CAP Health Check 2008:What does it imply for dairy?: CAP Health Check 2008: What does it imply for dairy? Gerrit Meester Ministry of Agriculture, Nature and Food Quality, The Netherlands Mansholt Graduate School Wageningen, 8 February 2007


Calendar 2008-2009: Calendar 2008-2009 Health check 2008 Budget discussion 2009 Second half Mandate Commission Barosso Elections: France 2007 European Parliament 2009 Presidencies European Constitution? WTO???????


Health check 2008: simplification: Health check 2008: simplification Codification of market regulations Further decoupling? Maintaining set aside and other exceptions? How further with cross compliance?


Health check 2008: other aspects: Health check 2008: other aspects Situation on cereal and other markets Longer term aspects dairy (and other) quota systems How further with direct payments: Regionalisation; flat rate; targeted? Capping, modulation, pillar 1/ pillar 2? More national or regional responsibility? National or regional co-financing? WTO aspects: Restart negotiations? Impacts export commitments, end of “peace clause”? Increasing number of disputes?


Decisions dairy in Midterm Review 2003: Decisions dairy in Midterm Review 2003 Maintenance milk quota until 2014/15 Decrease intervention prices in 2004-2007 butter 25% (3 x 7% en 1 x 4%) Skimmed milk powder 15% (3 x 5%) Direct payments as partial compensation, to be included in single payment system Extension milk quota 1,5 % in 2006-2008


WTO Doha Development Agenda: WTO Doha Development Agenda Restart 2007-2008? Elimination export refunds 2013 or earlier? Substantial decrease of import protection Pressure on blue box income payments Influence developing countries


General considerations international equilibrium prices dairy: General considerations international equilibrium prices dairy EU largest milk producer worldwide: 20-25 % of total world supply EU large consumption area: 450 million relatively rich consumers Well-known home market Australia and New Zealand Cheap suppliers Only 1,5 x production of The Netherlands Restrictions in capacity to increase supply Other players on international market more protected than EU


EU dairy prices: how close to international equilibrium prices?: EU dairy prices: how close to international equilibrium prices? Comparison prices and cost prices LEI OECD calculations on international equilibrium prices Calculations LEI on impact WTO agreement


Prices and cost prices in dollar in various countries and farm size classes (number of cows)  (Source: LEI): Prices and cost prices in dollar in various countries and farm size classes (number of cows) (Source: LEI)


OECD Dairy Policy Reform and Trade Liberalisation 2005 (1): OECD Dairy Policy Reform and Trade Liberalisation 2005 (1) Effects reforms EU-15 only all OECD Prices EU-15: Milk -16.5% - 9.8% Butter -33.5% -25.3% Cheese -17.0% -10.0% SMP + 4.8% + 7.5% WMP -14.4% - 7.5% Production EU-15 -10.7% - 7.3%


OECD Dairy Policy Reform and Trade Liberalisation 2005 (2): OECD Dairy Policy Reform and Trade Liberalisation 2005 (2) Economic effects EU-15 in mln. dollars: Income farmers - 8.065 of which quota values - 7.123 of which land prices - 193 of which “dairy capital” - 686 Upstream sectors - 375 Tax payers +2.067 Consumers +7.123


Consequences of lower market protection for EU dairy products?(Source: LEI , 1 euro= 1.15 dollar): Consequences of lower market protection for EU dairy products? (Source: LEI , 1 euro= 1.15 dollar) Import tariff EU-Price WM-Price WM-P+tariff Now EU/ 2012 2012 2012 2012 2012 WTO OECD FAPRI OECD FAPRI % % euro euro euro euro euro Butter 89.9 44.9 2464 1603 1771 2323 2566 Cheese 52.7 29.0 2580 1968 2366 2539 3052 SMP 80.3 40.1 1747 1735 2035 2431 2851 WMP 63.9 31.9 2110 1769 2088 2333 2566


Expectations 2015: Expectations 2015 EU prices close to world market prices Quota system economically redundant Many member states prefer abolishment Decreasing quota values Increased pressure on income payments Financial Framework 2007-2013: 1 % nominal growth Reductions per sector? Extra modulation (until 20 %)? Flat rate or more selective application? Capping larger farms? Studies on impact of quota abolition after 2015 LEI, FAL, EDIM, …


LEI Dairy study 2006: background: LEI Dairy study 2006: background Evaluation of EU dairy policy in 2008 Budget, further shift from price support to direct income support Further trade liberalisation Phasing out of export support, reducing import tariffs, decoupling support from production Milk prices may decline to levels where quota system is no longer effective


LEI Dairy study 2006: : trends: LEI Dairy study 2006: : trends Since introduction milk quota Number of dairy farms declined by 72% Dairy herd decreased by 40-45% in EU-9 Average farm size increased Milk price down since 2001 Income developments unfavourable


LEI Dairy study 2006: expectations/assumptions: LEI Dairy study 2006: expectations/assumptions Further trade liberalisation will alter market conditions WTO agreement leads to 5% price reduction (against reference scenario level) if quotas remain If quotas are abolished in 2009 and new WTO agreement is implied, a further 10% decline of EU milk price is expected (hence: 15% against reference scenario)


LEI Dairy study 2006: Impact on milk production in the Netherlands: LEI Dairy study 2006: Impact on milk production in the Netherlands


LEI Dairy study 2006: Impact on farm income in the Netherlands: LEI Dairy study 2006: Impact on farm income in the Netherlands


LEI Dairy study 2006: Implications for the dairy industry: LEI Dairy study 2006: Implications for the dairy industry Changes in regional milk supply expected to the benefit of North-west Europe and some other low cost producing regions, overall a small increase in total EU milk supply Ability/willing of industry to market extra milk supply depends on: Structure: in some countries industry is more efficient than in others Demand: focus on growth markets (outside EU, NMS) Business strategies: investments in innovative products and marketing


LEI Dairy study 2006: Transitional dairy policies: LEI Dairy study 2006: Transitional dairy policies Recognizing socio-economic impact of quota abolition on the sector and in some regions calls for (a combination of): Gradual price adjustments Quota adjustments Quota enlargement Balancing between countries Tradability among member states Lowering super levy Accompanying measures/rural development programs


LEI Dairy study 2006: Conclusions: LEI Dairy study 2006: Conclusions Quotas are less relevant for farmers’ income as milk price fall (further) Quota abolition beneficial for expanding farmers Early abolishment accelerates structural change Regional shift in milk supply Will industry market extra supply? Phasing out in the interest of farmers and processing industry


European agriculture in 2020: European agriculture in 2020 450 million rich consumers; free access to markets; good knowledge of market; good logistics Increasing demand on international markets: China, India; to be delivered mainly by Latin America Resulting in less pressures on European and international prices High knowledge and capital intensive EU agriculture able to compete in high value added products Elimination of all traditional trade barriers Non-trade issues mainly solved through private contracts in chain


Trends in dairy farming in The Netherlands (1) (Source: LEI background study The Choice for Agriculture): Trends in dairy farming in The Netherlands (1) (Source: LEI background study The Choice for Agriculture) 1990 2000 2004 Farms with dairy cows 46.980 29.470 24.330 Specialised dairy farms 39.550 26.680 22.280 Dairy cows (x 1000) 1.878 1.504 1.471 On specialised farms: % of all animals 90 93 94 Average herd per farm 43 52 62


Trends in dairy farming in The Netherlands (2) (Source: LEI background study The Choice for Agriculture): Trends in dairy farming in The Netherlands (2) (Source: LEI background study The Choice for Agriculture) 2004 2015 mutation Dairy cows (x 1000) 1.471 1.109 - 24.6% Dairy farms 22.280 13.82 - 38.0% Dairy cows per farm 66 80 +21.5%