7 September 2001

EUMILKOUTLOOK- FORECASTGOOD

Next years mid-term review of Agenda 2000 is supposed to

consider the future of milk quotas, with a view to

discontinue after 2006. But with dairy markets looking more

buoyant, the word in Brussels is dont rock the boat, as FW

Europe editor Philip Clarke explains

MARKET prospects for milk and dairy products are looking rather promising, according to the latest seven-year forecasts from the EU commission in Brussels.

Assessing the likely developments until 2008, commission analysts point to strong growth in demand for cheese, at home and abroad. Within the EU, per capita consumption is expected to continue growing at 0.8% a year. Combined with modest population growth, total demand should increase by 1% a year to about 19.5kg by 2008.

But the greatest expansion will be in the world market, where cheese demand is expected to be up by 2.4% a year. "Growing population, improved economic conditions, increasing urbanisation and a shift towards a more western diet in developing countries will underpin this trend," says the commission.

As such, hard cheese prices are forecast to climb from about $1900/t in 2001 to $2300/t by 2008. Initially, the EU will be constrained in its ability to benefit from this firming world market by limits on its use of export subsidies, imposed under the GATT Uruguay Round.

But towards the end of the period, as EU support prices are cut under Agenda 2000 and world prices firm, exports should climb again as the EU becomes more competitive.

Butter

With more EU milk going into cheese production, butter output is expected to decline slightly – despite a continuing trend towards higher butterfat levels in milk.

But consumption too is expected to fall, to about 4.4kg/person/year, while imports could rise due to the better market access provisions of the last GATT agreement. This could put pressure on intervention stocks, warns the commission, unless exports are higher than assumed.

That is a distinct possibility. World butter consumption is due for a 2.5% annual increase in the next few years for the same reasons as cheese. New Zealand and the EU are best placed to supply it.

The commission report points to a steady recovery in world butter prices, from about $1500/t currently to over $1800/t by 2008. Values may also benefit from strong vegetable oil prices, though uncertainty in the key Russian market could have the opposite effect.

Unfortunately, the prospects for skimmed milk powder (SMP) are not so encouraging, though neither are they alarming. Within the EU, production will mirror that for butter, sliding from just over 1m tonnes in 2000 to about 891,000t by 2008. But with consumption falling faster, the commission is predicting some build up of stocks.

On the world market, demand for SMP is also likely to be more modest than in recent years, replaced in some instances by whole milk powder. New Zealand, Poland and Argentina are expected to increase their share of world trade, at the expense of the EU.

SMP prices are forecast to fall this year and next, before recovering slowly from 2003 onwards.

It is against this background that the commission will be drawing up its mid-term review in June next year. However, a number of changes to the milk regime are already pre-determined under Agenda 2000.

Quotas are to be increased by 0.5% a year in each of 2005/06, 2006/07 and 2007/08. At the same time, support prices for butter and SMP will fall by 5% a year, while compensation will be phased in according to individual quota holdings.

In theory, the mid-term review could propose further changes. But that is thought highly unlikely, given the buoyancy in the market place.

Currently, intervention is being little used and export refunds for some products have been cut to zero. As a result, the whole dairy regime is costing the EU a little over k2bn a year – just 5% of the total farm budget for a sector which accounts for about 18% of agricultural output.

The expectation, therefore, is that the mid-term review will amount to little more than an assessment of the quota system and a list of options.

"The text of Agenda 2000 allows us to say that the current system is the best and to present that as one of the options," says senior commission official Dirk Ahner. "But the possibility of phasing quotas out altogether will also be examined, as will ways of improving them."

Farm ministers will have the final say on what happens after 2006. But total quota abolition seems unlikely. Apart from the cost implications – prices would have to fall to world levels, forcing Brussels to pay farmers large compensation bills – quotas play a major structural role.

"We cannot envisage a liberalised market," says Costa Golfidis, milk adviser to EU farmers body, COPA. "There would be a massive relocation of dairying to north-west Europe, as has happened with pigs. This would not be acceptable politically or environmentally."

Two-tier quotas

A two-tier quota system, paying full support for "A milk" that can be consumed in the EU and no support for "B" milk that has to be exported, is another possibility. But getting it approved by the World Trade Organisation could be tricky.

A third idea would be to convert milk quotas into dairy cow premiums, similar to the suckler cow premium system. For example a 120,000 litre quota holding could be transferred into 20 units of dairy cow premium, using an average yield of 6000 litres. Producers would be able to keep more real cows than their number of virtual cows, but would not get any aid on them.

Whatever emerges, there will be a need for flexibility, says Mr Golfidis. He favours a system where quota is moved up and down annually, much as set-aside is, to allow for predicted market changes. "This would require much better forecasting tools than we have at present."

There is also a need for greater simplicity. "With new member states to join the EU from 2004, we will have to incorporate them in the quota system. Italy cant cope with the current arrangement, so what chance has Poland?" &#42

EU 2002 REVIEW

&#8226 Based on market predictions.

&#8226 Quota abolition unlikely.

&#8226 Alternatives may be debated.