CHAPTER 3
EC DAIRY REGIME: MARKET SUPPORT MEASURES
BACKGROUND
3.1 The EC diary regime was introduced in
1964. Historically, the underlying objective of the regime has
been to manage the Community market for milk and milk products
in such a way that the prices obtained by milk producers meet
a target which is set annually by the Council of Ministers. However,
this is merely an indicative price rather than a legally binding
target. In practice, the price received by producers for their
milk has been affected by a number of factors, such as fluctuations
in national currency against the ecu/euro and WTO restrictions
on the level of subsidised exports.
3.2 In addition to production quotas, the
principal instruments of market management in the diary sector
are:
— import tariffs (introduced under
the GATT Agriculture Agreement);
— aid for private storage;
— subsidies to encourage the disposal
of milk and milk products on the Community market.
EXPORT SUBSIDIES
3.3 Export subsidies (or refunds as they
are known) are paid on exports of diary products from the Community.
Refunds vary according to the product and, in the case of cheese,
by destination. In principle, refunds were designed to cover the
difference between the high internal prices and the lower prices
on the world market. However, since the introduction of the GATT
Agreement on 1 July 1995, reductions in the level of export refunds
has formed a key instrument in the European Commission's management
on the WTO restrictions on subsidised exports of milk and milk
products. Refunds for certain products, such as cheese destined
for the Russian market, have also been increased to stimulate
demand.
3.4 Under the GATT Uraguay Round Agreement
on Agriculture the EC must reduce the volume of, and expenditure
on, subsidised exports by 21 per cent and 36 per cent respectively
below the 1986-90 average. All the reductions take place progressively
over six years, starting on 1 July 1995. The commitment on export
subsidies applies commodity by commodity. In the dairy sector
the ceilings on the volume of, and expenditure on, subsidised
exports apply individually to four product groups: cheese, butter,
SMP and other dairy products. The volume and value ceilings on
subsidised exports are particularly restrictive in the case of
value added products such as cheese.
3.5 In order to ensure that the Community's
GATT commitments are met, the Commission have introduced a licensing
arrangement for all subsidised dairy exports (previously, export
licences were required only for consignments of butter over 500
kg and powders over 1,000 kg). Under these new procedures the
Commission can monitor the volume and value of subsidised exports
of dairy products and, if necessary, take action to restrict the
issue of licences if it appears that the annual target is in danger
of being breached.
IMPORT TARIFFS
3.6 Variable import levies applied until
1 July 1995. They were designed to protect high priced dairy products
within the Community from cheaper imports. They have been replaced
by fixed tariffs. In accordance with the GATT Agreement, these
tariffs are reduced in equal instalments over the six year implementation
period (1 July 1995 to 30 June 2001) by 36 per cent (20 per cent
for SMP) by comparison with the 1986-88 average. In order to avoid
destabilisation of internal markets, the GATT Agreement allows
for the imposition of additional duties if imports exceed volume
ceilings or trigger prices. In the dairy sector the price trigger
mechanism has been in operation on an automatic basis since the
introduction of the Agreement. Any dairy imports entering the
Community at more than 10 per cent below the trigger price automatically
incur additional duties, with the exception of dairy products
subject to preferential duties.
3.7 In addition to the reductions in tariffs,
the Community has maintained its existing concessionary import
arrangements for butter and cheese with New Zealand, Australia
and Canada. The quantities and rates of levy for cheese
imports from these countries remain unchanged. In the case of
imports of butter from New Zealand, however, the volume
and levy rate have reverted, under the GATT Agreement, to the
1986-88 average. As a result, concessionary imports of New Zealand
butter increased to 76,667 tonnes a year from 1 July 1995, a 25,000
tonne increase compared with 1994. Preferential access for New
Zealand butter was negotiated when the UK joined the EC and the
entire quantity was originally confined to the UK market. With
the introduction of the Single Market in 1992, the prohibition
on re-exporting the butter from the UK to other Member States
was lifted. Under the regulations implementing the GATT Agreement,
the butter may now be landed anywhere in the Community and is
no longer required to be routed through the UK. The requirement
that the butter must be salted does, however, limit its appeal
on the continent where there is a marked preference for unsalted
butter.
3.8 In addition to the maintenance of existing
preferential access arrangements (known as current access in GATT
parlance), the Community has opened new reduced rate tariff quotas
for cheese, butter and SMP in order to fulfil the obligation to
provide increased import opportunities up to a level of 5 per
cent of domestic consumption by the end of the six year implementation
period.
INTERVENTION BUYING
3.9 Intervention buying is available for
butter and SMP. It was also available for certain Italian varieties
of cheese until August 1994 when the facility was withdrawn by
the Agriculture Council. The intervention system is designed to
support market prices within the Community by setting a floor
price at which products are purchased by national intervention
authorities and placed in storage. To prevent the build-up of
stocks and to reduce Community expenditure on the purchase and
storage of butter and SMP, the intervention arrangements have
been modified over the years. At one time intervention for butter
was permanently available. It is now open only if market prices
in a Member State fall below 92 per cent of the intervention price
for two consecutive weeks. And the price at which butter is taken
into intervention is now set by tender; the full intervention
price is no longer automatically available.
3.10 Intervention for SMP, at the full intervention
price, is available for only six months of the year (1 March to
31 August). If the total level of intervention stocks in the Community
exceeds 109,000 tonnes, the price at which SMP is taken into intervention
is set by tender (this has happened only once, in 1991). The full
intervention price is paid on SMP with a protein content of at
least 35.6 per cent by weight of the non-fatty dry extract. There
is a 1.75 per cent reduction for each percentage point by which
the protein level is lower than 35.6 per cent down to a limit
of 31.4 per cent. SMP with a protein content less than 31.4 per
cent is ineligible for intervention.
PRIVATE STORAGE
AID
3.11 Private storage aid is available for
butter, certain varieties of long-keeping cheese and, when public
intervention is suspended, SMP. Like intervention, it is a means
of supporting the market and stabilising prices by encouraging
the storage of products when they are plentiful and their release
on to the market when supplies are tight.
SUBSIDISED DISPOSAL
3.12 To encourage the consumption of milk
and milk products, a school milk subsidy was introduced
in 1977. In order to reduce the budgetary cost of the scheme,
the rate of subsidy was reduced by 25 per cent from January 1994.
At the same time a series of cost-cutting administrative amendments,
including a reduction in the range of products eligible for subsidy,
were made. The scheme is compulsory in that Member States must
make it available to schools and education authorities. But it
is up to those schools and education authorities whether they
claim the subsidy. And certain aspects of the scheme (the payment
of subsidy on milk and milk products consumed in secondary schools,
on products used in the preparation of school meals and on cheese)
are optional for Member States. The UK has withdrawn from the
optional elements of the scheme.
3.13 The Community has introduced a number
of measures over the years to encourage the use of surplus
butter. The most important of these is the subsidised sale
of butter for use in the manufacture of confectionery, pastry
products and ice cream. Concern about the increasing level of
expenditure on the scheme prompted the Commission to introduce
new arrangements at the beginning of 1995, including reduced aid
rates and a more competitive form of tendering, designed to reduce
uptake. Other disposal schemes for butter include reduced price
sales to non-profit organisations, subsidised sales to welfare
recipients and aid for concentrated butter for direct consumption.
3.14 Aid is also available to encourage
the use of skimmed milk and SMP in animal feed and in the
manufacture of casein. Until 1988 the animal feed scheme was the
most expensive of the Community's disposal schemes in the dairy
sector. But as the overall surplus of skimmed milk in the Community
has declined, the Commission have cut the rates of aid under this
scheme and have reduced the minimum amount of skimmed milk which
must be incorporated in animal feed in order to qualify for subsidy.
COST OF
THE REGIME
3.15 Total expenditure on the dairy regime
peaked at about 6.0 billion ecu (£4.0 billion) in 1985, when
spending on intervention was at its height and again in 1988 (5.9
billion ecu), when export refunds alone accounted for more than
3 billion ecu. Since then expenditure on export refunds and the
subsidised disposal schemes has fallen, assisted firstly by the
introduction of milk quotas and subsequently by a reduction in
quota levels. And intervention stocks of butter and SMP have declined.
Stocks of butter currently stand at 6,664 tonnes, compared with
1.3 million tonnes at their peak in 1986. Similarly, stocks of
SMP have fallen from around 1.0 million tonnes in the early 1980's
to about 230,000 tonnes today. However, intervention for butter
is currently open in nine Member States and sales of butter into
intervention are on the increase. Similarly, intervention is currently
open for SMP and sizeable volumes are being offered into store.
Nevertheless, stocks are nowhere near the levels reached in the
1980's.
3.16 Total expenditure on the dairy regime
in 1998 amounted to just under 2.6 billion ecu (£1.7 billion)
and is forecast to remain at that level in 1999. This makes it
the third most expensive support regime after arable crops (17.9
billion ecu in 1998) and beef (5.2 billion ecu).
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