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Policy Coherence

Exploring links between EU agricultural policy and world poverty

EU dairy policy reform and developing countries

World dairy markets and developing countries

Milk and dairy produce are essential elements of the daily diet almost everywhere in the world. Some 750 to 900 million people (or 12-14 percent of the world population) rely on dairy farming to some extent. Dairy development can therefore serve as a powerful tool for reducing poverty.

Most milk is consumed in the countries where it is produced, and only around 6 per cent of milk is traded across borders. Milk is mainly traded in the form of butter, milk powder and cheese, but also as concentrated milk, casein and butter oils. The EU and New Zealand are the biggest exporters of dairy products; major importers include China, Mexico, Japan, Algeria, Russia, Philippines and Saudi Arabia.

Source: CLAL.Producer prices for milk differ significantly around the world. Low cost producers include Latin America, South Asia and New Zealand. Developed countries such as the EU and US are high cost producers, while milk production costs in Switzerland, Norway and Canada are higher still. Over 90% of milk production in New Zealand is exported, and therefore milk prices in New Zealand provide a good indication of the prices on the world market. Traditionally, the milk price in New Zealand was about half the European milk price. However, since the spike in world dairy prices in 2007-08, this differential has been eroded considerably and today EU milk prices are not that much above the New Zealand benchmark.

International dairy trade has traditionally been characterized by the flow of exports from developed countries (EU, New Zealand, Australia, USA) to developing countries (China, Mexico, Algeria, Russia, Philippines, Saudi Arabia). New Zealand exports flow mainly to Asia, while EU exports have mainly gone to Russia, North Africa and the Middle East, and sub-Saharan Africa. Although milk production is growing rapidly in many developing countries, so is domestic demand, so only a few developing countries, mainly in Latin America (Argentina, Brazil) are expected to become significant exporters of dairy products in the near future.

The EU dairy regime

Milk production has traditionally formed the core of EU agriculture, comprising around 13 percent of the EU’s total agricultural production. The EU's export surplus is small, around 5 per cent of total production, but this accounts for around one-third of total world exports. The EU milk price is supported through high tariffs, export subsidies and intervention buying-in arrangements. High tariffs mean that the EU market for dairy products is effectively closed to imports from third countries, apart from limited volumes which enter under quota arrangements and preferential agreements.

Support prices for dairy products have been reduced since the Agenda 2000 CAP reform in 1999. EU dairy farmers have been compensated by inclusion in the direct payments regime. Limits have been placed on the operation of the public intervention system to avoid the situation in the 1980s when intervention became the main market for many dairy processors. Reliance on export subsidies has been reduced in recent years as world market prices for dairy products have firmed and the EU specializes more in the export of higher-value cheese. However, they were temporarily re-introduced in 2009 as a mechanism to support milk prices in response to the very low prices in that year. Since 1984, the volume of milk produced in the EU has been limited by a quota although in recent years EU production has been below the quota ceiling. This quota arrangement is due to be eliminated from 2015.

Effects of EU dairy policy reform

Simulations of the consequences of liberalizing the EU dairy market have been complicated by the simultaneous existence of high supported prices (which stimulate production) and the quota policy (which limits production). Different studies come to different conclusions depending on how binding they assume the quota to be. Older studies tended to put more weight on the binding nature of the quota, and concluded that EU liberalization (defined as eliminating both protection and quotas) would result in increased EU production and net exports. Later studies find that the protective effect of import tariffs outweighs the supply-constraining effect of quotas and that full liberalization would result in lower EU production and net exports.

It now appears that the two policy changes will not occur simultaneously. The decision to abolish quotas from 2015 is now an EU commitment, while tariff changes will not happen before a successful conclusion to the Doha Round which is not yet in sight. The most recent simulation study of quota abolition for the Commission, which assumes that quotas will continue to constrain milk supplies in most Member States by 2015, estimates that it will lead to an increase of milk production of 4-5%, with a consequent fall in internal EU prices of around 10% (IPTS 2009). Other observers note that many Member States no longer are filling their quotas. With lower internal prices and demand growth within the EU, they expect quota abolition in 2015 to have only a limited impact on EU milk supply (OECD/FAO 2010).

Quota elimination without reducing or removing the protective effect of EU tariffs means that EU dairy production will be higher, and consumption of dairy products lower, than they otherwise would be. This will amplify the EU milk surplus and depress the level of EU imports, and thus depress world market prices below the level they would otherwise be.

Effects on developing countries

EU high value cheese exports have a global market, but milk powder exports are sold mainly to developing countries, particularly North African and Middle Eastern oil exporters and Sub-Saharan Africa. Development NGOs have long criticized EU milk powder exports to African countries, particularly when these were heavily subsidized in the past. In many African countries, EU competition was blamed for undermining local efforts for dairy development. Imports of subsidised milk powder were seen as responsible for the failed attempts to establish dairy plants to provide the national market with milk, butter and other basic products.

Others argue that EU imports add to the availability of dairy products particularly in urban areas and benefit consumers who might not otherwise be able to afford access to dairy products. In many African countries domestic supply cannot keep up with the growth in domestic demand, particularly in higher value market segments. Products based on imported milk powder often target a different market segment to that served by the local informal dairy sector. Processing plants built initially to handle imported powder can also act as a stimulus to the development of a local dairy industry.

Probably the truth is somewhere in between these two extremes. Given local conditions of production, imported milk and dairy products are in the short term the only possible way of meeting the needs of an urban population with low purchasing power. High costs of production combined with inefficient marketing channels make locally produced fresh milk expensive as compared to imported produce. At the same time the mere existence of cheap dairy imports discourages processing plants from investing in local milk collection.

Reducing EU dairy product exports to Africa would not in itself transform the potential for African dairy production, as there are an increasing number of other low-cost exporters ready to take their place. However, the availability of EU surplus powdered milk on the world market remains unfair competition, limiting the growth of the dairy sector in developing countries and undermining the incentives for farmers to boost local production to keep track with the growing demand.

Links:

Commission Directorate-General for Agriculture and Rural Development Milk and milk markets website
Provides access to DG Agri documentation and reports on EU dairy markets and policy

Resources:

Oxfam, Milking the CAP: How Europe's Dairy Regime is Devasting Livelihoods in the Developing World (PDF), 2002
The classic study attacking the EU dairy policy for its damage to developing countries

Brot fur die Welt, Milk Dumping in Cameroon (PDF), 2010
Explains how milk powder from the EU is affecting sales and endangering the livelihoods of dairy farmers in Cameroon


Last updated 4 April 2012 by Policy Coherence (Email). ABIA Disclaimer.