Farmers, Orkla cash in on milk prices

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Milk prices have been falling around the world lately, but not in Norway, where dairy farmers benefit from state subsidy, strict market regulation and high tariff protection that keeps cheaper imports out of the country. Now Norway’s biggest industrial food producer, Orkla, stands to get more millions in state support so that it will continue using Norway’s high-priced milk in its products like frozen pizza – and maintain production in Norway.

Newspaper Aftenposten recently published one of those “only in Norway'” sorts of stories, explaining why Norwegian consumers (who increasingly drive over the border to shop in cheaper Sweden) are currently charged around NOK 15 (around USD 2) for a liter of milk. While international milk prices have fallen by as much as 50 percent in the past year, and 18 percent in Europe, Norwegian farmers have never been paid so well for the milk they deliver to dairy cooperative Tine. Last year they were paid an average of NOK 5.28 per litre, compared to the SEK 3.23 paid to Swedish dairy farmers. The weakening of the Norwegian krone has recently made it almost equal in value to Sweden’s krone.

Norway’s high milk prices are “first and foremost a result of Norwegian agriculture policy,” Hans Kjetil Bjørnøy of the state agriculture directorate (Landbruksdirektoratet) told Aftenposten. The policy aims to keep farmers farming and rural areas populated. Tine, meanwhile, is the “market regulator” of prices for dairy products in Norway, while the smaller Q-Meireriene dairy offers some competition.

State pays Orkla to use Norwegian products
The country’s agricultural policy also offsets the higher costs of using Norwegian agricultural products at Orkla, which produces among other things its frozen Pizza Grandiosa in Norway. Since milk prices have fallen so much outside Norway, it would be even cheaper for Orkla to buy milk-based cheese for its pizzas abroad. Orkla’s Pizza Grandiosa, it’s reasoned, needs to compete against cheaper European-produced brands of frozen pizza like Dr Oetker that use cheaper European milk.

In order to get Orkla to keep using cheese made with high-priced Norwegian milk, the state literally pays Orkla by implementing a regulation called RÅK (Råvarepriskompensasjon). It basically compensates Orkla for its higher cost of buying Norwegian råvarer (raw materials), like milk.

Taxpayers have thus effectively been subsidizing Orkla with around NOK 100 million a year, and Aftenposten reported that Orkla wants even more compensation now that milk prices abroad have sunk so low. Orkla looks likely to get it: “If the price difference between Norway and the EU increases, we raise the compensation,” Jens Tjentland of the agriculture directorate told Aftenposten.

Avoiding a competitive disadvantage
The theory is that then Orkla won’t be at a competitive disadvantage and can avoid having to raise the prices of its pizzas at a time when European pizza can be cheaper. The prices of most imports in Norway, though, have risen because of Norway’s weaker currency, the krone. It thus can be complicated to determine how much subsidy Orkla should be able to receive.

Orkla hasn’t been happy with what it’s been offered, since state compensation was adjusted in December and milk prices have fallen since. State officials say they may grant Orkla “a bit extra” to even things out. Orkla justifies receiving its taxpayer compensation on the grounds that without it, production of its pizza “and many other food products” wouldn’t be profitable. “Orkla’s purchase of Norwegian agricultural products provides business for around 1,200 farms, of which 436 produce milk,” Orkla spokesman Håkon Mageli wrote in a letter to the editor of Aftenposten. He acknowledged that farmers and food producers like Orkla are mutually dependent on each other and that “good terms” for Norwegian farmers (ie: their state-mandated protection from foreign competition) are also important for Norwegian industry.

Officials at Tine’s rival Q-Meireiene, meanwhile, say they’re not benefiting nearly as well from Norway’s agricultural policies as either the farmers, Tine or Orkla. More consumers are choosing Q-milk over Tine, with its market share rising to around 20 percent and its revenues rising by 4 percent last year. But Tine, with 80 percent of the market, has earned so much money that it’s able to pay out more dividends to its dairy farmer members. Q-milk has to pay just as much to keep farmers from delivering milk only to Tine, contributing to a 13 percent decline in its operating profit for 2014.

newsinenglish.no/Nina Berglund