3. AGENDA 2000: OPERATION OF MILK QUOTAS
(23732)
10896/02
SEC(02) 789
|
Commission working document: Report on milk quotas.
|
| Legal base: | —
|
| |
| Document originated: | 10 July 2002
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| Deposited in Parliament: | 9 August 2002
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| Department: | Environment, Food and Rural Affairs
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| Basis of consideration: | EM of 2 September 2002
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| Previous Committee Report: | None; but see (22773) 12457/01: HC 152-ix (2001-02), paragraph 18 (5 December 2001)
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| To be discussed in Council: | At various times
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| Committee's assessment: | Politically important
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| Committee's decision: | For debate on the Floor of the House (together with the Commission Communication on the mid-term review of the CAP)
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Background
3.1 When the Berlin European Council adopted the Agenda
2000 reforms of the Common Agricultural Policy (CAP) in March
1999, it also asked the Commission to carry out a mid-term review.
The main elements of that review are set out in the Communication
which we have also considered today[18]
(and which we have recommended should be debated on the Floor
of the House). We deal here with one aspect of the review —
the future of the milk quota system — which the Commission
has addressed separately in a working document.
The current document
3.2 The working document contains four main sections.
— (a) The importance of milk to the Community agricultural
economy
3.3 The document notes that, in the majority of the Member
States, and in the Community as a whole, milk production is the
most important agricultural activity in terms of value, representing
around 14% of the total value of agricultural production at producer
level. In addition, the Community is the world's biggest producer
and consumer of dairy products, accounting for 21% of each, though
Australia and New Zealand together have now overtaken it as the
prime exporters of most dairy products, apart from cheese.
3.4 This section also outlines the main price support
mechanisms under the Community dairy regime — public intervention
and private storage, internal aids to consumption, export refunds
and quotas. It notes that the latter were introduced in 1984 to
contain milk production which, stimulated by high support prices,
was outstripping consumption. More particularly, there were fears
that the resultant surpluses were leading to levels of Community
expenditure on intervention storage which would jeopardise the
very future of the CAP, whilst the level of subsidised exports
was beginning to cause significant disruption on world markets.
The quota system, under which producers are charged a levy (the
so-called 'superlevy') if they exceed their quota, was considered
by the Commission at the time to be the most effective method
of addressing the problem, as it controlled expenditure whilst
at the same time allowing the existing price support measures
to be maintained, thereby helping to protect producer incomes.
— (b) The development of the Community dairy sector under
the milk quota regime
3.5 This section of the document notes that quota for
the Community of ten Member States was set in 1984 at 104 million
tonnes, in effect a 3.5% cut in production as compared with the
year before, but that, since then, the global amount of Community
quota has fluctuated. Thus, cuts had by 1992-93 resulted in a
drop of 10.5% in quota for the Community of ten, but these were
offset by increases in quota for certain Member States, plus the
effects of German reunification and the accession of new Member
States. As a result, the global quota for a Community of 15 now
rests at around 120 million tonnes. At the same time, surpluses
have been reduced from their all-time high of 22.3 million tonnes
in 1983 to their current level of around 4 million tonnes, whilst
annual CAP expenditure on the milk sector has decreased over the
same period from around _5.2 billion to _2.8 billion.
3.6 The report also outlines major developments since
the quota regime was adopted. For example, the dairy cow population
dropped sharply in the period 1985 to 1993 (following the imposition
and then reduction of quotas), as producers tried to lower production
costs, but, after 1993, with increases in quota in certain Member
States, the rate of decrease in cow numbers slowed. At the same
time, herd sizes have increased, as producers have aimed increasingly
for economies of scale. This has been accompanied by increased
consolidation in the processing industry, in response to the need
to maintain margins with a more limited milk supply. The report
notes that, despite the substantial CAP expenditure on the dairy
sector, milk margins per kilogram have been static or slightly
declining under quotas, and the Commission says it has been only
structural change and the increase in quotas per farm which have
resulted in rises in Community producers' incomes.
3.7 In its analysis of the economic effects of the quota
regime, the report defines 'quota rent' as the financial benefit
which producers derive from the relatively high prices produced
by a combination of quotas and the price support mechanism, and
it suggests that this could account for up to one third of the
value of milk at current prices. It also notes that a market for
buying and leasing of quota has evolved, leading to a situation
where the economically more efficient producers have tended to
increase their production, at the expense of the less efficient.
However, it adds that, where quota is purchased or leased from
a holder no longer in milk production, a proportion of the 'quota
rent' will drain out of the dairy economy.
3.8 The report then looks at the effect of quotas on
the competitiveness of Community milk production. It says that,
because the quota regime, along with other price support mechanisms,
helps to keep prices artificially high, it contributes to making
Community dairy products less competitive both on the internal
market, as compared with milk substitutes, and on the export market.
However, the report argues that not all of the high price is due
to the quota regime, and that, even under liberalised conditions,
there would be barriers to producers realising full efficiency
gains. It also highlights the importance of quotas in protecting
milk production in the Less Favoured Areas, which represented
33% of total Community milk production in 1997.
3.9 It concludes that quotas have had a significant and
complex impact on all aspects of the dairy industry. It acknowledges
that the system has not been stringently applied, and that the
Council has, over time, introduced more flexibility. It says that
the need to maintain this flexibility, whilst at the same time
defining its limits, has led to a complex body of Community and
national legislation, which has given rise to a raft of litigation.
— (c) Prospects for the Community milk sector under Agenda
2000
3.10 The Report points out that, using economic modelling,
independent experts have projected the impact of the Agenda 2000
agreement up to 2008. They estimate that, as compared with 2000-01,
milk production would increase by 1.7% (in line with the increase
in quota under Agenda 2000), and that the price of raw milk would
fall to 87.7% of 2000 levels — a smaller reduction than
the 15% cut in support prices — as a result of increased
internal demand for cheese, fresh dairy products and whole milk
powder (WMP). This growth in demand would be partly matched by
an increase in production in the case of cheese and fresh dairy
products. Skimmed milk powder (SMP) and butter consumption, on
the other hand, is projected to decline, with the decrease in
their use in animal feed and food manufacturing respectively.
Imports of all major dairy products would increase (in the case
of cheese, and SMP, by 50% and 80%, respectively), whilst exports
decline. As a result of the cut in support prices, milk sector
revenue (even after partial compensation through direct aid) is
projected to be _2.7 billion less in 2008.
3.11 The Commission concludes that, up to 2008, the projected
outcomes are favourable as market balance improves, intervention
stocks stabilise at a low level, and dependency on export refunds
and internal disposal aids is reduced. Also, the quota increase
and price reductions should lead to a reduction in the 'quota
rent', thereby relieving the sector of some of the burden of quotas,
and taking a first step towards their eventual lifting. However,
the Commission also makes the point that the Council's decision
to defer the price cuts until 2005, instead of 2000 as originally
proposed, has delayed the full benefits of Agenda 2000, and that
the continuation of the quota regime is associated with economic
inefficiencies and administrative difficulties, constraints on
Community production, and a continuing need for export refunds
and disposal aids, albeit at reduced levels.
— (d) The future of the quota regime
3.12 This section outlines four possible scenarios for
the period from 2008 to 2015:
- repeating the Agenda 2000 approach from 2008;
- introducing a two-tier quota regime, and
- abolishing quotas in 2008.
It is assumed that each option is implemented from 2008 onwards,
and the measures agreed up to 2008 under Agenda 2000 will remain
unchanged. The final result in 2014-15 is then compared with the
situation in 2000-01 in relation to various factors, such as price,
production, import and export levels, and sector revenue.
3.13 Under the 'status quo' option, there would
be no further changes beyond those in Agenda 2000, right up to
2015. The Commission says that, with the continued increase in
internal demand for cheese, fresh dairy products and whole milk
powder, and static production, the raw milk price would rise as
compared with 2008, and would be 93.7% of that in 2000. Imports
would be the same or increase as compared with 2008, whilst exports
would decline still further, those for butter falling to only
5% of 2000 levels, with significantly lower levels also for the
higher value products. This last consideration is identified by
the Commission as one of the main negative aspects of this option,
along with the fact that, with constant quota from 2008, the relief
generated by the additional quota under Agenda 2000 would begin
to be lost, and the sector would return to a state of being locked
into quotas.
3.14 Under the repeat of Agenda 2000 option, there
would be a further increase in quotas of 3% in three steps between
2008-09 and 2010-11; a further cut in support prices of 10% (applied
asymmetrically, with 15% for butter and 5% for SMP); and compensation
in the form of more direct aid, representing 60% of the cut in
prices.
3.15 The Report says that, as a result of strengthening
internal demand, raw milk prices under this option would be 15.6%
lower in 2015 than in 2000, and hence less than the corresponding
cut in support prices. As a result of the quota increases, milk
production would be 4.7% higher than in 2000. Consumption of dairy
products by 2014-15 would be marginally higher than under the
'status quo' option, as would production and exports (especially
of whole milk powder and butter). However, under this option,
exports would still be lower than in 2000.
3.16 The paper also mentions that, under this scenario,
the study examined the possible impact of quota trading between
Member States, in order to reduce further the economic inefficiencies
introduced by quotas. It concluded that any savings would be short-lived
(_1 billion for 2008-2015), due to the overall shortage of quota
within the Community.
3.17 The Commission summarises this option as representing
an important step towards long-term market balance, with the processing
sector benefiting from producing more higher value products, with
positive impacts on producer prices. Intervention stocks would
not reappear, and export refunds and aids to consumption would
be less necessary for both butter and SMP. Unsubsidised exports
would increase compared with the Agenda 2000 scenario, especially
in higher value products such as cheese. Further total quota increases
and lower prices would result in a considerable gain to consumers
through lower prices, whilst the sector would be better able to
respond to market signals rather than support mechanisms. On the
other hand, the option would increase considerably Community budgetary
expenditure through a further round of direct payments, whilst
the quota system would continue to restrict the shift of production
to low-cost producers. As a result, the sector as a whole would
continue to lose potential added value and income.
3.18 The Report says that, under the two-tier option,
quota would be set for the internal market at the level of unsubsidised
internal consumption (effectively a 5% cut in the 2008 quota level).
Thus, domestic disposal aids would be abolished, and, although
intervention or private storage measures would be retained, this
would be at a minimal level needed to absorb fluctuations in demand.
Alongside this, there would be an open, independently managed
quota for exports. This option would maintain internal prices
above world prices, while at the same time exports would be unsubsidised,
and so no longer subject to World Trade Organisation (WTO) constraints.
3.19 Under this option, milk production in 2015 would
be 8.8% higher than 2000 levels, with the price under the internal
quota 14.2% lower. The effective 5% quota cut would act as a constraint
on internal consumption, with SMP and butter consumption in 2015
below projected 'status quo' levels. The major impact would be
on exports, which would benefit from unlimited milk supplies.
As a result, exports for all dairy products (other than WMP) would
be higher than 2000 levels, with the biggest impact on butter,
where exports would be 143% of 2000 levels.
3.20 The main advantages of this option, as identified
by the Commission, are that there would no longer be a need for
export refunds and internal disposal aids; reliance on intervention
and private storage aids would be heavily reduced; and Community
export capacity, reduced under Agenda 2000, would be restored.
However, the Commission says that the two negative aspects identified
call into question the feasibility of this option. The administrative
burden of ensuring that only milk produced within the quota system
benefits from market support is potentially huge. Even more importantly,
there are serious doubts whether this option would be WTO-compatible.
The Report notes that Canada has been operating a similar system
for milk since 2000, which was challenged in the WTO by the US
and New Zealand. The WTO Dispute Panel found against Canada, which
is appealing against the decision. Consequently, the Commission
suggests that continuing concerns about its WTO compatibility
would probably rule this out as the option for the Community.
3.21 The final option would involve removing quotas
in 2008. Since this would lead to an immediate increase in
production, the paper suggests that there would need to be cuts
in support prices of as much as 25% in addition to those in Agenda
2000 (making a 40% price cut in total), in order to make intervention
purely a safety net mechanism of last resort. The projections
also assume that, in order to compensate for these cuts, direct
payments would need to increase, and, for the sake of simplicity,
it is assumed that these would double the level set under Agenda
2000.
3.22 The Commission estimates that production under this
option would increase more than under the others, and, as compared
with 2000-01, would increase by 12.6%, as compared with only 1.7%
under the status quo. This in turn would mean that prices would
be far lower under this option (falling by 38.5% compared with
2000-01, as against only 6.3% under the status quo). The Report
adds that, as a result, the increase in consumption of milk products
would also be significantly higher than under the other options,
as (with the exception of the two-tier option) would exports.
3.23 The Commission identifies the advantages of this
option as being the removal of the economic burden of quotas on
potentially efficient farmers; the elimination of artificial support
measures, with consumer prices reflecting the cost of milk production
by the most efficient means; the creation of a self-sustaining,
completely unsubsidised export capacity, and the increased market
transparency and simplification of the Community milk sector.
The disadvantage it identifies is that the fall in prices would
not be fully compensated for by increased market opportunities
for the cheap milk, with consequential impacts on the viability
of individual and regional production.
3.24 This section of the report also provides a comparison
of the four options, which is summarised at Annex I. It also provides
an analysis of the impact on milk sector revenues, which
assumes that the direct payments under Agenda 2000, and any other
additional direct payments under the scenarios, continue at the
same level up to 2015. It concludes that the highest revenue in
2015 would be under the 'status quo', option, where brightening
market prospects and firm milk prices would lead to a gain of
_2 billion in 2015 as compared with 2008. The lowest would be
under the removal of quotas option, where the price falls are
only partially compensated for by the direct payments, leading
to a drop in sector revenue in 2015 of _4.4 billion as compared
with 2008.
3.25 The Report says that the biggest influence on the
budgetary impacts of the options is the level of direct
payments, as, under all the scenarios, it is assumed that internal
aids to consumption and export refunds would be zero, or close
to zero, by 2015, and that there would be no intervention stocks.
As a result, the 'status quo' and two-tier options are assumed
to be the cheapest options by 2015, at _2.9 billion, as they would
involve no change in the level of Agenda 2000 payments. The removal
of quotas would be the most expensive option, at _5.9 billion,
as a result of the assumed doubling of Agenda 2000 direct payments.
3.26 In its assessment of the environmental impacts
of the options, the Commission does not predict any great changes
in intensity of milk production, in terms of feed and land use.
The economic model used assumes that there will be a growth in
milk yields up to 2015. Therefore, even for the quota abolition
option, where production is projected to rise, the Commission
considers that cow numbers will not be higher in 2015 than in
2000. The two options which result in the lowest levels of production
('status quo' and repeating Agenda 2000) would result in the greatest
reduction in cow populations, and thus the lowest impacts in terms
of greenhouse gases.
3.27 The Commission concludes that the prospects for
the Community milk sector under Agenda 2000 are generally positive
until 2008, but that, after that date, the quota constraints and
comparatively high prices associated with the status quo, would
by 2015 damp down the rise in domestic consumption and result
in a significant loss of export opportunities for higher-value
products. It therefore presents the other three options, which
aim to increase Community competitiveness through further quota
relaxation and price reduction, as those which Member States should
examine for the mid-term review.
The Government's view
3.28 In his Explanatory Memorandum of 2 September 2002,
the Parliamentary Under-Secretary of State (Lords) at the Department
for Environment, Food and Rural Affairs (Lord Whitty) says that
the report is disappointing in that only one of the options —
quota removal from 2008 — fulfils the commitment for eventual
abolition, as agreed under Agenda 2000 for the mid-term review.
3.29 He also considers that the way in which quota abolition
is presented in the report makes this option appear less attractive
than it might otherwise be. He says that, in not quantifying the
impact of the options on consumers, the analysis in the report
is limited in scope, and that it does not take into account any
dynamic benefits from the freeing up of the dairy market. For
instance, an independent UK study, commissioned and funded by
DEFRA and the devolved administrations, identified a significant
net gain to the Community as a whole of _2.3 billion a year through
this approach, mostly due to dynamic benefits through increased
innovation and productivity improvements, worth an estimated _0.7
billion each to the farm sector and the dairy marketing chain.
3.30 The Minister says that, in terms of the analysis
which has been done, the loss of revenue to the milk sector indicated
in the paper is likely to be exaggerated. The projected cut in
support prices of 40% in preparation for quota abolition may be
too great — some estimates have pointed to 25-30%. Similarly,
the economic model used for this study tends to exaggerate the
impact on prices of increases in production. Despite this, the
projected increase in milk production of 12.6% in 2015 as compared
with 2000 indicates that milk production would be viable even
at the low prices indicated in the paper. The fact that the direct
payments envisaged by the Commission are decoupled should mean
that the returns solely from milk, as opposed to any direct payment,
would provide the incentive to produce.
3.31 The Minister comments that the report attaches importance
to the role of quota in yielding general social and environmental
benefits, including the protection of LFAs, and that this is inconsistent
with the Commission's general Mid-Term Review paper, which highlights
the importance of attaining such benefits through targeted aid
via the CAP's Second Pillar — a view with which DEFRA agrees.
However, he adds that the devolved administrations are concerned
about the impact of quota abolition on marginal areas, particularly
within the LFAs, as they are not necessarily confident about the
capacity of Second Pillar payments to mitigate these effects.
3.32 The Minister believes that the 'status quo' option
is generally undesirable, and that there are serious practical
difficulties in implementing the two-tier option. This leaves
the repeat of Agenda 2000 as the only other potentially viable
option. He comments that the Commission's recitation of advantages
suggests that it appears to favour this option, despite the fact
that the advantages identified are the same as those for full
quota abolition, though to a lesser degree. He says the report
does acknowledge the negative impact of the continuation of the
quota system, adding that it is 'one more step on the way to the
lifting of the quota regime'. However, if this option were adopted,
it would appear that abolition would not be possible until around
2015, given the apparent need, according to the report, for still
deeper price cuts in preparation for this eventuality. As such,
the Minister suggests that this option would merely postpone the
inevitable, perpetuating uncertainty for producers.
3.33 The Minister stresses that abolition of quotas has
been UK policy since their introduction and remains the Government's
aim. He says that Italy, Sweden and Denmark are also still firmly
in favour of milk quota abolition in 2008, and that the UK intends
to continue to work with them towards this objective.
3.34 The Minister has also provided in his Regulatory
Impact Assessment of 8 January 2003 on the Communication setting
out the main mid-term review proposals a comparison with the status
quo of two of the other three options for milk quotas (repeating
the Agenda 2000 approach, and abolition). This is summarised in
paragraph 3.35 of this Report.
Conclusion
3.35 Although we have tried to summarise the main
elements in the Commission's working document, the analysis in
it is lengthy and detailed, and perhaps has the effect of confusing
as much as enlightening. In addition, we note the Minister's suggestion
that the presentation in the document indicates a Commission preference
for a continuation of the approach adopted in Agenda 2000, rather
than the abolition of the quota system favoured by the UK. Be
that as it may, this is clearly an important document, which forms
an integral part of the mid-term review. It should therefore be
debated on the Floor of the House alongside the main review document.
We also think it would be helpful if the House had before it on
that occasion the report on the operation of milk quotas, produced
by the European Court of Auditors in October 2001, on which we
reported on 5 December 2001.
ANNEX I
COMMISSION COMPARISON OF THE FOUR QUOTA OPTIONS
|
Year
2000-10
|
Projected situation in 2014-15
|
| |
Status quo
|
Further
Agenda 2000
|
Two-tier
quota
|
Quota
removal
|
CONSUMPTION |
|
|
|
|
|
Cheese |
100
|
111.4 |
113.5
|
113.5 |
118.9
|
Fresh products |
100
|
142.5 |
142.6
|
142.7 |
143
|
SMPA |
100
|
82.3 |
87
|
91.8 |
99.2
|
WMPB |
100
|
2.6 |
144
|
140.7 |
148.5
|
Butter |
100
|
95.9 |
99.5
|
90.6 |
109.1
|
PRODUCTION |
|
|
|
|
|
Raw milk |
100
|
101.7 |
104.7
|
108 |
112.6
|
Cheese |
100
|
1080.6 |
111.1
|
112.8 |
117.5
|
Fresh products |
100
|
140.6 |
141
|
141.4 |
141.8
|
SMP |
1000
|
76.1 |
81.4
|
88.6 |
96.1
|
WMP |
100
|
80.2 |
89.1
|
115.1 |
111
|
Butter |
100
|
84.6 |
89.4
|
95.6 |
102.3
|
PRICE |
|
|
|
|
|
Raw milk |
100
|
93.7 |
84.4
|
85.8 |
61.5
|
Cheese |
100
|
99 |
95.1
|
95.3 |
84.1
|
Fresh products |
100
|
102.8 |
101.3
|
100.5 |
98.2
|
SMP |
100
|
84.3 |
79.3
|
73.7 |
65.7
|
WMP |
100
|
87.7 |
83.6
|
93.2 |
71.5
|
Butter |
100
|
93.7. |
84.4
|
85.8 |
61.5
|
EXPORTS |
|
|
|
|
|
Cheese |
100
|
82.5 |
89.4
|
116.1 |
108
|
Fresh products |
100
|
94.5 |
101.2
|
106.9 |
112.1
|
SMP |
100
|
87.9 |
93.5
|
106.3 |
111.9
|
WMP |
100
|
38.2 |
51.9
|
97.6 |
85.5
|
Butter |
100
|
5.4 |
17.6
|
143 |
50.6
|
A Skimmed
milk powder.
B Whole
milk powder.
ANNEX II
BUDGETARY IMPLICATIONS (_ million)
|
Projected situation in 2010-11 and 2014-15
|
|
Status quo
|
Further Agenda 2000
|
Two-tier
quota
|
Quota
removal
|
|
2010
|
2015 |
2010
|
2015 |
2010
|
2015 |
2010
|
2015 |
Consumption aids |
135
|
0 |
154
|
11 |
0
|
0 |
0
|
0 |
Export refunds |
70
|
0 |
26
|
2 |
0
|
0 |
0
|
0 |
Direct payments |
2938
|
2938 |
4895
|
4895 |
2938
|
2938 |
5876
|
5876 |
Total expenditure |
3143
|
2938 |
5075
|
4908 |
2938
|
2938 |
5876
|
5876 |
18 See
paragraph 2 above. Back
|
