Options for milk quota reform

How to manage the transition to the phasing out of milk quotas is one of the items on the CAP Health Check agenda. A recent study from the FAPRI-Ireland team based in the Rural Economy Research Centre, Teagasc in Ireland has examined the impacts of two alternative transition paths to phasing out milk quotas by their expected date of elimination in 2014/15.

One option, discussed in the September 2007 Agricultural Council, was a once-off increase in each member state’s quota by 3% in 2008/09 (in addition to the increase already foreseen in that year under the Mid Term Review Regulation No. 1788/2003) and the removal of milk quotas entirely on April 1st 2015 – what might be considered the ‘big bang’ approach. The second option would to be provide a series of incremental increases of 3% per annum, again starting in 2008/09 but continuing until 2014/15, thus providing for a total quota increase of close to 20% over the period, and again with the elimination of milk quotas entirely on April 1st 2015. This might be called the ‘soft landing’ approach. In this second scenario, the study estimates that quota removal in 2015 would have a negligible impact because the EU in aggregate would have achieved its productive capacity in the quota expansion phase preceding its elimination.

The study provides commodity supply and use projections for the EU-25 for the major farm commodities for each scenario which can be compared to their baseline projections (updated in late summer 2007) published separately. The scenarios can be evaluated by comparing production and prices in 2016 with the comparable variables in the baseline. Note, however, that the 2016 values are not necessarily in equilibrium in that year, and that some of the reported differences between the two scenarios may represent points on different paths towards their equilibria.

The point is relevant because the model used is dynamic and highly non-linear. For example, in the ‘big bang’ scenario, EU milk production would increase by 2% (as a result of the one-off 3% increase in quota in 2008/09) and prices would be 5% lower relative to the baseline in 2014. Once quotas were eliminated in 2015, there would be a further 1% increase in aggregate EU production but only a further 1% drop in the EU milk price (i.e., the 2016 price would be 6% below the baseline price in the ‘big bang’ scenario).

In the ‘soft landing’ scenario, EU milk production would increase by 4% by 2014 and the average EU price would be 7% lower than in the baseline. However, the elimination of quotas the following year would have a negligible impact on production or prices, so these would also be the percentage differences in 2016.

Thus, in aggregate terms, there is little difference between the end points of the two scenarios. However, individual member states will view the prospects very differently. Member states with competitive milk production sectors (Ireland, Poland) will favour the ‘soft landing’ option because they have the potential to increase production even at slightly lower prices. Other countries where quota limits are barely filled at the present time face the prospect of both lower production and lower prices and will want to hold on to the quota restrictions as long as possible because they keep prices higher than they otherwise would be.

An indication of the relative competitiveness of different member states in milk production is given by the size of quota rents in milk production. Estimates of these rents vary and observed values of traded quota prices are not necessarily a reliable guide because of the way in which the market in milk quota is regulated in different countries. Also, available studies generally cover the EU-15 so no data are available for the NMS.

The FAPRI-Ireland study bases itself on quota rent values in a 2006 paper by Lips and Reider, which in turn takes its values from a 2002 INRA-Wageningen University study and a 2002 study by researchers at the Federal Agricultural Research Centre in Braunschweig. The Lips and Reider values are reproduced below, in descending order. We would expect countries at the top of the list to be those most enthusiastic about the ‘soft landing’ option and countries at the bottom of the list to be least enthusiastic about that option, wanting to hold on to the current quota system as long as possible. It would be interesting to get views on how realistic are these quota rent figures and the resulting ranking of countries at the present time.