Memorandum by Dairy UK
1. Dairy UK is the trade association that
represents the interests of the United Kingdom's dairy farmers,
milk producer co-operatives, manufacturers of dairy products and
processors and distributors of liquid milk. Between them, Dairy
UKs members handle 90% of the milk produced in the United Kingdom.
GENERAL
2. In the long term the UK dairy industry
aspires to operating entirely free from the support and constraints
of the CAP. The industry possesses natural climatic advantages
along with efficient farmers and processors which would allow
it to compete successfully in a liberalised market. As part of
the process of liberalisation Dairy UK supports the abolition
of dairy quotas when their current legal basis expires in 2015.
3. In respect of the CAP Dairy UKs primary
concern is that the EU should maintain an EU wide policy framework
in place for agriculture that recognises the specific peculiarities
of the sector, safeguards its productive potential and minimises
the potential for competitive distortions created by the discretion
given to Member States for the implementation of the CAP within
their territory. Within these broad parameters the policy should
over time move away from direct responsibility for market management,
whilst still providing a minimum of residual safeguards against
market shocks, and assist the industry in developing its own strategies
and tools for adapting to a more liberalised framework.
4. The continuing issues of transition from
the current policy framework also need to be recognised. In particular
the operation of the CAP has generated profound distortions in
the pattern of milk production in the EU and the EU's relationship
with the world market. These distortions will take some time to
unwind and this will create a requirement for adequate transitional
measures.
5. In the present commercial environment
of high world prices, these distortions would not necessarily
create an issue for the industry. However, whilst the supply/demand
balance is expected to be in the industry's favour for next 12
months at least, it is unclear whether they will last in the medium
term. This may mean that in the transition to the abolition of
quotas the renewed engagement of the EU in certain aspects of
market management may be required.
What should be the long term objectives of the
CAP?
6. The EU still needs a common policy targeted
specifically towards agriculture. A common rural policy is not
a substitute. Agriculture, as a sector of the economy, has specific
needs distinct from other economic sectors and these still need
to be addressed. In particular the inherently fragmented nature
of primary agricultural production needs to be recognised and
the vulnerability of small agricultural enterprises to external
shocks needs be acknowledged along with the dependency of farming
on technology developed by external centralised research establishments.
7. Within the current framework the main
pressure is from the tension between maintaining a common EU policy
and the greater opportunity for competitive distortions created
by the increased discretion given to Member States in implementing
the CAP in their national territory. This could undermine the
operation of the single market for agricultural goods which is
one of the greatest achievements of the CAP.
8. In the longer term the main pressure
facing the CAP is the need to adapt its strategic focus. At present
the CAP lacks a clear unambiguous justification from which it
can legitimately sustain its claims on the budgetary resources
of the EU. The justifications advanced for the CAP have evolved
from fear of scarcity, through addressing an embarrassment of
over supply, to a situation were the rationale for continued support
is now notionally the provision of environmental benefits to the
public in exchange for direct payments. This justification rests
on the value the public wishes to give to these benefits when
there is no clear way of calculating such a value.
9. Newer drivers such as energy and food
security and climate change have yet to be fully incorporated
into the policy because the necessity to do so has not been felt
by experience. As suggested by the NFU this points to the need
for a CAP that at least addresses the maintenance of productive
potential, as opposed to product output.
THE REFORMED
CAP
10. The impact on the dairy sector of the
reformed CAP is difficult to determine. Dairy farmers did not
receive any form of direct payment prior to the reform. By providing
an income stream decoupled from production obligations the single
payment may have given dairy farmers greater liberty of action
in determining how to take their businesses forward and this may
have accelerated the restructuring of the industry.
11. The failure of the RPA is well known
and lessons on its performance belong to the debate on change
management and the introduction of complex software projects in
Government agencies.
12. A handicap for English dairy farmers
is the distortion created by the different ways the single payment
was implemented in the UK as a result of the various options open
to the constituent countries of the UK. This has created an uneven
commercial environment which parallels the distortions created
at the EU level.
THE SINGLE
PAYMENT SCHEME
13. On its own the single payment scheme
is not a sufficient basis for a Common Agricultural Policy for
the EU. It helps to support individual farmers and is a means
by which changes in farming practices and the provision of public
goods can be obtained from the sector. However it only addresses
issues at the level of the farm and does not address some of the
wider strategic issues that need to be incorporated into the CAP.
14. These would include the orientation
of long term technological research that would provide the EU
agricultural sector with the range of tools that would allow it
to respond to the changing demands that will be placed on it.
Whilst this is particularly important in the area of climate change
mitigation the issue of seeking continued improvements in productive
efficiency will also still need to be addressed. The volatility
of markets that can be expected in a fully liberalised framework
and the need to address the risks that this will create for farms
also has to be acknowledged in some way.
15. Changes that should be made to the single
payment at the EU level should seek to create a common and simplified
framework for all of EU agriculture to ensure the minimisation
of trade distortions and unnecessary restraints on production.
This would include abolishing the remaining coupled payments and
abolishing set-aside.
MARKET MECHANISMS
16. Dairy UK supports the abolition of the
quota regime as a necessary and inevitable step towards the creation
of a market based industry free from public support.
17. Elimination should ultimately be achieved
by a gradual increase in quota volumes. The international transferability
of quota should not be permitted as this would create the risk
of quotas within the UK acquiring value. This would impose an
unnecessary cost burden on dairy farmers remaining in the industry
that wish to expand their business.
18. The logic of quota abolition also necessitates
the prior withdrawal of export refunds to ensure the EU is not
exposed to an unlimited expenditure liability when production
constraints are lifted. The debate on how export refunds should
be lifted has recently been complicated by the sudden and unexpected
rise in world prices which has allowed all export refunds to be
currently set at zero.
19. Whilst there may already exist a long
term convergence between EU and world prices for milk powders,
the current convergence between the EU and world prices for butterfat
maybe of a more temporary nature. If world prices fall back again
then in order to avoid the build up of intervention stocks the
EU needs to be prepared to revive export refunds until such time
as the price differential between the EU and world market is addressed
over an appropriate transition period.
20. Quota abolition does not necessitate
the abolition of all market management tools. Private Storage
Aid could continue to provide a useful role in minimising seasonal
market volatility. The development of private sector risk management
tools could also be assisted by the EU, eg the development of
futures markets for dairy products.
21. In the absence of market support the
primary tool available to the industry to deal with the risks
of price volatility that can be expected from a liberalised market
is scale of operation, either through consolidation of processing
operations or through merger of co-operatives. The necessity of
this process has to be recognised by EU and UK competition authorities.
RURAL DEVELOPMENT
22. Dairy UK is concerned that the implementation
of the Rural Development Regulation in other Member States should
not create significant trade distortions. This requires a clear
and unambiguous legal framework and close scrutiny by the UK and
the EU of the schemes operated in other Member States.
23. Implementation of Axis 1 and Axis 3
under the Rural Development Regulation in England has been devolved
to the Regional Development Agencies. The regional administration
of these funds could create inconsistency and a fragmentation
of effort. We look to Defra to monitor the situation closely.
24. English dairy farmers are disproportionately
affected by voluntary modulation used to fund the Rural Development
Plan in England. This is a reflection of the UK's historic failure
to obtain a proportionate share of the pillar II budget. Dairy
UK would therefore support a greater use of compulsory modulation
as this would create a more equitable environment and allow a
reduction in the use of voluntary modulation.
WORLD TRADE
25. In the current market environment the
benefits of a WTO trade deal may be academic. Export refunds are
already at zero, no conceivable reduction in import tariffs would
make the EU market an attractive destination for importers and
expenditure on domestic support is minimal in relation to any
prospective obligations that could be imposed on the EU.
26. However, assuming a more normal relationship
between the EU and the world market, then the abolition of export
refunds would have serious implications on the ability of the
EU to manage its internal market. This is why it is important
that the EU obtains from any WTO agreement a flexible framework
for phasing out export refunds consistent with its obligation
to eliminate them.
27. Abolition of export refunds would also
place the EU under strong pressure for a further round of intervention
support price cuts for the dairy sector, particularly for butter,
to bring its internal price into greater alignment with the world
market. The impact these cuts would depend on their intensity,
period of implementation and the situation in world market.
28. In the long term the effect of the WTO
deal is to open the gateway for the abolition of the quota regime
as this can only be achieved once export refunds have been eliminated.
Once the quota regime is abolished this will allow the EU dairy
industry to fully participate in the growth in the world market.
Previously EU exports have been restricted by limits on the use
of export refunds imposed under the GATT Uruguay Round. This should
benefit consumers outside the EU as the growth in world demand
for dairy products cannot be met without the supply contribution
from the EU.
ENVIRONMENTAL PROTECTION
AND CLIMATE
CHANGE
29. Cross compliance and agri-environment
schemes have made a positive contribution to environmental protection.
The full extent of the improvement is yet to be quantified, but
the existence of these measures and the improvement they are generating
would justify a moratorium on new prescriptive legislation such
as may be proposed for the Water Framework Directive.
30. Agriculture can play a significant role
in mitigating climate change. There are several EU policy initiatives
to support the production and use of biofuels. However these policies
need to be subject to constant scrutiny to ensure that they do
not generate unintended or unacceptable side effects.
31. In the UK the enhanced Renewable Obligations
Certificates proposed in the May Energy White Paper should provide
an important stimulus to the development of on farm anaerobic
digestion plants which could allow dairy farmers to become energy
exporters. Opportunities also exist for Centralised Anaerobic
Digestion plants which would utilise waste streams from both dairy
processing plants and dairy farms.
32. On the other hand the decision to increase
the Renewable Transport Fuel Obligation will create a distortion
in the demand for arable crops. This, along with similar initiatives
at the EU level, will increase the cost of animal feed to the
dairy sector. Cost increases induced by biofuel initiatives can
logically only result in an increases in the price of milk to
recover these costs that will ultimately be passed on to the consumer,
or an intensification of the pressures on industry profitability.
FINANCING
33. Over the past few years the CAP budget
as always been regarded as under pressure. Forecasts arising from
the recent and previous round of accession indicate that this
pressure is set to continue. However, CAP budgets regularly come
in under-spent, and the recent improvement in the market situation
should help to alleviate this pressure.
34. Co-financing would not be a solution
to the financial problems of the CAP. Mandatory co-financing could
imply a fundamental re-distribution in the contribution made by
Member States to the EU which would probably lead to significant
resistance to such a proposal from a number of EU members.
35. Voluntary co-financing would probably
significantly disadvantage UK agriculture. To a degree voluntary
co-financing has already existed for the UK under the Fontainebleau
Refund negotiated by Margaret Thatcher. Under this formula 70%
of any savings in CAP expenditure in the UK is passed back to
the UK Treasury. This has provided a strong incentive for the
UK Government to minimise discretionary expenditure under the
CAP. Explicit voluntary co-financing would accentuate this process
to the disadvantage of UK agriculture. The competitive distortions
this may create would be inflated by the active support given
to agriculture that could be expected in some other Member States.
ENLARGEMENT
36. The 2004 enlargement has worked to the
benefit of the dairy industry. Essentially the quota deals negotiated
by the Commission with the accession countries ensured that the
old Member States benefited from the growth in consumer demand
in the new members. This has acted to improve the EUs internal
supply/demand balance and prevent EU prices being pulled down
by any sudden rise in production in the new Member States in response
to the higher support prices provided by the EU.
37. So far there as been no discernible
impact from the 2007 enlargement.
38. EU enforcement of hygiene regulations
has meant that advent of the new members within the EU single
market has not in any way undermined consumer confidence in the
safety of dairy products.
39. In the long term however the quotas
restraint imposed on the new members have ensured that they are
very largely opposed to the continuation of the quota regime as
it is apparent that the quota system is imposing expansion costs
on their efficient farmers and preventing their industries from
realising their competitive advantage and meeting the growth in
demand in their domestic markets.
40. It is difficult to forecast what impact
the further enlargement of the EU would have after 2013. Assuming
the quota regime is abolished in 2015 then further enlargement
would increase the agricultural area in the EU that is potentially
suited to dairy farming, which could be destabilising to the market
balance at the time, but it is not clear how long it would take
to realise this potential.
SIMPLIFICATION OF
THE CAP AND
OTHER ISSUES
41. The European Commission is currently
undertaking a `simplification' of the CAP by creating a single
regulation covering all market support regimes. The exercise is
of questionable value as the majority of market support measures
are in line for abolition. In reality the exercise is no more
than a codification whose primary benefit will be to simplify
the process of the Health Check and increase the discretion given
to the Commission.
42. The real opportunities for simplification
are in the implementation and enforcement by UK authorities. There
still exists duplication in many inspection agencies and opportunities
for greater co-ordination and co-operation between Government
inspection agencies should be exploited. This would be strongly
welcomed by farmers.
July 2007
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