8 EFFECTIVENESS OF MANAGEMENT
MEASURES IN THE DAIRY SECTOR
(31037)
14759/09
—
| Special Report No. 14/2009 of the European Court of auditors: Have the
management instruments applied to the market in milk and milk products
achieved their main objectives?
|
| Legal base |
— |
| Deposited in Parliament |
23 October 2009 |
| Department | Environment, Food and Rural Affairs
|
| Basis of consideration |
EM of 18 November 2009 |
| Previous Committee Report |
None, but see footnotes 21-23 |
| To be discussed in Council
| No date set |
| Committee's assessment | Politically important
|
| Committee's decision | Cleared, but relevant to the debate recommended on the dairy market situation
|
Background
8.1 Milk is one of the Community's main agricultural
products, accounting for 14% of the value of European agricultural
production and 27% of world milk production, with an annual turnover
of around €120 billion. There are about 1 million producers,
and an additional 400,000 are employed in the processing sector.
As with most other agricultural products, it is subject to a Community
regime, which was first introduced in 1968, but which has since
undergone substantial changes as a result of recent reforms, aimed
at reducing market support through intervention buying and at
introducing income support by means of direct payments, with the
latter now being decoupled from production and subject to certain
public and animal health and environmental standards being met
("cross-compliance"). Also, since 1984, it has been
subject to production quotas, though these are to cease on 31
March 2015.
The current document
8.2 This Special Report by the European Court of
Auditors seeks to examine whether the management instruments applied
to the milk and milk products market have achieved the objectives
of the regime, which it says are:
- to provide market equilibrium by matching supply
to demand and reducing structural surpluses;
- to stabilise milk and milk product prices;
- to ensure a fair standard of living for the agricultural
community;
- to improve the sector's competitiveness on international
markets, by aligning European prices with world market prices.
Market equilibrium
8.3 The Court observes that, following the introduction
of quotas, most Member States managed to bring the quantities
marketed into line with their allocation fairly rapidly, and that
the use of quotas was generally accepted as a means of regulating
production. It suggests that the system has been effective in
the sense that Community production generally complies with the
ceiling imposed, though it suggests that the level of acceptance
has been due in part to that ceiling having remained fixed for
a long time above the level of internal demand. It points out
that until 2004-05 there were nevertheless small quota over-runs
(of up to 1%) within the Community of 15, whereas, following the
most recent accessions, the overall quota has been under-used,
but with considerable differences between Member States.[20]
8.4 However, the Court suggests that, between 1984
and 2004, quotas did not put an end to over-production, making
it necessary to resort to intervention buying and subsidies, and
it recalls that, in an earlier Special Report,[21]
it found that quotas had been set at too high a level in relation
to internal consumption and level of unsubsidised exports. At
the same time, it notes that, as a result of the reforms introduced
in 2003, the surpluses began to shrink as from 2004 due to a decline
in the production of butter and skimmed milk powder and an increase
in internal consumption, particularly in the new Member States:
despite this, subsidised products still accounted for about 15%
of European milk production in 2006 (albeit with a lower level
of aid, due to reductions in the intervention price), although
the surge in world prices at the end of 2006 and in 2007 led to
a temporary disappearance of surpluses (and hence the need for
subsidised disposal and export refunds).
8.5 The Court also examines the impact on market
equilibrium of the various measures to aid disposal, such as the
school milk scheme, but concludes that this has been limited.
Stability of milk prices
8.6 The Court notes that initially the regime relied
on rising support prices, which in turn encouraged massive overproduction
that was neither stable nor in equilibrium, but that the introduction
of quotas enabled prices to be maintained at a stable, albeit
relatively high, level (though it adds that this nevertheless
resulted in a significant fall in real terms). It goes on to observe
that there is little correlation between the price received by
producers and that paid by consumers, with the former having fallen
by 6% between 2000 and mid-2007, whilst the latter has increased
by 17%. It adds that, as in other sectors of the food supply chain,
consumer price formation is complex, reflecting not only the price
of the raw material, but also other factors, such as energy and
labour costs, as well as the high level of concentration among
processors and distributors — a point which was highlighted
in a recent Commission Communication.[22]
Impact on producer incomes
8.7 The Court says that the average net income of
agricultural holdings in real terms has shown a downward trend,
though that of specialist milk producers has been maintained at
a slightly higher level than in the industry as a whole. It suggests
that a number of factors have contributed to this, including reorganisation
within the sector (with the number of producers having fallen
by more than 50%), an increase in the size of holdings and in
productivity, and increases in subsidies: however, it comments
that there is nevertheless considerable diversity between Member
States, with average herd sizes in Denmark, the Netherlands and
the UK being much higher than those in other Member States, whilst
in central and eastern Europe the majority of dairy farms operate
on a semi-subsistence basis.
European competitiveness on the world market
8.8 The Court notes that the world market is mainly
for processed products, and is very limited, accounting for only
6% of production. Also, prices are volatile, and are almost always
lower than those within the Community, as a result of which it
is mainly used as the final outlet for produce which the domestic
market cannot absorb. It comments that the Community's position
deteriorated after the introduction of quotas, and that its share
of world trade in milk products continues to fall, with its ability
to subsidise exports being limited in volume and value by GATT
restrictions, even though access to the world market is usually
difficult without such aid. It suggests that, given the inelastic
demand for milk products within the Community, any increase in
production following the abolition of quotas will lead to a significant
increase in exports, equivalent to 70% of the additional production,
and it notes that the Commission is seeking to develop exports
without having recourse to refunds.
8.9 The Court also seeks to identify the most critical
issues to be taken into account in liberalising the milk sector,
noting that, in order to allow for a "soft landing",
the Council has agreed that Member States' quotas should be subject
to five annual increases of 1% between 2009-10 and 2013-14 before
being withdrawn on 31 March 2015. It says that one immediate effect
of this will be to solve the problem of those Member States with
insufficient quota, and that the majority of specialist dairy
farms will be able to continue production, albeit with reduced
incomes, whilst consumers should benefit from a slight fall in
prices of milk products, and exports should be encouraged. However,
it warns that market instability can rapidly lead to the re-emergence
of surpluses; that restructuring could risk a considerable reduction
of production in less favoured areas and to a geographical concentration
of production; and that changes in competitiveness will have a
significant impact on producers and processors.
8.10 The Court concludes by making the following
recommendations:
- that monitoring the development of the market
in milk and milk products should continue, so that liberalisation
of the sector does not lead once again to over-production;
- that the price formation process in the food
industry should be subject to regular monitoring by the Commission,
and that the concentration of processing and retailing companies
must not reduce milk producers to "pricetakers", or
restrict opportunities for final consumers to benefit fairly from
decreases in prices;
- that in-depth reflection should be given to strategies
to tackle the special problems of those regions where milk production
is most vulnerable, in particular in mountainous areas, and to
tackle the environmental consequences of a geographical concentration
of milk production;
- that efforts should continue to focus milk production,
as a matter of high priority, on meeting the needs of the domestic
European market and on producing cheeses and other high added
value products which can be exported on the world market without
budgetary support.
8.11 In its reply, the Commission states that it
will continue to monitor developments in the sector closely, and
will submit market reports to be the European Parliament and the
Council in 2010 and 2012 which will provide useful indications
on production and market developments as the expiry of the quota
regime in 2015 approaches.
The Government's view
8.12 In his Explanatory Memorandum of 18 November
2009, the Minister of State at the Department for Environment,
Food and Rural Affairs (Jim Fitzpatrick) simply says that there
are no policy implications.
Conclusion
8.13 Although it would have been helpful if the
Minister had given some indication whether the UK accepts the
Court's findings, the document does in fact cover ground similar
to that in the Commission's Communication in December 2008 on
the food supply chain and in its more recent Communication[23]
on the dairy market situation. Consequently, we are content to
clear it, but we do regard the issues it raises as relevant to
the debate which we have recommended in European Committee A on
that latter Communication.
20 For example, Italy accounted for the major part
of the total over-run, whereas the UK and Sweden (and, more recently,
France) have been making less and less use of their quotas. Back
21
No. 6/2001 see (22773) 12457/01 HC 152-ix (2001-02), chapter 18
(5 December 2001). Back
22
(30279) 17380/09: see HC 19-ix (2008-09), chapter 7 (4 March 2009). Back
23
(30825) 12289/09: see HC 19-xxvii (2008-09) chapter 6 (14 October
2009) and HC 19-xxix (2008-09) chapter 1 (28 October 2009). Back
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