By Guy Montague-Jones

The European Court of Auditors has warned that dairy market liberalization could be ill-suited to EU policy aims such as price stability and competitiveness.

Deregulation of the EU dairy market is in full swing and plans to dismantle the quota system in 2015 are on track despite mass protests from farmers.

So how well is EU management of the dairy market delivering on the policy objectives of reaching market equilibrium, stabilizing prices, protecting producer incomes, and improving competitiveness?

This was the question that the European Court of Auditors sought to answer in a report published this week.

In its conclusions, the EU financial watchdog was critical of existing management policies.

With regards to market equilibrium the Court warned that the instability of markets is likely to lead rapidly to new large surpluses. It said quotas have in the past been set too high for market need and that they now no longer really represent a restriction on production.

On price stability, the Court expressed concern about the gulf between producer and consumer prices. Between 2000 and mid-2007 nominal consumer prices for milk products increased 17 percent while nominal prices paid to producers fell 6 percent.

Monitoring Price Formation
The Court raised concern about how consolidation among processors and retailers is affecting prices. It warned that the concentration of processing and retailing companies must not reduce milk producers to “price takers” and must not prevent consumers from benefiting fairly from price reductions.

To prevent such misalignment in pricing, the report recommended that the price formation process in the dairy industry should be regularly monitored by the Commission.

Falling milk prices and the fast pace of deregulation is expected to accelerate the well established trend towards consolidation in dairy production. The EU-15 has already lost half its dairy farms between 1995 and 2007; more than 500, 000 producers gave up during this period.

Focusing on Domestic Markets
As for competitiveness, the Court said the EU share of world trade in milk products has been declining since 1984. It said European producers of basic milk products (butter and milk powder) are only competitive on world markets when prices are high.

The report therefore recommends that the Commission and member states focus primarily on the domestic market and the production of high-value added products that can be exported without budgetary assistance.

Source: Dairy Reporter

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