Milk prices are so low that the EU has had to intervene but the news is not as bad for the industry as it sounds, reports Mintec's Liliana Gonzalez

Dairy prices surged in 2007 and 2008, only to bottom out in the early months of this year as massive over-supply flooded European markets.

The current prices of some products, such as liquid milk, are reported to be so low that milk producers are struggling to survive in the market and have begun to limit production. This has persuaded the EU to step in once again to support the dairy industry.

When there is an oversupply of produce, as is currently the case with dairy powder and butter, there are several methods the authorities can use in a low pricing situation: private aid schemes, export subsidies and intervention levels have all been used by the EU to support dairy farmers.

One popular programme is the Private Storage Aid (PSA) scheme, in which butter is put into storage and released on to the market during the winter in order to offset seasonal market imbalances. The scheme is an alternative to public intervention in that the product remains private property, to sell at the end of the storage period.

The PSA's closing date has recently been extended from August 2009 to February 2010, meaning storage costs will be covered by this year's EU aid scheme over the winter lull. This supports the market, as butter can be taken out of the scheme during the winter months, when availability is lower, but it can also be left in storage if prices remain steady or weaken. The PSA's total stock held has increased from 96,800 to 109,500 tonnes in the past three weeks alone, an increase of 13%. Other help includes the EU export subsidy for butter, which was raised to 700 per tonne on 4 June.

Skimmed milk powder and butter prices are also supported by the intervention system. Originally 30,000 tonnes of butter and 109,000 tonnes of skimmed milk powder (SMP) were bought in at a pre-determined (intervention) price.

Given the current economic situation, this scheme has been reviewed and consequently extended from its original closing date of August 2009 to March 2010. The EU has already bought about 82,000 tonnes of butter and 232,000 tonnes of SMP. The Commission has forecast that a further 31,000 tonnes of butter and 50,000 tonnes of SMP will be purchased between September 2009 and February 2010.

Despite the fall in commodity returns seen in the sector and lower farmgate milk prices due to seasonal reductions (the average UK farmgate price fell by 1ppl between April and July 2009 to an average of 22.8ppl), retail prices do not appear to have dropped in line with the falls in the wholesale market.

The support measures put in place have helped to stabilise prices around intervention price levels. But in the medium and long term it is expected that demand will pick up and this, combined with an improving economic situation, will see prices return to more normal historical levels and the butter mountain will once again fall to a more manageable size.