The Commission has proposed a 2% increase in milk quotas beginning on 1 April 2008 to apply on an equal basis to the 27 Member States. This proposal repeats the Commission’s proposal for a 2% increase in the 2003 Mid Term Review (additional to the 1.5% increase already agreed for 11 Member States as part of Agenda 2000). Member States at that time rejected the proposal but called on the Commission to report on the market situation, once the reform was fully implemented, before a final decision was taken. The Commission has also published this market outlook report which argues that the expected positive growth in demand for dairy products both on the EU and world markets offers ample opportunities to absorb a 2% quota increase. Leaving quotas unchanged would prevent the EU from exploiting rising demand and healthy price levels.
The EU is of course a very large dairy producer in world terms. A chart in the market outlook report shows that the EU-25 accounts for 40% of world trade in cheese, 30% of trade in whole milk powder, 20% of trade in skim milk powder and 10% of world trade in butter. Thus, even small increases in EU milk production can have a large effect on world market prices for dairy products. This makes the milk price received by EU producers quite sensitive to the level of EU production.
Indeed, the Commission projections suggest that its proposed 2% increase in milk quota, if fully utilised, would lead to a reduction in the EU raw milk price of 4% by 2014 compared to the baseline. As the baseline foresees a price increase of 7%, the relaxation of quotas would claw back some of this projected increase.
The Commission’s projection is fully in line with the recent FAPRI-Ireland modelling of a 3% quota increase in 2008 (which the model assumes would translate into an 2% increase in actual milk production as some Member States would not avail of the increased quota limits). That report projected milk prices would be 5% lower than in the baseline by 2014 following an increase of this magnitude.
The Commission also notes the real impact on production is likely to be more limited than it assumes in the light of recent EU quota fulfilment rates. An interesting set of tables in the report shows EU overshoot or undershoot of quota levels in recent years and its distribution by Member State. Since 2004-05 not all available EU quota has been taken up, with the biggest undershooting occurring in France, the UK and Hungary.
The report also contains a table with Member State estimates of the price paid per kg of quota in 2007. These varied from €1.33 per kg in Cyprus, 70-80c in the Netherlands and 62c in Denmark, to virtually nothing in France, the UK and Hungary. These disparities are an indication of the distortions introduced into the EU milk market by the freezing of national quotas at 1984 production levels, with only minor adjustments since then.
The Commission’s proposal to increase milk quotas by 2% next April clearly makes sense in the current environment of high prices and buoyant demand. Nonetheless, despite the cessation of export subsidies and the elimination of all internal disposal aids because of high market prices, EU butter prices remain about 30% above world market levels, and a quid pro quo for increased quota should be a further reduction in butter intervention prices. This would have no effect on the raw milk price in the current market environment, but it would signal to dairy farmers contemplating expansion that they should look to market conditions in the future and not artificial intervention outlets in making their decisions.