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12.08.2016
Incentive to reduce milk production – why now and why at all?
At the July Farm Council the Commission presented its new € 500 million support package for
agriculture, including a € 150 M EU-scheme to incentivise milk production cuts and ‘additional
conditional adjustment aid’ with a total envelope of € 350 made available to Member States (who can
double the amount allocated to them with their own money). The package also comprised some
technical adjustments like the possibility to derogate from the obligation to maintain the herd size at
farms receiving coupled payments and an extension of both public intervention and private storage
for SMP until the end of February 2017.
But why encourage a reduction of milk flows now or actually in the last quarter of 2016? True, as all
the recent meetings of the Milk Market Observatory have confirmed, a supply side adjustment remains
necessary but at the same time that adjustment has already been visible in production figures for some
time, proving that supply is reacting to the lower milk prices. In June, most Member States with the
exception of Ireland and the Netherlands reduced their milk production in comparison to the year
before and everyone expects this trend to amplify through the remainder of the year, including the
Commission in its short-term outlook. So why use public funds for something that is taking place
anyway?
Apart from the timing issue, the results of this scheme to pay for the quantities of milk not delivered
(in comparison to the year before), are far from straightforward. The programme might encourage
some producers to actually increase production, speculating on a positive effect on milk prices of the
scheme. There is also a broader free rider problem as developments in the EU are not isolated from
the world market, meaning that producers in other regions can take advantage of lower volumes in
Europe. In addition, many farmers who will benefit from the scheme may have planned to reduce or
abandon production anyway, so the net impact in these cases is nil.
The Commission has rightfully stood firmly against calls for a return of quotas or other forms of
mandatory supply management. It also opposed the crisis volume control scheme proposed by MEP
Michel Dantin during the last CAP reform talks. The right for producer and other organisations to jointly
agree on production reductions for a limited duration – a programme unlikely to have any impact on
the market - was only endorsed in April when overproduction had already been an established fact for
a long time. Perhaps as a reaction to the criticism by farmers about the lack of funding for this scheme,
the support package for voluntary output cuts followed in July. It would seem the Commission has
been quite reluctant to put these measures in place but has had to yield to mounting pressure from
some Member States and members of the farming community.
As markets are firming, the question how to control European production is not the main challenge for
the months to come. In fact the issue of overproduction may become non-existent much sooner than
anticipated. We should be more worried about the integrity of the internal market and the functioning
of the EU as a whole as increasingly nationalist and protectionist tendencies have taken root in
numerous Member States. Brexit aside, the decision to allow the French mandatory origin labelling
decree – although clearly in violation with EU law – is encouraging others to come up with similar trade
barriers to satisfy domestic demands. It appears the Commission has stepped away from its role of the
guardian of the treaties and signalled it is ready to let political compromises overrule the strict
application of internal market rules.
In the same vein, it is crucial to overcome the anti-trade climate which is currently slowing down trade
negotiations or blocking them altogether. The EU dairy sector needs improved market access in order
to benefit from the growing global demand. Trade policy is however suffering from a lack of legitimacy
as negotiations are seen as undemocratic and only serving the interests of big business. In addition,
the EU is struggling with internal difficulties as the division of competencies between the Commission
and Member States remains unclear. In this vein, improved communication on how a well-functioning
common market and the trade deals negotiated by the EU are in the interest of the whole dairy sector,
including producers, is required. This is a joint task for the public authorities and stakeholders.