Impact assessment of the 2003 reform and 2009 Health Check on the milk market

Several studies have analysed the impacts of the recent dairy policy reforms, among which Requillart et al., 2007; Bouamra-Mechemache et al., 2008 (both relying on the EDIM model); Chantreuil et al., 2008 (using the AGMEMOD model); Witzke and Tonini, 2008 (using the CAPSIM model); Jongeneel and Tonini, 2009; and Jongeneel et al., 2010). In the following discussion, we rely mainly on results obtained in the EDIM analysis (see in particular Bouamra-Mechemache et al., 2009). This study played a key role, which is reflected for example in quota rent estimates they made, and which were often used as a starting point for the other studies. Moreover, the EDIM model, which is a spatial partial equilibrium model, has a high level of detail with respect to modelling the different policy instruments, while it also considers a large number (14) of dairy products and preserves balance constraints between dairy products.

CAP reform

The 2003 CAP reform included for the dairy sector 1) a 25% decrease in the intervention price for butter over four years from 2004/05 to 2007/08; 2) a 15% decrease in the intervention price for SMP over three years from 2004/05 to 2006/07; 3) gradual increases in milk quota implemented during the period 2006/07 to 2008/09 in EU15; overall, the EU27 milk quota to increase by 1.1% to reach 140 million tonnes in 2008/09, and 4) the introduction of direct payments in 2004/05. These payments are considered as fully decoupled and as such do not affect the level of production which only depends on market prices.

Figure 5.2 shows the calculated impact of the 2003 CAP reform on the evolution of raw milk prices, both within the EU25 and for its key competitor Oceania assuming “normal” conditions on world markets. It includes the impact of empirically estimated autonomous changes in the demand for dairy products both in the EU domestic market and in the rest of the world. Similarly it includes changes in the production costs (technical progress). Three phases can be distinguished:

  • • The EU milk price first sharply declines until 2005/06 in response to the decrease in the intervention prices of butter and SMP.
  • • Then it remains roughly stable until 2008/09. A smaller decrease in the intervention price and a slight increase in production quotas are compensated by the increase in domestic demand. Moreover, as long as subsidies are needed to support domestic dairy product prices, subsidies are adjusted so that the raw milk price remains stable.
  • • The EU raw milk price regularly increases afterwards. EU supply is still restricted by milk quotas, which are still binding for a majority of member states. At the same time, the demand for dairy products increases over time. More precisely, whereas the demand for protein in the EU increases over time, the demand for fat remains roughly stable. This induces an increase in the SMP price while the butter price remains constant and very close to the intervention price. The evolution in SMP and butter prices in turn explains the increase in farm milk price.

The presented impacts presume that a new WTO agreement has been implemented, following the Falconer proposal of autumn 2007 (including removal of EU export subsidies, tariff reductions for butter, powder and cheese of 23%, 63% and 21% respectively, and doubled TRQ import quotas for butter and cheese).

Figure 5.2. Impact of recent dairy policy reforms on the price of raw milk in EU25

Index 100 = EU25 price in 2003/04

Source: Bouamra-Mechemache et al. (2009).

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