The end of milk quotas: FAQs

As EU milk quotas come to an end this week, we've put together some guidance covering the most commonly-asked questions...
 

The questions:

 

Why and when were quotas established?

milk production line_275_183Milk quotas were introduced to address the structural oversupply on the EU market of the late 1970s and early 1980s that had led to the infamous milk lakes and butter mountains. The European Commission brought in milk quotas in 1984. The regime required a quota being fixed for each individual producer or purchaser, with a levy ("superlevy") payable for those who exceed their quota. Subsequent changes have meant producers only have to pay the levy when the Member State also exceeds its national quota.

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Have quotas achieved their purpose?

The system of quotas – and the threat of levy – helped to cap the expansion of EU production. Since then there have been other important changes to the Common Agricultural Policy which have led to a much more market-oriented sector. Successive reforms of the CAP have seen a reduction in guaranteed prices, with a range of policy tools aimed at stabilising farm revenues, notably the system of direct payments, primarily decoupled from production.

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Why remove them now?

time for change stopwatch graphic_200_150Milk quotas were originally introduced for five years, but the expiry date has been put back several times. The final date was decided in the 2003 CAP reform, and reconfirmed in 2008 with concrete steps to provide a "soft landing" by the end of March 2015. In recent years there has been a considerable increase in the consumption of dairy products, especially on the world market and this is projected to continue in future. The quota regime prevents EU producers from responding to this growing demand.

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Will this leave dairy farmers without any protection or support?

Farmer and dairy cow_600_450Extreme price volatility will be limited by the "safety net" instruments still available under the Common Market Organisation (public buying in of butter and skimmed milk powder and private storage aid schemes). The Commission has also the possibility to intervene in exceptional circumstances, as it was the case last year with the Russian import ban in the Baltics countries and in Finland.

There are other ways that dairy farmers can be supported including the CAP, RDP or through the development of producer organisations and interbranch organisations. These may carry out a series of activities, including improving knowledge and transparency on production and the market; helping coordinate better the way products are placed on the market, in particular by means of research and market studies; promoting consumption; carrying out the necessary research to adjust production in favour of products more suited to market requirements, in particular with regard to product quality; and promoting innovation, etc.

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Is there a risk of over-producing again?

No, there is not a risk of the same sort of structural surpluses as in the past. The guaranteed price for butter and skimmed milk powder now merely serves as a safety net – such as during the 2009 dairy crisis, where it put a floor in the market. This means that producers are looking at the market when they decide how much to produce. Increased focus on added-value products (such as cheese and yoghurts) as well as on ingredients for nutritional, sports and dietary products have a strong potential in terms of growth and jobs for the EU.

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What are the forecasts in terms of production at Member States and EU level?

Flags at European parliamentWhile some Member States perceive the end of milk quotas as a source of concern, others welcome the opportunities provided by it. The Commission's medium-term market outlook last December forecast continued growth in exports, especially for cheese, skimmed milk powder and whey.

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Will it create greater price volatility for milk?

Volatility is a normal characteristic of agricultural markets. The European dairy sector is now following a market-orientated policy, which means that, following the ending of milk quotas, production should be based on market needs and opportunities. Where possible, supply and demand should be adjusted to meet those needs and opportunities. The EU is the most important milk producer in the world and a major player which, with or without quotas, is connected with the dynamics world market. So while experience show quotas cannot prevent crisis, they certainly do impede our farmers to follow market signals and take advantage of market opportunities. The role for the public authorities is limited to safety net measures. Public intervention remains available if prices drop below a reference level.

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Will there be a major change in the UK and EU dairy sector?

Cows being moved_184_275Milk quotas have been in place for thirty years and have been binding in most member states so it’s difficult to predict what will happen when they’re abolished. Furthermore the way quota was administered was different across Europe. For example in the UK and Netherlands quota transfer markets are well developed and milk production is carried out by the most efficient producers. In Ireland on the other hand, quota was ring fenced to prevent industry concentrating in a certain region.

It is expected that the elimination of quota will result in an increase in production in the most efficient member states. Part of the reluctance to ending quota is the view that there will be a large expansion in production leading to a collapse in prices. That does not tally with the fact that the strong prices of recent years have been maintained even though the EU was well below quota. It is expected that the change will lead to a redistribution of quota between countries and within some countries. Production will move from the high cost producers to the lower cost ones and some commentators state that newer member states may in that case have a cost advantage.

Future developments in the UK (and Europe) will depend on the strategies processing companies adopt through the contracts they offer producers. Without the same contractual requirements or strategies across the EU growth could vary significantly from country to country. Milk prices are low across Europe so any expectations for significant growth post quota are probably wide off the mark.

The UK has been under quota for a number of years – and the UK industry has had to go through a restructuring process – meaning that we should be in a stronger position than our neighbours in Europe. The UK industry has only grown in the past couple of years because of the efficiencies gained through previous tough times.

milk production in the uk 2002-14_500_358

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Milk production in 2015

Business graph_275_183Developments in production in 2015 have somewhat been shaped by the ending of quotas and by low milk prices seen across the EU.

Some Member States are still bound by quota and have been working to reduce their production levels in early 2015 to reduce their superlevy fine. These countries include Denmark, Germany, Estonia, Ireland, Latvia, the Netherlands and Poland. Other major milk producing countries have not been bound by quota and for them the main driver for change in production levels have been movements in milk price, with feed costs having fallen and forage and weather conditions favourable. Any major downward adjustment of milk production is difficult to predict though because of the high number of dairy cows present on farms. Many farmers have been reluctant to reduce their herds as they prepare for expansion in a post quota world.

According to the European Commission EU milk deliveries in 2015 are expected to increase moderately by around 1%. Supply increase is expected in the countries where the number of dairy cows remain significantly higher than the year before – for example cow numbers in Ireland are up 4.2%, the Netherlands up 0.8% and Germany up 0.7%.

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The future

Despite some downward pressure currently being felt in the market, the medium-term prospects for milk and dairy commodities are favourable, thanks largely to a steadily growing global demand. Milk production is expected to increase both in the EU and in the other main milk-producing regions of the world. EU milk prices are expected to remain relatively stable thanks to slowly growing domestic consumption, which continues to absorb close to 90% of the milk produced in the EU.

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The NFU’s position

NFU logo reverseThe NFU supports the removal of quotas and the move towards a free market for the dairy sector. It is vital however that all countries act responsibly and collectively in order to manage future volatility and seize new market opportunities.

Quotas have not been a limiting factor in the UK dairy industry for a number of years. Milk production has increased over the last year due to good weather conditions and a milk price that supported production. Since mid-2014, alongside other EU countries, the milk price received by farmers has consistently fallen, with some UK farmers now received a milk price well below 20ppl for their milk. This has not been caused by the ending of quotas, and having the quota system in place has not stopped numerous boom and bust cycles of recent years – indeed we see the quota system as hampering the development on an efficient EU dairy sector.

There are some concerns in the UK – with farmers and dairy processors – on how other EU countries will react to the ending of quotas. Some are rapidly increasing output without an end market for these goods. With milk prices yet to show any large signs of recovery in EU this could push commodity and thus farmgate milk prices down further in the EU, and stall any recovery in the dairy markets. It’s vital that expansion in any member state is planned in accordance with available market opportunities. In the UK we have seen a number of milk buyers rapidly put in place A and B contracts where farmers are to an extent penalised (through a lower milk price) for producing over a pre-determined milk volume.

Low and volatile farmgate milk prices have had a much greater effect on UK milk production levels than milk quota. In common with other EU member states, environmental factors will play a greater role in future- especially with plans for ammonia and methane reduction targets on the horizon. Weather and animal health issues, specifically bovine TB are also major factors affecting the UK dairy industry.

Once we get through this period of low milk prices we know that the medium and long-term outlook for dairy is positive, with growing global demand and production opportunities. We need to focus on supporting farmers through the immediate crisis and look for ways to manage future volatility, but given the right tools and a fair market place UK farmers can compete with the best.

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