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EDIM Report Summary

Project ID: 502111
Funded under: FP6-POLICIES
Country: France

Final Report Summary - EDIM (European Dairy Industry Model)

The European Union (EU) dairy industry is facing major changes due to the Luxembourg reform, the EU enlargement and the World Trade Organization (WTO) negotiations. In order to analyse the impacts on milk and dairy markets of these changes, a tool that represents the EU dairy industry has been developed. The model developed is a spatial partial equilibrium model of the whole dairy industry which allows testing the economic impact of policy reforms. The model covers EU-25 (distinguishing 18 groups of countries), Oceania, the main importing zones. It distinguishes 14 final dairy products. It takes into account the policy instruments that are used in the EU dairy policy and has also a detailed modelling of trade policy instruments (Tariff-rate quota (TRQ), tariffs, exports subsidies). It provides results over the period 2004-2014. The results concern the production, consumption, exports, imports and prices for milk and dairy products in each region. The model has been used to test some policy scenarios such as the Luxembourg reform, WTO agreement in 2008 and alternative scenarios of further change in the EU domestic policies.

The model developed is an improved version of the existing model of the European dairy industry that has been developed by the INRA-Wageningen consortium and has been used for the analysis of the mid-term review. The final model is a spatial model of the dairy industry in the EU-25. It consider milk production, milk processing into 14 dairy products, demand for dairy products at the country level in the EU (18 countries or group of countries are considered). It also integrates a module that represents the Oceania dairy industry and a module on importing regions (four regions are considered). The model is designed to analyse the impact of policy reforms on the milk and dairy markets in the EU and on world markets.

Milk production quotas characterises the EU agricultural policy since 1984, and the 2003 reform has prolonged the quota regime till 2015. However, international and domestic factors are challenging the European dairy sector. From recent trade talks, one can foresee the reduction of price support measures and the progressive elimination of export subsidies, extensively used in the dairy sector. On the other hand, the EU is substituting price support measures with green box policy instruments. For example, the 2003 Common agricultural policy (CAP) reform introduced a decoupled payment per ton of milk quota to compensate dairy farmers from the cuts in butter and skim milk powder guaranteed prices. In order to evaluate the dairy farmer reactions to these new policy changes, a key issue is to ascertain whether the milk quota rents (i.e. the difference between milk price and marginal cost) are currently positive and what will be their size under these new policy scenarios. In fact, a milk price increase (respectively decrease) will simply increase (respectively decrease) the value of the quota rents, and hence farms profits. As long as the unit quota rent is positive, a change in the milk output price will have no effect on milk supply. But, if milk quota is not binding (i.e. unit quota rent is zero), milk production will respond to changes in its output price. Moreover, in case of quota removal, marginal cost curves represent the 'potential' supply curve under which milk producers will expand / contract their production.

Under the EDIM project, marginal costs and quota rents for the EU-15 Member States have been estimated on the Farm Accountancy Data Network (FADN) data, under two different estimation procedures. The methodology adopted allows to measuring both the size of the marginal cost and the position of each farm on its marginal cost curve, thus providing some crucial insights on the likely impact of policy reforms.

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