Gradual liberalisation of milk quota has contrary effect

The gradual liberalisation of the milk quota, which was decided upon by the European commission last year, will lead to a milk surplus and a sharp price decline on the world market in the years to come. As a result, the profits of European dairy farmers will also decline. Economist Dr Roel Jongeneel of Wageningen UR made this conclusion in an issue of Euro Choices.

German, French and Dutch dairy farmers protested recently in Brussels against the low milk prices during a meeting of the European Agricultural Council. The milk price paid to dairy farmers has meanwhile fallen to €0.21 per litre, while the price 18 months ago was still €0.50. The price decline is partly the result of the EU decision, which was made last year in preparation for abolishing the milk quota in 2015, to gradually liberalise the quota every year. The European Commission believes this gradual liberalization will create a 'soft landing' for dairy farmers as a transition to the conditions on the world market. In addition, the worldwide economic recession has placed strong downward pressure on the milk price.

By using the EDIM dairy model, the researchers calculated the consequences of this decision. As an alternative scenario, they calculated the consequences of the Falconer proposal from the WTO negotiations from 2007 (which are now at a stalemate). In this proposal, the European import tariffs for milk would be sharply reduced, the import quotas for other dairy exporting countries would be sharply increased, and the European export subsidies for milk would be abolished. The prevailing thought was that this liberalisation proposal would have a bad effect on the farmers, but this scenario actually leads to a small increase in farmer income. In comparison, the dairy farmers' income declines greatly during the 'soft landing', say the researchers.

The elimination of export subsidies is only disadvantageous for dairy farmers if the EU price for milk and butter is significantly higher than the world market price, but this is no longer the case. The gradual liberalisation of the milk quota is much more disadvantageous because it leads to a 3% increase in milk production and a 9% decline in the milk price in 2014. Moreover, by that time the milk quota will no longer be worth anything. The researchers have calculated that the combination of this loss in value and the price decline will lead to an annual reduction in profit of €2 billion for European dairy farmers. The problem for the European dairy farmers is that they are unable to sufficiently compensate for this price decline with higher production. Dairy farmers in the Netherlands are an exception; over the long term they could realise 10% more income due to much higher production.

Jongeneel advises the EU to stop the liberalisation of the milk quota for the next few years, until the milk price recovers. / Albert Sikkema