Documents considered by the Committee on 2 February 2011 - European Scrutiny Committee Contents

8   Evolution of the dairy market



COM(10) 727

Commission Report on the evolution of the dairy market situation and the consequent conditions for smoothly phasing out the milk quota system

Legal base
Document originated8 December 2010
Deposited in Parliament13 December 2010
DepartmentEnvironment, Food & Rural Affairs
Basis of considerationEM of 25 January 2011
Previous Committee ReportNone, but see
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionCleared (but relevant to the debate recommended on contractual relations in the milk sector: see chapter 1)


8.1  Council Regulation (EC) No 1234/2007 establishing a single common market organisation for agricultural commodities requires the Commission to present a report by 31 December 2010 on the evolution of the EU market for milk and the consequent conditions for the phasing out of the milk quota system. The present document fulfils that obligation.

The current document


Market developments to date

8.2  The Commission says that, after a significant fall in prices and producer incomes in 2008-09, the market recovered in the second half of 2009, with a further improvement in the first half of 2010. More specifically, it reports:

  • that, after the exceptional peak in 2007, farm gate prices fell following a drop in dairy product prices, reaching a level just above safety net prices in May 2009, but that they then increased until November 2009: after stabilising in the first quarter of 2010, they have since been increasing, and the weighted average price in the EU-27 reached 31.5c/kg in August 2010, with prices in different Member States ranging from 21.2 to 51.4c/kg;[21]
  • that there were no intervention stocks of butter and skimmed milk powder in 2008, but that an increase in private and industry stocks indicated that an increasing quantity of EU bulk product did not find its way onto the market: intervention stocks increased rapidly in 2009 following a drop in demand and a move by dairies away from high value products, and this proved to be sufficient to re-balance the market, following which a recovery in prices has resulted in no intervention buying in 2010;
  • that the recovery in dairy commodity prices was due notably to reduced supplies from the Southern Hemisphere and a better than expected recovery in world demand;
  • that average EU prices for the main dairy commodities have been volatile since 2008;
  • that, apart from whole milk powder, EU dairy exports fell in 2008, with this trend being halted in 2009 following the introduction of export refunds to cover part of the increasing gap between EU and world prices, although EU exports recovered in the first months of 2010 without export refunds, due to increased world demand.

Medium term market developments

8.3  The Commission says that it has sought to simulate medium-term market prospects, applying the latest macro-economic prospects and assuming no changes in the CAP following the decisions on the CAP Health Check and in trade policies, as well as making certain assumptions about improved GDP growth prospects, a gradual strengthening of the Euro against the US dollar, and OECD/FAO projections for dairy market commodities, making it clear that, if any of these do not materialise, the resultant projections would be affected significantly.

8.4  Subject to those caveats, it suggests that milk production will return to an increasing path from 2011 onwards, with EU-27 production in 2020 projected at about 3% above rhe level in 2009 (and milk deliveries due to increase by a slightly higher amount, due to gradually declining on-farm consumption). In particular, it notes that production is likely to show a very modest reaction to the end of the quota regime. The Commission also says that there appears to be a favourable outlook for high value dairy commodities, particularly fresh products and cheese, and that there is expected to be continued market stability for butter if domestic demand remains firm, though the prospects for skimmed milk powder are less favourable.


Milk production and quotas

8.5  The Commission recalls that the Council decided in 2008 to increase milk quotas by 2% on 1 April 2008, and that the Health Check later that year resulted in annual increases of 1% over five consecutive years, beginning on 1 April 2009. It notes that there now remain three such increases until the expiry of the quota system on 1 April 2015, but suggests that the system is gradually becoming less relevant as production falls short of quota in an increasing number of Member States, with only three liable to pay a surplus levy in 2009-10, and EU milk deliveries as a whole being about 7% under quota for the year, due in part to the economic recession. It also observes that, as quotas become less relevant, EU milk supply can better respond to market opportunities.

Milk quota prices

8.6  The Commission says that one of the main signals that a "soft landing" is on track is the gradual erosion of "quota rent".[22] It suggests that the quota price is a good indicator of quota rent, and says that, with the shortening life of the quota scheme, this is already low or close to zero in a vast majority of Member States.

Expected evolution and sensitivity analysis

8.7  The Commission says that the evolution of milk production after quota abolition depends on factors such as the shape of the CAP after 2013, production costs, environmental obligations, and the evolution of national and international milk markets. It says that, although some national studies suggest potentially large increases in production, most do not take account of the picture for the whole EU-27, where production increases are expected to remain modest, with most Member States expected to produce less than quota.

"Soft landing"

8.8  The Commission says that both the evolution of milk production against milk quotas, and the downward trend in quota prices show that a "soft landing" is on track, with quota no longer being relevant in most Member States to restricting production. It also suggests that the so-called "new challenges" under the second (environmental) pillar of the CAP arising from the Health Check is providing further support for dairy farmers in preparing for the end of quotas.

8.9  The report concludes that there is no reason to revisit the Health Check with regard to quota phase out by 2015, but it raises the possibility of two possible further steps to pave the way towards quota abolition:

  • as an exceptional measure if others are insufficient, the introduction of a separate proposal involving a disturbance clause based on Article 186 of Council Regulation (EC) No. 1234/2007, under which producers who volunteered to take production off the market could be paid compensation; and
  • in order to enhance transparency, meetings would be arranged between the Management Committee experts and the Advisory group on milk to follow market developments in order to assess the market situation and prospects.

A further report is expected to be tabled by the end of 2012.

The Government's view

8.10  In his Explanatory Memorandum of 25 January 2011, the Minister of State for Agriculture and Food at the Department for Environment, Food & Rural Affairs (Mr Jim Paice) says that the Government welcomes this report, and agrees that the outcome of the Health Check agreement 2008 should be fully respected and that the EU dairy sector is largely on track for a soft-landing in 2015. However, he says that the Government is sceptical about the introduction of any new market measures which could potentially work against achieving a competitive EU dairy industry, and hopes that a market situation when the use of the Commission's proposed disturbance clause might be considered will never arise, adding that it would be important to have a detailed assessment to ensure it delivered genuine competitiveness and high value for money. He notes that, in the past, schemes such as these have had the potential to involve large and unwelcome expenditure of public money with questionable outcomes for the sector concerned.


8.11  We note that the Commission has taken a reasonably optimistic view of the prospects for the EU dairy industry in the period covered by its report, not least in relation to a "soft landing" after the end of the milk quota system, and that the report has been welcomed by the Government. On the other hand, the Government has expressed some reservations over the suggestion that a disturbance clause might be considered, and the Commission itself has acknowledged that its conclusions depend heavily upon a number of major assumptions. We therefore think it right to draw this document to the attention of the House: and, although we are content to clear it, we regard it as relevant to the debate we have recommended in European Committee on the Commission's proposals[23] relating to contractual relations in the milk sector.

21   The figure for the UK was 29.1c/kg. Back

22   Defined as the difference between the price under quota and marginal costs of production. Back

23   (32337) 17582/10: see chapter 1. Back

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