Good prospects for dairy reform

A particular milestone in the CAP was passed last month when the European Commission set export refunds on dairy products to zero for the first time ever in the management of the EU dairy regime. This reflects the extraordinary jump in world market prices for milk products in the past twelve months, with prices for skim milk powder more than doubling in US dollar terms.

World dairy product prices 1979-2007Source: USDA Dairy: World Markets and Trade July 2007

Dairy prices do show a cyclical pattern, and some fall in prices compared to the recent highs must be expected as supplies adjust. Nonetheless, some of the factors behind the meteoric rise in prices since mid-2006 are likely to be sustained, leading to a generally higher level of dairy prices over the next ten years. Both OECD-FAO and FAPRI in their latest forecasts suggest that, on average, world dairy product prices will be 20-35% higher by 2013 as compared to 2004 even under a ‘business as usual’ scenario, i.e., without taking into account the impact of a successful Doha Round agreement on prices.

This new market situation has transformed the context in which further milk market reforms will be discussed in the CAP Health Check. In a number of recent speeches, Commissioner Fischer Boel has outlined what the dairy agenda in the Health Check will be.

Top of the list is the operation of the traditional market management tools in the dairy regime. Questions will be asked about the continued role of intervention, aids for private storage, and internal disposal mechanisms. The need to address the continuing market imbalance between fat and protein has also been flagged. The Commissioner’s view is that export subsidies are unlikely to be a viable policy option after 2013, regardless of what happens to the Doha Round. This situation has clear implications for the future of intervention, given the close link between these policy instruments. It is thus likely that the Commission’s proposals will aim to abolish all of the traditional market management instruments, with only import tariffs and possibly aids to private storage remaining.

The major issue will undoubtedly be the future of milk quotas, where the Commissioner has made no secret of her ambition to see the discontinuation of the milk quota system after it expires in 2015. She has stated that the Commission has no intention of proposing an extension of the system after 2015 and, even if it were to do so, she does not believe there is any longer a qualified majority among the Member States in favour. Given the need to provide clarity to dairy farmers about the future direction of policy, an important outcome of the Health Check should be a clear road map to help farmers to prepare for this eventuality and to ensure a soft landing. The Commission is under an obligation to produce a report on the functioning of the quota regime once the last round of support price cuts agreed under the 2003 CAP Reform package is implemented. This means that some sort of report is expected in late 2007 or early 2008.

The prospect of a period of sustained higher world market prices for dairy products should facilitate agreement on this agenda. First, it will reduce farmer opposition to change now that the elimination of export subsidies (likely to be agreed in the Doha Round in any event) will have a much more limited adverse impact on the raw milk price than had earlier been feared. Second, it should help to limit the budget cost of further reform by making it more unlikely that compensation for any further reduction in intervention prices, especially for butterfat, will be paid. Third, it will strengthen the hand of member states and agribusiness seeking an immediate relaxation of the quota regime to avoid any further loss of market share on global dairy markets (even though the shortfall in exportable supplies from the EU is one of the factors behind the recent rise in dairy product prices). All of this suggests that the pace of change in the EU dairy regime, for long the most resistant of all the commodity regimes to reform with the possible exception of sugar, could accelerate over the next few years.

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