risks resulting from the removal of the quota system, the new milk production and highly competitive scenario cannot be underestimated,” the study found.

Last month, the decades-old quota system for milk production in the EU was removed. The quotas were introduced to keep a lid on production as EU subsidies had contributed to excess production of milk and milk products, with excess produce stored away at huge cost or dumped on world markets with export subsidies.

The authors warned that the removal of the quota system would strengthen the market position of huge retail businesses across the EU – but would whittle away the power of primary producers.

The study found that the dairy sector had not only overcome the challenges of accession but had thrived. The average quantity of local milk produced is the highest among the EU10 member states which joined in 2004. Since EU membership milk production increased marginally (2.4 per cent) and its value increased by 36.5 per cent.

Average yearly milk production per cow reached 6,472 kilograms in 2013, as compared with 5,261 kilograms in 2003. The 2013 levels are almost comparable with the yield in countries with an equally long tradition in milk production.

Equally remarkable is the improvement in raw milk quality with quality levels much better than the EU required standards, particularly fat content which increased from 2.62 to 3.39 per cent.

However, natural and structural disadvantages persist – particularly the total reliance on imported grains and other feed materials, unlike its counterparts in the EU where dairy farmers can source grains produced locally. With EU membership, purchases of grains were liberalised and prices rose 53 per cent between 2003 and 2013.

The Maltese dairy sector is of strategic importance. It generates an annual production of 41,000 tons of fresh milk for dairy processing with retail sales estimated at €38 million. About 50 per cent of the economic activity generated is local value added.

From an environment perspective, 59 per cent of agricultural arable land in Malta is used to produce forage, mainly for the dairy sector. Without the local dairy sector there would be no or very limited alternative use for the land other than urban development, the authors warned.

“These natural and structural limitations explain the relevance of support measures... in ensuring a level playing field in this sector while justifying why it fully deserves the attention of policymakers,” the study said.

Photo: Chris Sant Fournier

Malta had negotiated a number of derogations to apply following accession, including state aid and transition periods, as well as €8.38 million direct income support by 2010 to mitigate the effect of the removal of levies on imported dairy products.

Koperattiva Produtturi tal-Ħalib, the milk producers’ cooperative which holds 70 per cent shareholding of Malta Dairy Products, developed a strong and efficient supplier-buyer relationship. This also ensured total quality control over the milk supply chain with KPĦ as the sole owner of the feed mill supplying animal feed to its members. MDP processes, packs and distributes fresh milk produced from around 85 dairy farms in Malta and another 34 in Gozo. In May 2005, MDP and KPĦ introduced a payment scheme basing payment to milk producers, based not only on the volume supplied but also on fat and protein levels.

The estimated investment in farm upgrading in the sector in the first 10 years of EU membership reached €40 million, most of which was forked out by dairy farmers themselves.

Besides farm upgrading, €17.3 million were also required at MDP, of which only 2.6 per cent came from EU support schemes.

Unsurprisingly, given the required investment, the number of licensed milk production holdings supplying raw milk fell from 184 in 2003 to 120 in 2013, while the number of dairy cows fell from 7,607 in 2003 to 6,333 – though this was expected in view of higher levels of efficiency.

The study found that despite the challenges caused by market liberalisation, stiff competition, the increase in the price of feed, the heavy financial commitment required by dairy farmers, and the challenge to meet EU regulations and standards, the production of milk after 10 years of membership remained at the levels recorded prior to EU accession.

The study concluded that competition was likely to intensify as dairies across the EU consolidate and merge, seeking increased market shares and exploiting their favourable economies of scale and lower costs of production. “The dairy sector... together with policymakers, will need to find new ways to address natural and structural disadvantages that have long characterised Maltese agriculture, while at the same time coping with the forces of competition.”