European Union dairy policy reform: impact and challenges

Abstract

Recent Common Agricultural Policy (CAP) reforms have affected dairy policy, including the milk quota system, and increased the market orientation of the sector. A modelling exercise, using the European Dairy Industry Model (EDIM), simulates an initial sharp decline in the EU milk price in response to the decrease in the intervention prices of butter and SMP after 2003, followed by a period of stability and an increase from 2007/08 as the demand for dairy protein products increases over time and EU milk supply is still restricted by quotas. The phasing out of the milk quota following the implementation of the 2009 Health Check is estimated to lead to an increase in milk production and a decrease in the milk price both within and without the European Union. The gap between EU domestic and border prices is expected to continue to narrow. Looking at developments in dairy markets between 2000 and 2007, the study finds that milk prices did not decrease as much as expected because the intervention prices were no longer binding, in particular for skimmed milk powder. The income of dairy farms increased as decline in milk prices was more than compensated by the introduction of dairy premium and higher farm productivity due to the increase in farm size. However, since 2007, incomes of dairy farmers have strongly fluctuated as both milk and feed prices have been highly variable in opposite directions.