Analysis n° 11 – July 2009 Regulations of the dairy sector: what’s at stake?

The profound crisis that the dairy sector is currently going through is in sharp contrast to the euphoria of 2007. Structural analysis of the sector, based largely on the criteria used by public economics, enables us to identify, among the specific features of the industry, those that justify the implementation of regulations. The characteristics of milk, a perishable, bulky product, and the concentration of processing factories mean that the relationship between production and primary processing is more akin to a captive market than to a competitive market. This market failure has major implications for both price formation and the distribution of value-added. Alongside this, examination of the diversity, evolution and location of the farming systems highlights a second market failure, linked to environmental and social external costs. How can these two failures, and the interactions between them, be corrected coherently? This is the initial central issue for the invention of modes of regulation that bring together markets, contracts and public policy in the future.