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Assessing new policy scenarios for milk and dairy

International and domestic policy reforms affecting Europe’s milk and dairy industry need their impact to be analysed and measured. An EU-funded team of researchers developed a set of tools to simulate this impact of alternative policy scenarios.
Assessing new policy scenarios for milk and dairy
Europe’s dairy industry faces major changes as a result of various policy reforms and the effects of EU enlargement. A tool representing the EU dairy industry has been developed to analyse and assess the impact of these reforms on milk and dairy markets. This model covers the EU-25, 18 country groups, and other main importing zones, and also distinguishes 14 final dairy products. Taking into account policy instruments used in EU dairy policy, it provides results for the period from 2004 through to 2014 and covers production, exports, imports, consumption and prices for milk and dairy products in each region.

Since 1984, milk production quotas have characterised EU agricultural policy, with the 2003 reform prolonging the quota regime until 2015. However, domestic as well as international reforms continue to challenge the continent’s dairy sector. At the time the 'European dairy industry model' (EDIM) project was established, indications were that price support measures would be reduced and export subsidies — which the dairy sector relies on heavily — gradually eliminated. At the same time, the EU sought to substitute the former with green box policy instruments. One example of this initiative was a 2003 Common Agricultural Policy (CAP) reform introducing a decoupled payment per tonne of milk quota as compensation for dairy farmers for cuts in guaranteed prices for butter and skim milk powder.

To evaluate the reactions of dairy farmers to such policy changes, it was important to determine whether the difference between milk price and marginal cost (the so-called milk quota rents) was positive and what their size would be under new policy scenarios. The answer to this and other quota rent questions is important for gauging impacts on milk production and supply, milk output price, farm profits and marginal cost curves representing the 'potential' supply curve affecting production-related decisions.

Members of the EDIM project estimated marginal costs and quota rents for the EU-15 Member States on the Farm Accountancy Data Network (FADN) data using two estimation procedures. Their approach enabled measurement of both the size of the marginal cost and each farm’s position on its marginal cost curve. The results thus provided crucial insights into the likely impact of policy reforms on the milk and dairy industry.

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