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Health Check reform

The European Commission’s Health Check proposal involves a 2% quota increase in 2008 followed by further increases of 1% per annum from 2009 to 2013. By gradually increasing the quota, the Commission, anticipating quota abolition in 2015, aims to smoothly phase out the quota system and create a so-called ‘soft landing’ scenario (the calculations assume that a WTO agreement has been implemented similar to the 2003 CAP reform scenario).

Relaxing the milk quota constraint will lead to an increase in the EU’s milk production. The supply increase induces a milk price decline both within and outside the European Union (Figure 5.2). Relative to the Luxembourg scenario, the EU’s milk price will decline by a further 9% in 2014/15. The decline in milk prices will erode the quota rents, with the average quota rents in the EU25 being close to zero (less than EUR 0.02 per kg) in 2014/15. But if the milk quota rent comes close to zero, this implies that the quotas are on the edge of being binding. For this reason, the situation projected for 2014/15 becomes very close to a no-quota situation. As a consequence, removing the quotas in 2015/16 is estimated to lead to only a limited further increase in production under this scenario.

As regards dairy product markets, it turns out that EU25 production is 3.6% higher than in the Luxembourg scenario (while the potential increase is 7%). In most countries the quota is no longer binding (except in Austria, Belgium, Ireland, Italy, Netherlands and Spain). Following the increase in milk production, both the production and exports of dairy commodities increase while their prices decrease. An exception is butter for which the WTO agreement has a positive impact on its world market price. In the European Union the price of butter drops more than the price of SMP, because the European Union is not competitive on the world market for butter (recall that the new WTO agreement implied the removal of all export subsidies). As a consequence, the additional butter production needs to be consumed in the European Union. This can only be achieved by a significant drop in the butter price. On the other hand, the increase in SMP production is absorbed by higher EU consumption as well as through an increase in EU exports. Because EU exports increase, the world market price for dairy products will go down by 3 to 6% depending on the type of product. This explains the negative impact on dairy product prices and on the farm milk price in Oceania, which drops by about 3%. Although there still remains a price gap between the European Union and Oceania, it nevertheless substantially narrows over time.

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