The Devil is in the Derogation
Dutch dairy farming is potentially on the brink of a seismic change. After years of argument and negotiation, a potential agreement on phosphate regulations was abandoned.
On 13 October, Dutch Minister for Agriculture, Martijn van Dam, announced that the agreement on reducing phosphate through the issue of phosphate permits (which would immediately acquire a market value) had been abandoned due to infringing EU regulations regarding State Aid. And this will create a problem, because by failing to make a successful proposal to reduce phosphate, the Dutch Government risks losing a ‘derogation’ (special permission) it has from the EU Commission on nitrate levels. Losing this derogation could deal a massive blow to Dutch dairy farmers and the wider industry, as 3.5m tonnes of milk could be lost.
What had been agreed?
Dutch dairy production has always been intensive. Dutch milk production produces 13,000kg per hectare. In comparison, Germany, which is the largest producer of milk in Europe, produces just over 7,000kg per hectare. Therefore, the Netherlands has always been keen to include environmental considerations.
Over the last few years, discussions have focused on the amount of phosphate produced from the manure excreted by dairy cows. The proposed legislation sought to reduce the amount of phosphate produced through the issuing of phosphate permits. According to a specified reference rate, farmers would be issued with phosphate permits which could be traded. Every time these permits are traded, the government would remove 10%, providing a ‘sinking lid’ to the amount of phosphate.
Combining initial reductions with the sinking lid suggested that cow numbers would fall by just over 200,000 head and that milk production could drop by more than 1bn kg in the next two years.
Why it fell down?
The 'problem' with the phosphate permits issued by the Dutch government is that they will be transferable, and therefore will have a value.
To preserve fair competition across the EU market, individual states are not normally allowed to provide businesses with grants or subsidies that are unavailable in other EU states. Such grants are viewed as a 'state aid'. Those circumstances where state aid is allowed are covered by complex rules. These rules state that you cannot use state aid for a situation where an EU regulation is being or has been breached. Unfortunately, the Netherlands has breached the required levels of nutrient applications in the past, so the plan proposed by the Dutch government has been judged to be illegal.
Losing the derogation could mean…?
This reaction by the EU Commission means that a new solution has to be found—and the pressure is building. This is because if no solution is found, the Dutch government could lose its derogation covering nitrate usage from the EU Commission.
This ‘derogation’, granted in recognition of the intensive nature of Dutch agriculture, is a special permission allowing Dutch farmers to apply more nitrates to land compared with other EU regions—for farms which are 80% grass, the annual application from manure can be 250kg per hectare compared with the norm of 170kg per hectare elsewhere in Europe.
The derogation was conditional on meeting requirements, including the regular monitoring of groundwater levels and complying with required phosphate restrictions. The failure to introduce a control mechanism raises the possibility that the derogation on nitrate levels will be lost.
If this happened, it would mean an immediate 30% cut in the amount of nitrates that can be applied to land. Given that most nitrates come from manure rather than artificial fertiliser, it could effectively mean a requirement to cut the Dutch dairy herd by nearly 30%. It will depend on the yield of the remaining animals how much milk would then be produced. Assuming 500,000 cows were removed (approx. 30% of the national herd), with an average annual yield of 7,000 kg per cow (assuming lower yielding animals are culled first), this would mean 3.5m tonnes of milk being lost—equivalent to 26% of the milk produced in 2015—impacting both farming operations and the wider industry, following capacity expansions in the lead up to milk quota removal in 2015.
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Where to go from here
Matthew JohnsonAnalyst - Dairy Read more