French dairy farmers have got too much of milk and thus were caught in a pricing squabble with supermarkets while missing out on the Chinese thirst for imported powdered milk.
France is famous worldwide for its cheeses, but many dairy farmers complain they are getting squeezed and are threatening to hang up their wellies in a sector already expected to shed 1,000 jobs in the coming months.
AdvertisementFor weeks French dairy farmers have been locked in negotiations with the country's supermarkets over getting a hike of up to three cents (four US cents) per litre.
Meanwhile, a lack of facilities has left French dairy farmers on the sidelines of a boom in the price of powdered milk, which is climbing "nearly 25 percent month on month", according to Renaud de Kerpoisson of the agro-industry consultancy ODA, with the 2007 record of $5,000 (nearly 4,000 euros) per tonne set to be broken.
That demand is being driven in particular by China, where scandals involving poisoned baby milk have touched off a thirst for foreign baby formula and powdered milk.
Meanwhile, a severe drought has hit New Zealand, which last year produced 40 percent of the 1.9 million tonnes of powdered milk sold worldwide, according to the Gerard Calbrix, an economist at ATLA, a French dairy industry association.
France is active in the sector. It produced 430,000 tonnes of powdered milk last year, according to industry sources, or 23 percent of the global total.
However the country lacks enough drying facilities for French farmers to cash in on rising prices.
In particular "in springtime when there is more milk, we lack the capacity to transform" milk, said Gerard Picot, head of the industry association FNIL.
French farmers have "extreme difficulties to add value to their production," he noted.
While 40 percent of their products are exported, French farmers have largely missed out on the growing appetite for dairy products of the expanding middle classes in emerging countries as only half of that goes outside of EU.
But within a few years French dairy farmers should have more options as plans are underway for building eight milk drying towers.
One that has gathered much attention is by Chinese infant formula producer Synutra, which is making its first foray abroad with the construction of two milk drying units in France's western Brittany region.
Synutra is bankrolling 90 percent of the 100 million euro tie-up with Sodiaal, France's top and Europe's fourth-largest dairy cooperative, and the project will be capable of processing 280 million litres of milk from 2015.
"You don't build a drying tower by snapping your fingers," said Christele Josse, head of the FNCL federation of dairy cooperatives.
In order to succeed in emerging markets she said French dairy companies would need to ensure top quality and safety standards and also learn how to manage the volatility of the price of milk.
The record over the past decade hasn't been encouraging as French exports of butter and powdered milk have largely been loss making as the country's products aren't very competitive on the world market, noted Picot.
"Financial tools must absolutely be put into place to protect margins," said Josse.
The Euronext exchange started powdered milk futures in 2010 to help dairy farmers, like other farmers, reduce their risks by locking into prices.
This is all coming as the milk industry is approaching a major transformation with the end of milk quotas in the EU in March 2015.
Josse said European dairy farmers are watching closely as the US market prepares to liberalise milk prices, which have been regulated by the federal government since the Great Depression.