Gradual EU Quota Increase Would Enable Smooth Adjustment For Processors, Farmers
Brussels, Belgium—A gradual increase in European Union (EU) milk production quotas would lead to a steady price trend towards the end of the quota system in 2015, enabling a smooth adjustment for dairy processors and producers, according to a just-released report.
On the contrary, an abrupt quota removal would generate a relatively big price shock and a more uneven development over individual EU member states, according to Economic analysis of the effects of the expiry of the EU milk quota system, which was prepared by the Institut d’Economie Industrielle.
The report was prepared to provide a quantitative assessment of the impact of the abolition of EU milk quotas on the EU dairy sector, including the different policy approaches of gradual phasing out and abrupt abolition of milk quotas.
The key questions the study tries to solve are how milk production in the different countries will vary if quotas are removed or expanded and what the price effects will be. Four scenarios are considered in the study: two would phase out quotas, with a 1 pecent or 2 percent annual quota increase from 2009-10 to 2014-15; and two would remove quotas, one in 2009-10 and the other in 2015-16.
The two scenarios that fit into a strategy of “soft landing” are those where quotas would be increased gradually. Results of the scenarios are similar, although under a 2 percent annual quota increase the evolution of prices and production is smoother.
During the soft landing period, EU milk production gradually increases: by 0.7 percent per year under a 1 percent quota increase and by 0.8 percent per year under a 2 percent quota increase.
The milk production increase is not evenly shared among all EU countries, the report noted. In a first group of countries (Austria, the Netherlands and Spain under both quota increase scenarios plus Belgium, Hungary, Ireland and Italy under the scenario increasing quotas 1 percent), the increase in production is equal to the increase in quota.
However, at the end of the soft landing period the quota rents are small as a consequence of the decline in the farm milk price and the increase in marginal costs following the increase in production.
In a second group of countries (the UK in the case of a 1 percent increase in quotas, the UK, Portugal and Czech Republic in the case of a 2 percent quota increase), production falls. This is a consequence of the negative price effect of the global increase in EU milk production.
Finally, in a third group of countries, the increase in production is
lower than the increase in quota.
In both scenarios, removing quota in 2015-16 does not cause a sharp increase in production, because quota rents at the end of the soft landing period are small on average.
During the “soft landing” period, dairy product prices are slightly lower, by 5 to 10 percent in 2015-16. Due to lower prices, there is some additional consumption, but the increase is limited, so the increase in milk production is mainly exported. Export subsidies are used to export fat products.
As a consequence of quota removal, milk production increases sharply during two years: the year when quotas are removed, and the following year. The increase in EU production is about 5 percent with the main part occurring the first year.
The production increase induces a decrease in skim milk powder and butter prices.
While the SMP price remains higher than the intervention price, that’s not the case for butter, which reaches the (effective) intervention price.
In the absence of an intervention price policy, the decline in the butter price and consequently the farm milk price would be more pronounced.
Following two years of adjustment, the production increase becomes lower and mainly due to the increase in demand and accompanied by a price increase. The increase in the EU farm milk price is rather limited as it is only due to the increase in the protein price while the fat price remains sustained (through the intervention price of butter).•
