Reference no: EM132897468

In late 2007, EU producers and consumers of milk products become only too well aware of how political decisions in one part of the world can, with interconnected global markets, transmit market 'shocks' to all corners of the world. A drive by the Chinese government to provide all Chinese children with half a litre of milk a day caused demand for milk to increase dramatically by around 25% a year, with around one-third of all the worldwide production of milk now exported to China. Prices of a litre of milk in the EU rose by over 25% in one week alone in August 2007, with substantial price increase in dairy based products such as cheese, butter and yogurt following closely behind. For example, Kraft raised prices of its cheese based products by 12% in 2007, linking the price rise explicitly to higher milk costs. However, others blame over-regulation in the EU, rather than globalisation, for milk-based inflation. They argue that it is the excessive milk quotas imposed by the EU in 1984 and due to last until 2015 that has prevented the supply side of the EU market for milk from adjusting to this surge of Chinese demand. Even so some market adjustment is taking place, if only slowly. For example EU dairy farmers are breeding high-performance milk cows and selling these to Chinese farmers, who have little or no tradition of dairy farming. Increased Chinese production of milk is also being helped by Chinese government subsidies for farmers who switch to dairy farming.

What aspects of political risk are involved here and how might those political risks have been taken into account?