Thoughts on the future of the Swiss dairy market

1. Management Summary

Switzerland is faced with the challenge of redefining its traditional position as a cheese nation. The promotion of milk powder production has not achieved the desired success, and the largest producers are financially struggling. To strengthen cheese production and increase value creation, existing strengths, such as the positive image and extensive know-how in cheese making, must be effectively leveraged. As part of this reorientation, it is crucial to reform the market structures, particularly the role of the AOP (Appellation d’Origine Protégée) organisations, and to promote innovative products, while simultaneously improving the export opportunities for fresh products through sectoral openings.

2. Current Situation

A large part of Switzerland’s agricultural land is particularly well-suited for milk-based grass farming. Therefore, milk production serves as an income source for Swiss farmers. A significant portion of the milk must be exported, as production in Switzerland exceeds domestic consumption. The largest export product is cheese, followed by milk powder.

Traditionally, Switzerland has been a cheese-exporting country rather than a milk powder country. Due to the failure of the Swiss Cheese Union, the production of milk powder was strongly promoted over the past 25 years. Unfortunately, this strategy has not been successful, and the two largest milk powder producers are now in dire financial straits. In contrast, cheese dairies have developed well despite open borders and limited political support. It is time for Switzerland to realign itself and to consistently realise the untapped value creation in the cheese market.

A brief retrospective shows that until 1999, the Swiss Cheese Union controlled milk marketing and positioned Switzerland as the country with the best raw milk cheese. The organisation made many mistakes; notably, a strong semi-governmental cartel hindered innovations. The losses incurred by the Cheese Union were so significant that, on a turnover of approximately CHF 600 million, it recorded almost the same amount in losses. This led to its dissolution at the end of the last century. With this, the political influence of the industry grew. A new strategy emerged, with the production of milk powder as its central element, into which massive investments have since been made.

However, such a strategy cannot succeed. Unlike cheese, Switzerland has neither a tradition nor a positive or negative image in the production of milk powder, meaning that milk powder must be sold at world market prices. A strategy can only be successful if Switzerland has clear strategic advantages in this area. However, since there are no technical, qualitative, or cost-related advantages, failure was predictable.

3. Present Situation

As expected, the large milk powder producers that emerged after the Cheese Union (Hochdorf and Cremo) are financially under strain. This provides an opportunity to create a new market order and reposition Switzerland as a cheese nation. In contrast to milk powder production, cheese production has significant advantages over other cheese producers:

1. A very good image as a cheese manufacturer

2. A high proportion of silage-free milk

3. Extensive know-how in the production of quality cheese

4. A cost advantage in cheese maturation due to low interest rates.

Given these advantages, it is evident that implementing a cheese strategy is likely to be more successful, which is confirmed by the positive development of many cheese dairies in recent years.

4. The Future

In light of the considerations above, cheese should take centre stage again, distinguishing three segments:

- Raw milk cheese: the traditional premium product and image bearer.

- Cheese from silage milk: the qualitative "mass product".

- Cheese as a regulatory product for the processing industry.

The cheese types to be developed and the technologies to be invested in have been successfully determined by market participants in the past. This should remain the case in the future. The positive developments of various cheese dairies show that consistent strategic implementation in all three segments can achieve successful results.

Additionally, in recent years, many innovative fresh milk products have been developed that should not be neglected. Unfortunately, the export of these products is complicated due to closed borders. To change this, Switzerland would need to generally open its borders to dairy products, which, however, is politically challenging due to strong price pressures. Sectoral openings, for instance for desserts, could possibly be considered.

Powder towers will also be needed in the future to accommodate production peaks; however, as long as they are subsidised, they should not be viewed as a standalone business model. It would make sense to examine whether the industry can jointly manage such a company to avoid market distortions.

Moreover, there is a market for milk powder in Switzerland, which should be served if buyers are willing to pay a premium for Swiss milk. The cheese by-product whey protein concentrate is in high international demand, but the Swiss origin poses a problem, as this needs to be labelled separately on the products, while most users only declare EU milk. The current production of Swiss whey proteins is too low to effect a change in the labelling of packaging. Here, the Swiss retail sector could exert pressure by insisting that the origin of Swiss products is labelled on imported items.

5. Framework Conditions

For the reorientation of the dairy market to succeed, the framework conditions must also be adjusted. An important point concerns antitrust law, which currently does not apply to agriculture. A shift in thinking is required here.

Regarding this, a thought from Beat Kappeler, a publicist and former union secretary, is relevant: "It was clear that cartels are not only harmful to consumers but also to the industries themselves. The beer cartel was so strict that breweries became complacent and invested their profits entirely in real estate. They had no need to explore new markets. To this day, the beer industry is almost the only Swiss industry that does not export. When the cartel was finally abolished, the breweries were taken over by foreign corporations."

Let us not allow the dairy market to fall asleep!

1. Market management and Interprofession

An important area of market order is market management and the Interprofession. Raw milk cheese is dominated by the Interprofession that were formed based on the cartels of the Cheese Union and hinder innovation. A current example is the Emmental AOP: the dairies and farmers relied entirely on the corresponding varietal organisation. When sales continuously declined, a market participant decided to no longer market this cheese and did not renew the purchase contracts with the dairies. Although this situation was foreseeable, the dairies had not built a second pillar and are now forced to cease production entirely.

For an efficient and sustainable market development, it would be desirable for the Interpfrofessions to be reformed, becoming more flexible and better aligned with market needs. One reason for their quasi-monopoly is the jointly subsidised market management conducted via "Switzerland Cheese Marketing". Here, politics can make a significant impact. Advertising and support should benefit all market participants, not only as a subsidiary measure, as is currently the case. Today, Switzerland Cheese Marketing arbitrarily excludes organisations, for instance due to legal disputes or because their marketing strategies do not fit the established scheme. An open organisation, not dominated by the varietal organisations, that also provides a real added value beyond merely collecting subsidies would be desirable.

2. Cheese Milk subsidy

The cheese subsidy determines the milk price in relation to the international milk price. This measure supports all cheese producers and is market neutral. It is up to politicians to decide how strongly the milk price should be subsidised. It should be noted that the level of the cheese subsidy also influences the price of fresh products since the milk used for these products also becomes more expensive. Given that fresh products cannot be exported due to tariff barriers, this has only a limited impact on direct exports but promotes shopping tourism to nearby countries. A cheese subsidy that is too high would disproportionately favour cheese compared to fresh products, which is why a reasonable balance must be found.

3. General milk subsidy

The general milk subsidy is levied to support powder production but negatively impacts the cheese strategy. For this measure to be market-neutral, the funds should also be used to support "regulatory cheese". The goal is to phase out these subsidies in the medium term.

4. Silo prohibition subsidy

The silo prohibition subsidy is a market-neutral measure that promotes the production of silage-free milk and should be one of the main instruments for implementing the "cheese strategy".

6. Conclusion

The reorientation of the Swiss dairy market offers a promising opportunity to restore Switzerland's traditional strength as a leading cheese nation. By strategically leveraging existing advantages, such as the positive image, extensive know-how, and high quality in cheese production, innovative products can be promoted and new markets opened. Through the reform of market structures and a strong focus on the needs of producers and consumers, it is possible to successfully position cheese as a central product, thus increasing value creation. By learning from the past and taking the right steps into the future, we can ensure that Switzerland continues to be known as a pioneer in high-quality milk and cheese production.

14-02-2025