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This chapter will give a detailed outline of the price support system itself, as set out in the basic Regulation (EEC) 804/68, and refer to its pre-history and some of the main developments of the policy since its inception.

It took the original Six members of the Community eleven years to achieve a common policy for milk and the other major commodities of cereals and beef. In the milk sector each member state had differing levels of protection for milk producers and different methods of achieving it. In Germany and the Netherlands the liquid milk market and the manufacturing or industrial milk market were separated with elaborate methods of pooling prices between the two to obtain the producer price. In order to establish free trade within their borders the Six had to harmonise support prices and intervention measures, eliminating border taxes and controls between themselves in transitional steps, and establishing a common level of tariffs on imports of dairy products from third countries in matching steps. Export refunds had to be established and harmonised pari passu. The transitional system introduced a mechanism with a set of intra-Community levies on trade to be gradually eliminated in a series of steps as external tariffs and internal intervention measures were harmonised. Agreement in this process was achieved by the gradual alignment of the level of protection afforded by measures in the highest-price country. The predecessor to the current Regulation which the Community adopted to carry this out was Regulation (EEC) 13/64, and the transitional period was completed in the four years from 1964 to 1968.

Regulation (EEC) 804/68 has three major Titles. Title 1 deals with prices and the fixing of the actual level of support (Articles 2-5). Title II deals with the Intervention System (Articles 6-12). Title III deals with Trade with third countries' (Articles 13-21) and Title IV deals with "General Provisions" (Articles 22-37), the establishment of a Management Committee, the rules for authorising producer bodies, such as the UK Milk Marketing Boards, the rules governing aids, etc. The principle policy matters under each Title will be dealt with in turn.

Title I. Articles 2-5 of the Regulation require the fixing by the Council for each milk year of a Target Price for milk (of 3.7 percent butterfat), an intervention price for butter and skimmed milk powder (and intervention prices for Grana Padano and Parmigiano Reggiano cheeses) together with threshold prices for "pilot products", which give the required level of protection for the Community processing industry that will enable the prices of imported milk products to correspond to the Target Price for milk.

The annual fixing of the Target Price determines the overall level of support for milk producers - the "targeted beneficiaries" of the system. The fixing of intervention prices (and, following them, threshold prices) influences the prices of the range of dairy products in the market place according to the amount of fat and solids-not-fat contained in them. In the ten years from 1984/85 to 1994/95 the Community have reduced the ratio of butterfat to solids-not-fat support from around 70: 30 to about 42: 58. This has tended to lower butter prices and cream prices in the market whilst increasing the price of skimmed milk powder. Liquid milk prices can be affected between whole milk and skimmed milk, and small differences can be made in cheese prices according to compositional variations and types. Producer payment systems, which in most countries are geared to paying on the basis of fat and protein composition of milk, are also affected by this ratio which in turn affects feeding and breeding regimes on farms. Finally, the budget cost of support is also affected by the Community's handling of this ratio through the cost of subsidised disposal schemes for butter and skimmed milk powder. In practice, changes in the ratio have been a complex process of balancing the budget cost of support (the skim powder market is expensive to support) against the market need for lower butter prices and the conflicting interests of all parties in the system. (Butterfat, for example, is less difficult for farmers to control in the short term through feeding than protein and solids-not-fat.)

Because of the acute problems of surplus that emerged in the first half of the 1980s and the financial burden thus imposed, the Community introduced a quota system for five years with effect from 2 April 1984 to "re-establish balance in the milk sector" by a method that "despite the administrative difficulties which its implementation may involve (is) the most effective method, and the one having the least drastic effect on the incomes of producers..." (Preamble Regulation (EEC) 856/84.) Each Member State was allotted a "guaranteed total quantity" which was based on deliveries to dairies and direct sales by producers in the calendar year of 1981 with the exceptions of Ireland and Italy, whose total guaranteed quantities were based on the calendar year 1983. Each Member State was required to opt for one of two formulas for distribution of "reference quantities": Formula A and Formula B. Formula A distributed reference quantities directly to individual producers whilst Formula B distributed reference quantities to individual purchasers. The policy was effected by alteration and addition to Article 5 of 804/68.

An additional levy was introduced ('the super-levy') on all sales that exceeded reference quantities in a 12-month period. As the policy developed the system was made tougher and a super-levy of 115 percent of the Target Price became payable on all milk over-quota once allowance was made for producers who under-produce. To produce milk and deliver it above quota puts producers at high risk of effectively paying a fine when the price of the milk paid by the dairy was nothing like 115 percent of the Target Price, and in many cases well below the Target Price. The system was certainly effective in keeping the majority of producers within their quotas. Quotas were reduced in stages in 1987/88 and 1988/89 and were only exceeded for the Community as a whole after the chaos of the first year, marginally in 1990/91. (Details of implementation will be discussed in Ch. VIII.)

Title II (Articles 6-12) lay down the policy of intervention purchases for butter and skimmed powder (and speciality cheeses in Italy). The intervention agency is to be designated by each member state and those agencies shall buy in product offered to them provided it reaches certain standards (e.g., produced by an approved manufacturer, meets standards of keeping quality, be of a minimum fat content and maximum water content). Disposal of product by intervention agencies must take place in ways that "avoid disturbing the balance of the market", e.g., food aid; exports with Community subsidies; sales to non-profit making institutions, or the food processing industry, or for animal feed in the case of skimmed milk powder-markets that can be isolated and separately identified and do not undercut general full-priced sales.

After quotas had been reduced and the Community's massive stockpiles of butter and skimmed powder had fallen, the Council took steps to limit the availability of intervention. In March 1987 Article 6 of 804/68 was modified to enable intervention purchases of butter to be suspended as soon as stocks exceeded 180 000 tonnes. Similarly, intervention buying of skimmed powder was suspended for the winter period (September-February) and only available for the period 1st March to 31st August until stocks reached 106 000 tonnes. If the suspension of intervention buying lowered market prices to 92 percent of the intervention price for butter in "a representative period" in any member state then tenders for purchase by the intervention agency in that member state were to be allowed. The buying-in price to be fixed by tender was not to be less than 90 percent of the intervention price. The aim of modifications to policy in these ways was to bring pressure on marketing agencies to shift milk away from intervention products as demand fell for those products and move it into the manufacture of products (especially cheeses) for which demand was rising. Clearly this policy would save budget cost and also speed up reaction in the industry to changes in market demand when the overall supply of milk was being held down by quotas.

Title III (Articles 13-21) lays down the policy for trading with third countries. Imports into the Community and exports from it of dairy products are controlled by licences. Levies are charged on imports of milk products by licensees. In July 1995, as a result of the GATT Agreement in the Uruguay Round, the levies were converted to tariffs. Dairy products are divided into groups of "pilot products" and the levy (now tariff-equivalent) calculated as the difference between "free-at-frontier" prices for those products and the most favourable price for the product in international trade. Export refunds (now fixed) were similarly calculated for the Community as a whole but also varied according to the destination of the product or its use. In a situation in which world market prices for one or more pilot products rises "substantially above" threshold levels, which then threatens the stability of the Community market, the Council is required to take steps to deal with the matter.

Finally, Title IV of Regulation (EEC) 804/68 provides a "sink" for "General Provisions". A key provision in this section of the Regulation is the establishment of a Management Committee and the rules for running it. Article 29 of the Regulation establishes the Committee and requires it to consist of the representatives of member states and to be presided over by a representative of the Commission. Voting is by qualified majority, weighted as in Article 148 of the Treaty of Rome. The Commission shall submit draft measures to the Committee which is required to adopt an opinion by a minimum of 62 votes cast under qualified majority voting rules. The opinion has to be adopted within a time limit determined by the Commission according to the urgency of the matter in hand. The Commission may then adopt measures (e.g., issue Regulations, Directives, opinions) if there is a majority opinion in the Management Committee or on its own authority if the Committee has not adopted an opinion in the time period set.

Amongst the miscellaneous provisions of the final Title are the conditions which a member state must fulfil in order that a producer organisation with "exclusive rights of purchase in an area" may be established. As this applied only to the United Kingdom and was intended to legalise the Milk Marketing Boards, it will be dealt with later in discussion of the implementation of the Community policy in the UK.

The above paragraphs in this section are intended to provide an outline of the policy and something of the history of its development. The policy itself is immensely detailed and controls the whole system of milk production and marketing in all its aspects from the farm to the consumer. A necessary part of the creation of a single market for milk, which took the community many years (until 1992), was the adoption of common Health and Hygiene Directives which lay down common sanitary standards in the production and handling of milk and milk products at all stages. Without common standards in this area the creation of a single market with the same rules for competitive operations throughout is impossible. Whereas harmonising price support by raising it to the level of the highest presented a route to agreement, harmonising sanitary standards to either the highest or the lowest presented quite different problems. In general common health and hygiene standards on farms and in dairies have been agreed at or near levels of the highest, but the time period necessary was very long and it was achieved in a period when there was in any case great pressure in the Community to reduce support prices.

Chart 2: Summary of regulation (EEC) 804/68 on the common organisation of the market in milk and milk products

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