Pressure building on Commission to postpone milk quota reform

If there was a jewel in the crown of the CAP health check deal agreed last November it was probably the decision to phase out milk quota between now and 2015, with a one per cent increase in quota each year. But this prize is now under threat as several powerful EU member states led by Germany have argued at today’s Agriculture Council meeting that the reform should be postponed.

Milk prices have fallen over the past few months to a point where many less competitive dairy farmers are not able to turn a profit. Relative to market demand, too much milk is being produced at too high a cost. Of course in a normal market there would be a supply response until prices returned to equilibrium levels. But this far from a normal market. In the EU, when prices go down and less competitive dairy farmers stop turning a profit, they do not respond by cutting production. On the contrary, they keep on producing and organise mass protests in national capitals calling on their farm ministers to do something to get prices back up.

Why are milk prices in decline? According to EU Agriculture Commissioner Mariann Fischer Boel,

“The problem we are facing today is not the result of increased production in the EU but rather the combination of increased production in a number of third countries… and a decreasing demand in EU and on the world market.”

The way that the EU keeps milk prices above their true market levels is through a system of production quotas, not unlike the OPEC oil cartel. The only farmers who are allowed to sell milk in the EU are those who own or lease quota. Over-quota production is discouraged by a system of fines. (It works a little differently in Italy where politically powerful dairy farmers continue to produce over quota but instead of paying the fines they force their government to pay the fines for them. I’m told that the new quota won by Italy in the health check deal last year are being allocated to the very same farmers who persistently broke Italy’s quota limits.)

Milk quota keep prices up across the board and benefit all farmers with quota, not just those ‘in need’ of subsidy. A system that serves to keep less competitive farms in business and also provide windfall profits to the more competitive producers. However, some of the more competitive producers would like to expand their production to achieve further cost efficiencies but are unable to do so because they have not got sufficient quota to cover the increase in output. Quota can be bought and in some countries like the Netherlands, buying or leasing quota is one of the main running costs for dairy farmers, alongside traditional expenses such as renting land and buying feed.

In short, the EU’s more competitive dairy farmers (those based in places where the climate is conducive to dairy farming) would on balance like to see the quota system end. Less competitive dairy farmers (those that are very small or are farming in places that are not conducive to dairy farming e.g. half way up mountains or in very dry or very cold places) would like to see quotas preserved. All things being equal one would expect that consumers of milk and dairy products would like to see cheaper milk through the phasing out of quota.

The push for a postponement of quota reform is being led by German farms minister Ilse Aigner. Michel Barnier, her outgoing French counterpart, has also defended quota:

“If it was up to me we’d keep the milk quotas in some form or another… We have to be very careful not to exacerbate the current overproduction.”

Faced with a problem of overproduction or a fall in demand, allowing prices or output to fall is just not a politically acceptable option. Unless, of course the cut in production is called a ‘milk strike’ such as that organised last year by BDM, the German milk producers federation, and which is again being threatened. More evidence of agriculture policy as the triumph of politics of economics.

While not countenancing “a complete re-orientation of the EU dairy policy” Commissioner Fischer Boel has not ruled out a postponement of this year’s planned quota increase. Few expect Fischer Boel to be in post next year, so a short term fix must look rather attractive.

More at EUBusiness.com

Update (20h00): EU Observer reports that the Commissioner gave short shrift to any ideas about reopening the November deal. It quotes her as follows,

“I am not going to re-open the agreement that we made in the health-checK. I hope this is clear enough so we can stop this blurred discussion that is sending totally the wrong signal to the farmers. Farmers believe sometimes that one minister or another will be able to put pressure on the commission to re-open the whole discussion. This is not going to happen. It is actually dead, this idea.”

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