The Impact of Reforms Within the Milk Sector in 1984 - Research Paper Example

The Impact of Reforms within the Milk Sector in 1984 with the Introduction of the Quota System - A UK Perspective Introduction Milk production is considered as the most important agricultural activity in most EU countries, with 18.4% of the total value of agricultural production being milk production. The milk quota system was introduced in 1984 and since then there seems to have been a decline in milk output by member states due to reductions in reference quantities1. There has even been a drop in dairy cow numbers and although dairies and cooperatives have continued to receive considerable amount of milk, on-farm use and direct sales have decreased since 19842. The milk sector of the EU is characterised by high vertical coordination3. Milk is sold either through contract or cooperatives. The ratio of cooperatives in total milk production is different in the individual member countries of the EU because of differing systems of agriculture. The ratio of cooperatives is the lowest in Spain and Greece (18 and 20 percent), and is the highest, in Denmark, Ireland, Finland, Sweden and the United Kingdom (96-100 percent). Within the UK, milk and dairy products are mainly distributed through cooperatives. The milk production scenario in the UK is not just limited to distribution factors but also to its production which seem to determine the general outlook of the milk sector4. The milk sector in UK is a large one and there are around 12 million cattle in the UK mainly reared for beef or milk production. Department of Environment, Food and Rural Affairs or Defra is responsible for UK milk production and marketing policy. Defra has the responsibility for sponsorship of the dairy industry in the UK and helps to sustain the industry. The Common Agricultural Policy5 and milk quotas and UK policy on dairy are controlled and implemented by the Defra. Defra thus upholds global Milk and dairy policies and also represents UK interests at the EU Management Committee for Milk and Milk Products6. In this analysis, a discussion on pre 1984 milk production would be followed by the post 1984 scenario after the quota system introduction. Milk sector pre 1984 The pre-1984 scenario in the dairy sector showed higher production quantities and as there were no quota constraints, the more efficient producers could expand on a large scale whereas the least efficient ones had to leave milk production. Milk production quotas that were introduced by 1984 tend to thwart these market patterns and even allow the least efficient milk producing units to stay in business putting a check on the more efficient ones who have competitive advantages. There was an excess milk production in the pre-1984 scenario and the export facilities or even the disposal facilities were time consuming, expensive or even insufficient or unavailable7. What made the EU reform' The additional production quota, introduced in 1984, has been designed to reduce the imbalance between supply and demand for milk and milk products and consequently the resulting structural surpluses8. Thus with the quota system, excess production and surpluses could be handled more efficiently. Some of the factors responsible for introduction of quotas include budgetary pressures, over or excess supply of milk when productivity increased much more than the consumption and also external pressures. According to the Defra, the milk quotas system was introduced by the European Community in April 1984 in which member EU states were allocated a national quota of milk production and supply. This was done to curb excess production of dairy products and also to reduce expenditure on the disposal of surplus milk and milk products9. Pre-1984, expenditure on support and removal in the dairy sector had reached 5.2 billion euro that was 30% of the total agriculture budget10. Reform - The use of quotas/ super levies as the main instrument The quota limits were in place for EU milk production since 1984, and individual milk producers were subject to these policy changes. Following the 1984 policy, if production of milk for either or both types is above the national quota, then the producers who have exceeded their individual quotas are liable to pay a punitive levy on their over-production after the end of the quota year. The levy collected is used for the cost of storing and disposing of surplus milk within the European Community. The levy is set, per 100 kg of milk, at euros 33.27 for the 2004/05 quota year, euros 30.91 for 2005/06, euros 28.54 for 2006/07 and euros 27.83 for the period 2007/08 and thereafter11. However the quota system has been changing over the years and the trends in wholesale milk quota locally owned is shown in Table 1 to show the changes: ' Year Volume (Million Litres) 1984/85 1322.5 98/99 1543.1 99/00 1597.4 00/01 1616.3 01/02 1646.5 02/03 1665.5 ' Source: ' UK Rural Payments Agency - Defra 2005 Within the UK, if a wholesale producer's deliveries of milk exceed the given quota and the UK goes above its national wholesale quota, the producer is liable to pay a levy on his over-production. To reduce levy liability of milk producers and the country as a whole, the rural payments agency or RPA performs regular levy calculations and shares the unused wholesale quota between all over-quota producers in the UK in proportion to their individual quotas and then the levy is charged. Purchasers can collect the levy from producers either directly or by withholding payment for deliveries which exceed a producer's registered quota12. In the same way, like producers, direct sellers who over-produce are also liable to pay levy if the UK direct sales quota is exceeded. All producing and selling parties are expected to follow the quota system to prevent over production and managing of surplus production13. However sellers pay levy at a reduced rate, depending on how much unused direct sales quota is available in the UK. Thus in the post-1984 scenario, milk production is strictly controlled and regulated to balance demand and supply. The evolution of milk quota is graphically represented as follows: Source: European Union online, retrieved 2005 Impact on Producers The levy on the producers is administered separately for deliveries to an undertaking approved by a Member State and the other for direct sales to the consumer. If a producer exceeds the quantity which is allocated to him for production by the Member States, he then pays his contribution to the levy. The levy is then transferred by the Member States to the European Agricultural Guidance and Guarantee Fund (EAGGF) to pay for costs of storage and removal of surplus supply14. The graph below shows that under the quota system, milk production per dairy is definitely on the decrease and also there is a general reduction in milk production. A comparative graph on milk production pre and post 1984 policy is shown here. Source: European Union online, retrieved 2005 The provisions for quota transfer are different for different member states of the EU and the UK has a free market policy compared with states like Germany where market quota transfers can be more restrictive and complicated15. Although for freer markets like UK, quota values sold and leased are recorded to check malpractice. The income of dairy producers seems to have risen steadily since 1984. The graph is given below: Source: European Union online, retrieved 2005 Impact on Consumers Although milk producer prices increased over the past 20 years, there has been a decrease in growth rates. The growth rate of milk production was at 7.7% from 1973-1984 and the prices fell considerably. With the introduction of the milk quota system, prices increased by 2.3% per year. This means that at surplus production in the pre-1984 situation, milk prices were lower and there have been some changes in price to maintain a balance of demand and supply since 198416. The target price for milk has been set considering supply and the quota system and producer prices and income of dairy farmers seem to depend on this. Any excess production is absorbed in the form of butter. Impact on UK (Production, imports, exports, etc) The milk quota system of 1984 has had a profound effect on the dairy sector, even within the UK as in the whole of EU halting and reversing the upward trend in production. The impact was not just on production but also on exports and imports. Despite such regulations in place, the EU and UK milk sector is still characterised by a significant structural surplus. This (net) surplus, estimated at around 9.0 to 9.5 million t of whole milk equivalent, which still needs to be exported or stocked17. A part of internal consumption of milk produce within the UK has special disposal measures, involving around 11 million t of whole milk equivalent. The budget costs of these special disposal measures and managing surpluses represent a third of the market price of the milk produce which is still a considerable expense. The graph for EU milk production, internal consumption and surplus is given in terms of million t below. Source: European Union online, retrieved 2005 A further graph can show the estimated impact of the quota system on milk production Estimated Impact of quota on milk production. Source: INRA, 2002 In recent years there have been serious considerations for review of the quota system with suggestion for abolition of this system18. Yet initial research of such a possibility and simulated analyses suggest that the EU dairy sector after quota abolition (Bouamra et al, 2002) can show moderate increases in production (+13%), large decreases in price (-38%) and sharp falls in sectoral gross margin (-'13.5 billion before compensation) (Bouamra et al, 2002). The immediate adjustment costs of abolition of the quota system seem to be quite high although there may be long term gains of competitiveness. Impact on EU Budget The quota system is to be in place until 2014-15 although the production rates and milk sector performance is clearly dependent on the price of milk, economic factors and internal market demands. The milk quota system is one of the production control systems that seem to involve a lot of administrative and political implications. It also has a strong impact on the economy and budget. It has not been easy for EU member states or the UK to implement the policy and correct application requires constant monitoring and facing up to internal problems of implementation19. A graph on the EU budget in the pre-1984 and post-1984 era is given to show the role of milk expenditure: Source: European Union online, retrieved 2005 The graph shows that despite the rising budget, the expenditure on the EU milk sector ha decreased and remained stable over the last 20 years. Estimated Impact of the quota system on taxpayer costs can be shown in the graph below: Graph on impact on EU budget and taxpayer costs - Source: INRA, 2002 Impact on UK Economy - Theoretical underpinnings Considering the UK perspectives and econometric models and theories in the analysis of the economic impact of the milk sector, Boyle (1998) established that Irish dairy marketing cooperatives focused on profit maximizing over the period 1961 to 1987 and studied the response of the sector to the imposition of the milk production quota in 1984. The economic theory used in this case is the theory of the cooperative managed firm (CMF) within a duality framework. The cooperative managed firm differs from a profit maximizing firm (PMF) in having as its objective the maximization of the price paid to its members for the raw material they supply and in processing all the raw material supplied by its members. Boyle tested his economic theory to study whether Irish milk sector could be considered as being focused only on maximizing profits. He showed that milk prices were being driven by exogenous changes in the price of processed output. The milk quota reduced the level of processed output but not proportionately as for every 10% fall in the amount of milk processed the processed output of the sector is reduced only by 6%. Boyle also suggested that there is a negative relationship between the amount of the milk processed and the demand for labour which implies that the introduction of the quota would not have adverse effects on employment in the sector (Boyle, 1998). Thus the introduction of the quota did not seem to have any negative effects on employment in the milk sector but seems to have had effects on processed output and prices explained with the theory of cooperative managed firm20. Impact on Rest of the world Global demand for milk considering whole milk equivalent is expected to decline from 111.8 million t in 1995 to 110.4 million t in 2001 and around 108.7 million t in 2005. There has been falling consumption of some milk products, like butter. There may be increased demands on cheese although this indicates that there may be a net annual surplus of around 9.0 to 9.5 million t (whole milk equivalent) up to 2005. The introduction of the 1984 reform seems to have had some influence as along with production, milk consumption also seems to be on the decrease. Despite the fall in production, the continuous surplus shows a definite decline in exports and a general demand for milk in the other parts of the world. Did reforms affect world prices and trade' Trade and world price of milk has definitely been affected by the quota system as prices have gone up considerably since the 1984 policy. The price of milk quotas for purchase or lease/rent as also the trade volume do not only depend on the milk price itself or the milk production margin or even the levy on over production. It also depends on the regulatory framework, such as, transfer restrictions21. Thus the economic consequences can be quite different for different member states. Free tradable quotas as available in the UK market allow the most efficient producers to bid for large production. Producer prices and consequently world prices of milk have shown a steady rise since the 1984 reform to cut down on overproduction and restrict supply. Milk reform in 2005 Following the 1984 regulations, there have been some changes to the milk sector policies in recent times. The EU milk sector report has stated that the milk quota regime has brought stability to the EU's dairy sector since its introduction in 1984 and the policy has been extended to 2015. There are proposed annual increases of 0.5 % of quota volumes for 11 of the EU-15 Member States including the UK, beginning in 200622. It has also been proposed that from 2004 to 2007 milk producers qualify for support payments that will be paid directly to producers. Introduction of a single payment scheme and maintaining market balance are two of the major directions of future reforms in the milk sector. Conclusion The analysis above has indicated that the 1984 quota system in milk production has had a definite and long term economic and social impact on EU and especially the UK milk sector. Bibliography: Bouamra Mechemache Z.;'R'quillart V.(2000) Analysis of EU dairy policy reform European Review of Agricultural Economics, Volume 27,'Number 4, December, pp. 409-430(22) Oxford University Press Bouamra, Z., Burrell, A., Couture, S., Dartigues, K., Guyomard, H., Herrard, N., Jongeneel, R. and R'quillart, V. (2002). Study on the Impact of Future Options for the Milk Quota System and the Common Market Organisation for Milk and Milk Products. Summary of a Report to the European Commission (DG Agriculture) by the Consortium INRA-Wageningen. P. Bogetoft;'K. Nielsen;'H.B. Olesen (2003) The single-bid restriction on milk quota exchanges European Review of Agricultural Economics, Volume 30,'Number 2, 1 June, pp. 193-215(23) Oxford University Press Boyle G. E. (1998) A Duality Approach to Testing the Economic Behaviour of Dairy-Marketing Co-operatives: The Case of Ireland Department of Economics, National University of Ireland - Maynooth Economics Department Working Paper Series, available online http://www.may.ie/academic/economics/pdf/N800798.pdf Burrell, Alison , retrieved 2005 The Luxembourg Agreement and the dairy sector: An EU perspective, from http://www.teagasc.ie/publications/2003/20031112/paper1.htm Colman D.(2000) Inefficiencies in the UK milk quota system Food Policy, Volume 25,'Number 1, February 2000, pp. 1-16(16) Elsevier Science Colman D and Roberts D (1994) - The Common Agricultural Policy, in The economics of the European Union :'policy and analysis /'edited by Mike Artis and Norman Lee. 2nd ed. Oxford :'Oxford University Press,'1997. Lips, Markus;'Rieder, Peter (2005) Abolition of Raw Milk Quota in the European Union: A CGE Analysis at the Member Country Level Journal of Agricultural Economics, Volume 56,'Number 1, January, pp. 1-16(16) Agricultural Economics Society Oskam and Speijers (1992) Quota Mobility and Quota Values: Influences on the Structural Development of Dairy Farming, Food Policy 17/1 pp 41-52 Study on the impact of future options for the Milk Quota system and the common market organisation for milk and milk products, 2002 From Consortium INRA - University of Wageningen Report available from http://europa.eu.int/comm/agriculture/publi/reports/milkquota/inrawag_en.pdf Milk Sector policy graphs retrieved 2005, from - http://europa.eu.int/comm/agriculture/capreform/milkrep/graphs_en.pdf Council Regulation (EC) No 1788/2003 of 29 September 2003 establishing a levy in the milk and milk products sector. http://europa.eu.int/scadplus/leg/en/lvb/l11091.htm Agriculture - CAP 2000 Situation and Outlook: Dairy Sector from http://europa.eu.int/comm/agriculture/publi/pac2000/dairy/index_en.htm The 2003 CAP reform - The milk sector from http://europa.eu.int/comm/agriculture/capreform/infosheets/milk_en.pdf Defra Report, on milk quota, 2005 from http://www.defra.gov.uk/foodrin/milk/Quotas/index.htm Official Journal of the European Union (2003c). Council regulation (EC) No 1787/2003 of September 29 2003 amending regulation (EC) No 1255/1999 on the common organisation of the market in milk and milk products. L270/121-122, 21 October 2003. Official Journal of the European Union (2003d). Council regulation (EC) No 1788/2003 of September 29 2003 establishing a levy in the milk and milk products sector. L270/123-136, 21 October 2003. Official Journal of the European Union (2003a). Council regulation (EC) No 1782/2003 of September 29 2003 establishing common rules for direct support schemes under the Common Agricultural Policy and establishing certain support schemes for farmers. L270/1-69, 21 October 2003. Ramsden S.;'Gibbons J.;'Wilson P.(1999) Impacts of changing relative prices on farm level dairy production in the UK Agricultural Systems, Volume 62,'Number 3, December 1999, pp. 201-215(15) Elsevier Science Szab' G'bor G. and B'rdos Krisztina VERTICAL COORDINATION BY CONTRACTS IN AGRIBUSINESS: AN EMPIRICAL RESEARCH IN THE HUNGARIAN DAIRY SECTOR presented at Conference on "Transition in Agriculture - Agricultural Economics in Transition II" Institute of Economics, Hungarian Academy of Sciences, October 28-29, 2005 Read More