BY LINDA McGURK
Indiana Correspondent

WEST LAFAYETTE, Ind. — With the European Union’s (EU) milk quotas gradually increasing and the whole system set to expire in 2015, the continent’s dairy farmers are on track to enter a new market-oriented era. It also means lower world prices could be in store for producers in Europe, as well as abroad.

“I think (abandoning quotas) will have an impact on the world markets. The question is how substantial the impact will be,” said Elisabeth Due, a trade expert with the Swedish Dairy Assoc.

Scrapping the quotas is part of an overall initiative launched in 2005 to reform and deregulate EU’s agricultural sector. To “soften the landing” for milk producers, the EU has decided to increase the quotas by 1 percent annually for the next five years.

But according to Due, the quota increase won’t automatically translate into higher production. Only seven out of the 25 member countries have exceeded their quotas in the past, she said. “In Sweden, for example, we’ve never produced more than the quota and as of right now, we’re 10 percent below it.”

For European dairy farmers, the changes outlined in EU’s reform package “Health Check for Common Agricultural Policy” (CAP) mean learning to survive and compete in the global marketplace without direct payments and export subsidies. The EU is a significant exporter of all major dairy products, currently holding a 40 percent market share of world cheese exports and a 39 percent share of the butter market.

“Retaining specific market shares is not a goal for the EU. It will be up to the dairy farmers to produce what the consumers want,” Due said.

Joseph Balagtas, an assistant professor of agricultural economics at Purdue University, said there’s still some uncertainty about the impact of the CAP reform on world dairy markets.

“The analyses I’ve seen indicate that milk prices in Europe will fall and production will increase by 3 to 4 percent,” Balagtas said. “The EU will become a larger exporter than it is now, thereby making U.S. producers worse off, since there will be a reduction in demand for U.S. exports.”

He added, “It will make it a little harder for U.S. dairy producers, but it’s a small factor when you compare it to other things that are going on in the dairy sector.”

Balagtas pointed out the deregulation of EU’s dairy market could make U.S. export subsidies and import restrictions on certain dairy products less sustainable from a free-trade standpoint. “It will be one more program that (the World Trade Organization) will look be able to look at and say ‘EU reformed its policies,’” he said.

“I don’t think the changes in the EU will have a huge impact on global milk prices,” said Michael Schutz, an associate professor and dairy expert in the department of animal sciences at Purdue. In some countries, however, he believes the move may lead to price collapse. “I know that’s been a concern in Ireland and England.”
Even without quotas, he said land pressure and animal care restrictions will limit growth in Europe’s dairy industry.

“The unknown is Eastern Europe and whether those countries have more opportunities for expansion, but even there I think the infrastructure is limited and can’t handle much more capacity,” he said.

The long-term emphasis of CAP is to shift funds from the agricultural sector to rural initiatives that address challenges such as climate change, biological diversity and renewable energy. The slimmed-down agricultural budget will still include some forms of financial support for EU’s dairy farmers, including investment aid and incentives for environmentally friendly farming practices.
The newly-launched school milk program “Milk: Drink it Up,” is another example of a program that intends to support milk production in the member states, while at the same time benefiting the health of school-aged kids.

“I think this is one of the programs that will remain in the long run, because there’s an obvious connection between milk consumption and good health in children,” Due said.

European dairy farmers have mixed feelings about the reforms, she added.

“Five months ago, when we had record-high world prices, they seemed optimistic about the future,” she said. “But now the prices are again very low. It’s hard in the milk business when prices are so volatile. European farmers are now aware of how a liberalized market functions, and we hope for more stability in the future.”