8 Evolution of the dairy market
(32331)
17243/10
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
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Legal base |
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Document originated | 8 December 2010
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Deposited in Parliament | 13 December 2010
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Department | Environment, Food & Rural Affairs
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Basis of consideration | EM of 25 January 2011
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Previous Committee Report | None, but see
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To be discussed in Council | No date set
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Committee's assessment | Politically important
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Committee's decision | Cleared (but relevant to the debate recommended on contractual relations in the milk sector: see chapter 1)
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Background
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
EVOLUTION OF THE MARKET AND MEDIUM TERM PROSPECTS
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.
PHASING OUT MILK QUOTAS
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.
Conclusion
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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