Creaming off dairy from the rest of the agriculture sector

Date: 28/01/1999

The Franco-German proposal late last year to exempt the dairy sector from the European Commission's proposed Common Agricultural Policy reforms touched a raw nerve with veteran officials in the institution's agricultural division.

Those who were in Brussels six years ago, when Farm Commissioner Franz Fischler's predecessor-but-one Ray McSharry was trying to convince hostile national governments to sign up to his own package of farm reforms, were struck by a keen sense of déja vu.

Faced with strong resistance from most EU countries, but desperate to push through price cuts at least in the beef and grain sectors, McSharry was forced to drop his plans for a milk sector overhaul.

Germany's opposition to reforming the milk regime this time round is based more on its desire to cut overall farm expenditure, thereby reducing its contributions to the Union budget, than on a simple wish to protect its farmers.

But McSharry's failure to reform the sector was seen as a major setback at the time, and EU officials and diplomats say that Fischler is determined not to miss this second opportunity to reform a regime which has posed persistent problems ever since the CAP was dreamed up.

The dairy sector was the first to reflect the shortcomings of the CAP, a policy which, generally speaking, supports prices while paying only minimal attention to supply-side problems. Because of the relative ease with which dairy farmers could boost production, and the relatively low costs of entering the sector, the introduction of guaranteed support prices for milk in 1969 made it virtually certain that huge surpluses would arise one day.

In the event, overproduction became a serious problem almost immediately, and the Commission found itself dogged by 'milk lake' scandals throughout the 1970s and early 1980s.

By 1984, when the cost of purchasing and storing surplus dairy products was threatening to bankrupt the then European Community, it was obvious that something had to be done.

The Commission hit upon the solution of introducing production quotas at farm level, backed up by the threat of fines in the event of an overshoot. Quotas were also intended to dissuade would-be entrants to the dairy industry, as they were transferable only if a farm was sold or inherited. This was the first attempt at complementing the CAP's exclusive emphasis on price support with measures to curb overproduction.

The milk-quota system was, and remains, controversial, with many governments fearing that limiting access to guaranteed prices would bankrupt many farmers. It gained the approval of the full Commission by only one vote when it was first proposed.

Once it was put into practice, it largely succeeded in reining in overproduction, but its shortcomings quickly became evident. Firstly, the link between quotas and farmland hindered the consolidation of the dairy sector, prolonging the lifespan of farms that were essentially unviable.

Secondly, the scheme imposed an enormous administrative burden on national governments. To this day, Italy and Spain have never really got to grips with the system, and Italian and Spanish dairy farmers find themselves facing enormous fines for exceeding their quotas nearly every year.

The quota system is also anathema to countries with a strong free-market tradition such as the UK.

However, the dairy regime does ensure that farmers enjoy a guaranteed income provided that they do not overshoot their production quotas.

This, broadly speaking, is why McSharry's attempt at reforming it failed back in 1992. It seems likely now that Fischler will have better luck. His basic proposal aims to drag the dairy sector a few steps down the road towards a free market by simultaneously cutting guaranteed dairy prices by 15% while increasing production quotas by 2%.

While the eventual outcome may not follow precisely this model, a majority of governments, including Germany, now agree that reform of some kind is essential.

This is partly because there is growing acknowledgement of the rigidities of the present system, but also because many governments now see the sense in the Commission's argument that lucrative export markets for European cheese and butter would open up if only the price was right.

Overhauling the dairy regime would put all the arguments for and against reform to the test. But reforming an agricultural sector which has come to symbolise all the shortcomings and inefficiency of the CAP itself would also send out the right message.

Estimated cost of the CAP if European Commission's reform plan is agreed (in billions of euro).

Note: All figures in constant 1997 prices

Source: European Commission