6 September 2002

OPTIONS FOR QUOTA REFORM

The EUs mid-term review

has put forward four

possible options for the

future of milk quota.

Philip Clarke, FW Europe

editor, reports on the pros

and cons of each

IF EU farm commissioner Franz Fischler had had his way, reform of the milk quota regime would already be well under way.

Significant changes were included in his Agenda 2000 proposals back in 1998. This included calls for 15% cuts in butter and skimmed milk powder prices, compensation in the form of a dairy cow premium and a 2% increase in milk quotas, targeted at young farmers and mountain areas. The aim was to phase these measures in over four years.

Broad support came from Denmark, Italy, Sweden and the UK – the so-called London Club. But, by the time Agenda 2000 was finally signed off in Berlin a year later, Dr Fischlers plans for the dairy sector were delayed.

Price cuts of 15% were agreed, but only from 2005/06 in three equal stages, with a corresponding increase in milk quota of 1.5% over the same three years. A dairy cow premium will provide partial compensation.

As part of the Berlin compromise, it was also agreed to hold a mid-term review, "with the aim of allowing the present quota arrangements to run out after 2006".

At the time it was expected that a deteriorating dairy market, with growing surpluses and mounting export subsidy bills, would increase the pressure for change. But now the market outlook is relatively buoyant.

Cheese prices

Cheese consumption is projected to remain strong, rising by about 1.1% a year, with prices remaining close to their current levels. And fresh dairy products will enjoy an even stronger upturn, with 24% extra demand by 2008, and higher prices.

Projections for skimmed milk powder are less positive, with falling demand from the animal feed sector and a dependence on consumption subsidies to keep the product out of intervention. Butter prices are also expected to fall, in line with the 15% cut in intervention.

But stronger cheese, fresh products and whole milk powder markets, should see farmgate prices fall less than the 15% drop in intervention prices. Most of this loss of revenue will be offset by dairy cow premium payments.

Against this background, which is not seen to challenge the EUs dairy budget of k2.8bn, the mid-term review published in July merely presents four options for future discussion (see panel).

While it makes no specific recommendations, the commission quickly dismisses the idea of a two-tier quota system (Option 3). Despite the improved market balance, an end to export subsidies and much reduced intervention stocks it would involve more red tape.

CWTO rules

More importantly, there is a big question mark over its compatibility with WTO rules. A similar two-tier system, operated in Canada, is under scrutiny and likely to be declared illegal.

The report also seems to play down the idea of maintaining the status quo (Option 1). "Due to the shortfall in milk supplies under quotas, domestic consumption rises at a slower rate than it would with lower prices and increased supply, and market opportunities are clearly lost," says the commission.

"While decreased export of bulk commodities may not be too detrimental, the substantial reduction of exports of high value products to emerging world markets is a serious loss to the EU milk economy. Throwing away an export capability is an outcome which may be avoided under a more competitive milk regime in the future."

That leaves Options 2 and 4 as the front runners, and both have advantages and disadvantages, according to the commissions analysis.

Extending Agenda 2000 principles of reduced support prices and gradually increased quotas, with partial compensation, (Option 2), would improve long term market balance, with extra milk channeled into market leading items, such as cheese and fresh products.

This in turn means that farmgate prices will not match the full drop in intervention prices, (25% from 2000 to 2010), due to the strengthening internal demand for milk. They are forecast to drop 15% over the period.

Option 2 will also lead to a further reduction in intervention stocks and export subsidies, and gains to consumers through lower retail prices.

On the downside, the commission points to the increased budgetary cost of paying producers more compensation. "The quota system also continues, restricting the shift of production to low cost producers." As for milk sector income, the commission predicts a net gain of k1.2bn (£780m) by 2015 after allowing for dairy cow premium.

Free market

That leaves Option 4, the free market option, with quotas swept away in 2008. "Since the lifting of quotas could be expected to give rise to an immediate increase in production, as low cost producers seek to increase their returns, market prices would fall," says the commission. It predicts a 13% lift in output and a 26% drop in price.

For this reason, the commission also suggests a 25% drop in support prices, to act as a safety net only, and a doubling of direct aid payments to farmers.

Among the advantages the commission lists the ending of the burden of quotas on efficient producers, lower prices to consumers, simplification of the system and the fact dairy products can be exported free of subsidies.

Negative effects

But there will be strongly negative effects for producers. "Prices fall to a very great extent and are not fully compensated for by the increased opportunities for cheap milk. The potential structural impacts could be appreciable," says the commission.

Milk sector revenue is also forecast to drop dramatically under this option, losing k7.3bn (£4.7bn) between 2008 and 2015. Even after allowing k2.9bn (£1.9bn) in extra compensation, the sector still loses a net k4.4bn (£2.8bn).

For this reason alone, Option 4 is likely to prove too radical for most EU farm ministers when the time comes to vote on the four options put forward. It, therefore, seems most likely they will go for Option 2 – or some variation thereof. &#42

Franz Fischler is keen to see milk quota reform and has put forward four options for discussion.

Option 1

No further change from what has already been implemented under Agenda 2000.

Option 2

A repeat of the Agenda 2000 approach, with quotas raised by 3% in three steps from 2008/09 to 2010/11, butter support prices cut another 15% and skimmed milk powder by 5%. Compensation for 58% of the price drop paid as increased cow premium.

Option 3

Two tier quota system. Current quota cut by 5% to create A quota, sufficient to meet domestic demand, with an open ended C quota for unsubsidized sales to the world market. Export refunds and disposal aids eliminated.

Option 4

Quota regime abolished from 2008. Intervention prices cut by 25%, so only operates as a safety net.