27 March 1998

Quotas are vexed question

What does Agenda 2000

hold in store for dairy

producers? Europe editor

Philip Clarke reports

OF ALL the sectors up for reform under Agenda 2000, it is dairying that is likely to prompt the most heated debate as negotiations get under way in Brussels.

In particular, EU farm commissioner Franz Fischlers plan to increase milk quotas by 2% (2.3bn litres), but to spread it unevenly across Europe, has drawn the sharpest of criticism.

Mr Fischler intends to give 1% of the additional quota to young farmers (under 40 years old), and the other 1% to mountain regions. But, according to Brussels criteria, the UK has no mountains and, as such, only gets half the 2%. Finland and Austria, on the other hand, will enjoy an 8% quota increase, while Spain and Italy will get 4% and 3% more ,respectively.

Flat nations

Dairy traders in non-mountainous countries such as Denmark, Ireland and the UK, have been quick to condemn the move as encouraging milk production in the most inefficient regions – the exact antithesis of what CAP reform should be about.

There is also concern that this quota will not stay in these regions, but will be sold off cheaply to the lowlands in those countries. Brussels is planning a ring fence to keep it in the mountains, but only for two years.

The cynical view in Brussels is that the large quota increase for Austria may have something to do with commissioner Fischlers future political aspirations. But the more sanguine view is that this may turn out to be a "joke" proposal – something that will be negotiated out of the final CAP reform deal, but only in return for concessions elsewhere.

Less of a joke is the 15% support price cut intended for butter and skimmed milk powder – more than the 10% originally planned.

Brussels claims that farmgate prices will not fall as much as this. But, while that may be true on the Continent, UK producers actually face bigger cuts.

Returns here are linked to official support prices through Milk Marques Intervention Milk Price Equivalent. Industry sources believe this will drop by over 18% by 2003, as the processing margin built into the calculation is fixed. This would take UK prices down below 16p/litre.

The 15% drop in support prices, says the commission, is the penalty for still allowing area aid to be claimed on forage maize and for the 2% quota increase. Total compensation for dairy farmers has also been trimmed as a result.

But the NFU argues UK farmers will lose out from this too. "The UK has very little eligible maize area and, as a result, the loss of direct payment compensation is not offset by the restoration of the silage subsidy," it says.

Anyone hoping for a simplification of the system will be disappointed; enter the virtual cow.

As shown in the charts, compensation averaging 177ecu/cow (£123/cow at current green rates) is being proposed, made up of three elements – the basic dairy cow premium, the beef premium and a national payment. (The beef element is intended as compensation for lower cull cow and calf prices, following reform in that sector, and varies between member states.

To determine how many premiums an individual farmer is entitled to, Brussels is introducing the virtual cow concept. Put simply, each dairy farmer has his total quota (including leased quota) divided by an EU average yield of 5800 litres a cow, to give a number of premium units. This ensures that higher yielding dairy units get more compensation for milk cuts than their lower yielding counterparts.

But it is still not full compensation. A farmer producing exactly 5800 litres of milk could expect to receive £123/cow in compensation. But an 18% fall in milk price would wipe £198 off milk receipts, leaving him £75/cow worse off.

To make matters more complicated, the commission is proposing a national element to the funding – putting the equivalent of 45ecu/cow (£31/cow) into the so-called national envelope.

Payment options

Member state governments are given the option of paying this as a headage payment or as an area payment, targeted within common guidelines, for example to certain regions or to smaller producers. If headage payments are used, then an upper limit of 329ecu/cow (£229/cow) is allowed for the three elements of income support. If area aid is chosen, the maximum figure is 350ecu/ha (£244/ha).

The NFU has expressed its concern at the prospect of national envelopes, seeing them as potentially trade distorting, especially if spending the money is optional. Others have questioned the point of sending money to Brussels, only to have it returned to be allocated.

But other observers have welcomed the move as paving the way for a more farmer responsive aid system. Paying direct income support as area aid could have environmental benefits. And it would break any link with production, making it more compatible with any WTO and GATT constraints.

Assuming national envelopes are paid out in full, the NFU still estimates that dairy farm gross margins will fall by over 11% by 2006 as a result of Agenda 2000. (See Table 2)

And, as with cereals and beef, support to dairy farmers will also be subject to an upper limit. Total payments will only be paid in full up to 100,000ecu (£70,000 at current green rates), with 20% cuts for the next 100,000ecu and 25% reductions after that. Equivalent to 565 cows, this would be unlikely to affect many specialist dairy holdings. But where dairying forms part of a larger mixed farm, the EUs capping proposals could have important consequences.

&#8226 Next week we take a detailed look at what Agenda 2000 has in store for the beef sector.

AGENDA 2000 – DAIRY SUMMARY


&#8226 15% cut in butter and skimmed milk powder intervention prices, in four equal stages and a 17% cut in the milk target price.

&#8226 New system of direct income supports as compensation, made up of a dairy cow premium, a beef premium and a national payment.

&#8226 Maximum levels of support allowed (after 2003) amount to 329 ecu a cow (£229 a cow) or 350 ecu/ha (£244/ha).

&#8226 Silage maize to still qualify for area aid on eligible land, worth £313/ha (£127/acre) at current green rates.

&#8226 2% additional quota – 1% for young farmers, 1% for mountainous regions, introduced in four equal stages. (UK does not qualify for mountain quota.)

&#8226 Quotas to continue only for another six years.

&#8226 Member states to have an option to syphon leased quota, or non-producing producers quota to national reserve.

NB All payments assume the current green conversion rate of £0.696/ecu. Since dairy payments do not as yet exist, it is unlikely they will benefit from the higher frozen green rate, applied to beef and sheep support.

AGENDA 2000 – THREE STAGE DAIRY PAYMENTS


1. Dairy cow premium, amounting to 100ecu a cow (£70 a cow), introduced in four equal stages to 2003.

2. Beef premium, amounting to 32.3 ecu a cow (£22.50 a cow), introduced in three equal stages to 2002.

3. National payment, equivalent to 45 ecu a cow (£31 a cow), but targeted according to national criteria and paid as area aid or headage payment.

&#8226 A farmers entitlement to headage payments is determined by his number of premium units. This is determined by dividing the individuals total quota (including leased-in quota) by the EU average yield of 5800 litres.

Table 2: Agenda 2000 – gross margin effect (£ a cow)


1997 2000 2006 Change

to 2006

Output 1,472 1,452 1,315 -11%

Variable costs 575 587 657 +14%

Gross margin 897 865 657 -27%

Compensation 0 35 137 –

— — — —

Total gross margin 897 900 794 -11.5%

Source: NFU.

Table 1: Agenda 2000 – vitual cow calculation


Low yielder: 100 cows at 5500 litres

550,000 litres

——- = 94.8

5,800 litres premium units

High yielder: 100 cows at

6500 litres

650,000 litres

——- = 112

5,800 litres premium units