European dairy post-quota comes under scrutiny

A new report from the Thünen Institute in Braunschweig in Germany goes against the proposal of the Federal Association of German Dairy farmers (BDM) to create a market observer to regulate the EU dairy market. The EU milk quota system is set to expire in April 2015.B DM and the European Milk Board (EMB) have presented a proposal for a future dairy market control, where the central element is a market observer, which will constantly monitor and analyse milk market developments and work in the event of a crisis to put in force a Market Responsibility Programme.

Market adjustments should be made flexible both in number and in amount depending on the market situation, says the report.

In the proposal, a target price range is defined in which the average European milk producer price should move. This system requires that a basic amount and distribution rights are introduced. As an additional intervention measure a voluntary set-aside amount for remuneration in the tendering or bidding process as well as a strategic storage is to be implemented. The cost should be covered by a regulation fund and it could be co-financing by the EU.

The proposal of the BDM or the EMB to establish an economic observatory at European level, which also performs as a market control is, according to the German report, to be rejected because of the following reasons:

• The proposal is, in theory, not only a continuation of the existing EU quota regime, but also a significant complication, as it will introduce a degree of flexibility in the raw milk supply (the distribution rights), a voluntary set-aside amount and a target price corridor on the basis of milk production costs. And the method of calculation of production costs (milk marker index) is not without controversy.
• In principle, the same regulatory concerns apply as for the existing quota system. The individual choice for the producers is limited because the market entry of new producers is more difficult. Also, impact on other agricultural commodities markets is likely.
• The overall welfare effects are negative (especially consumer).
• The structural change is inhibited and an efficient allocation of resources cannot take place.
• The sector is not efficient, and the proposal disconnects the domestic sector from the world market.
• Extensive administration brings additional cost.
• The desired price-stabilizing effect of the proposal can be questioned. Probably much more than the suggested 1-2% of EU raw milk consumption should be taken off the market, so that a “price stabilization” occurs. This is due to both the elasticity of the raw milk supply and on the elasticity of the consumer demand and the elasticity of the import range.
• An implementation of the proposed universal binding market observatory may only be legally acceptable to implement, if it managed by the individual countries. A private sector solution would fail in the case of Germany due to a competition law and antitrust law.
• The EU is very heterogeneous in terms of the structure of producers, milk processors and markets. But a “milk crisis” will, depending on the regionm also have different effects on the market players. A general market control would be fair, as many dairy producers and processors would be unnecessary penalized or would have to reduce their (international) competition ability.
• An efficient market control can only be made, if reliable market information is available. This is not the case for the EU dairy market and the world market. The price and volume information are at least two months old. Before a crisis is detected and the appropriate measures can be taken to help the operator, it will be too late. The international market information is not subject to any official listing. Therefore, their quality can be questioned. Use of such information poses the risk of incorrect estimates of the actual market developments.