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The United Kingdom
The Netherlands

So far, this study has focused attention on the implementation of the general model of support in the EU milk sector, i.e., the model of Chart 2 in which the milk price to farmers is under-pinned within Community borders by support buying of butter and skimmed powder and externally by a system of variable levies and export refunds (now "tariffised"). The budget cost and market imbalance consequent upon this system in an enlarged community has had to be limited since 1984 by the implementation of quotas. The different attitudes of the bureaucracies of member states to quotas have given rise to much variation. This chapter considers three countries in more detail: in two, Italy and the UK, variations in the "model" have been politically necessary to cope with the fact that the policy delivery system (PDS), particularly at the third tier in Chart 3, is different from the rest of the EU and is influenced by the unique market structures in those countries; in the third, the Netherlands, the PDS is affected by the broad historic orientation of both farming and the government towards trade.


(a) Market Structure

Very little milk in Italy is used for butter making and Italy has never made significant quantities of skim powder. The largest usage of both whole and skimmed milk in Italy is for cheese making. Italy is a milk-deficit country overall, consuming more milk and milk products than it produces. In terms of total butterfat, Italy has an overall self-sufficiency coefficient of 71 percent, and in terms of solids-not-fat, of 67 percent in 1993, these ratios not having shifted much over the years. This means that Italy is one of the largest milk-deficit areas in the Community. Of the intra-Community trade in liquid milk, more than half is accounted for by Italian imports (EC Dairy Facts and Figures 1994 Table 90 p.146). With a major part of this coming from Bavaria, Italy is a significant market for German milk producers. Italian imports of cheese (the majority from other EU countries) are also very substantial at around 290 000 tonnes in 1995, a level that is exceeded only by German imports from other EU states.

The cheese industry in Italy is unique. More than half of the available milk supply (including imports) is manufactured into cheese. Excluding milk imports, more than 60 percent of indigenously produced milk delivered to dairies is used for cheese making. The significance of this figure lies in the fact that 80 percent of cheese manufacture is of varieties that are exclusive to the localities from which they come and that cannot therefore be made outside those areas. This applies, for example, to the two largest varieties, Grana Padano and Parmigiano Reggiano. These two cheeses utilised 39 percent of manufacturing milk in 1995. Italy has at least a dozen other varieties of cheese that are exclusive to their areas of origin.

In Community terms, the Italian dairy industry with its annual production of around 9 ½ million tonnes is less than half the size of the French or German, comparable to the Dutch (around 10 ½ million tonnes), and smaller than the British (which is about 14 million tonnes). The Italian industry is, however, very much concentrated in the northern provinces of Lombardy, Piedmont, Veneto and Emilia Romagna which account for over 70 percent of Italian cows' milk output and two-thirds of the cow population. Yield per cow in Italy at 4 840 kg in 1993 is somewhat below the EU average of 5 147 kg, but above the levels of other Mediterranean countries. Yields are rising, as in all member states, as dairy cow numbers decline. The main Italian cheeses of Grana Padano and Parmigiano Reggiano are made in regions within the main milk-producing provinces. The Italian dairy industry is thinly spread in the rest of the country with very small cow herds, a high level of direct farm sales and very small processing units.

Italian cheese consumption is one of the highest in the EU (20.1 kg per head in 1993), second only to France (22.8 kg per head in 1993) and growing. Consumption of liquid milk (75 kg per head in 1993) is below the EU average (84 kg per head), and is tending to fall slowly, as it is in other EU countries. About half of Italian liquid milk consumption is of UHT milk (a growing proportion) and more than 40 percent is semi-skimmed. Butter consumption in Italy is very low relative to the rest of the EU.

From the point of view of implementing Community policies, Italy has a difficult processing industry structure because it is extremely fragmented. In the Commission Report by Dr J Gay on the "Structure of the Dairy Industry in the European Community", Italy is shown to have 2 430 dairy "enterprises" in 1991 compared with 296 in Germany and 966 in France. More than half of the milk deliveries are to enterprises handling less than 20 000 tonnes of milk in a year, a much higher proportion than in other countries with a major dairy industry. Fragmentation is particularly evident in Dr Gay's survey in the Italian cheese industry, with almost 70 percent of Italian cheese output being produced by enterprises producing less than 4 000 tonnes a year. In almost all other member states, over 70 percent of cheese production is in enterprises producing more than 4 000 tonnes annually. The liquid milk and fresh products enterprises in the 1991 survey are also shown to be relatively small, although there are fewer of them (327) and a larger proportion of output is in the hands of larger enterprises than is the case for cheese. It is fair to say that the structure of the cheese industry in particular and the large (though rapidly declining) element of direct farm sales make the job of establishing the accurate statistics throughout the system that policy implementation relies on especially difficult for the Italian authorities.

The supplies and disappearance pattern of the Italian cheese market is also important in understanding the implementation of Community policy as it has features that differ from cheese markets elsewhere. Table 6 gives the supplies and disappearance for 1993.

Stock levels tend to be high in relation to production not because of surplus but because much Italian cheese is of hard varieties that are very long maturing. Ripening is therefore an important element in the production process and also in production costs. Both imports and exports of cheese are high and have grown substantially since the establishment of the common market in the milk sector. Imports in 1970 amounted to 93000 tonnes, compared with 292 000 tonnes in 1995. Exports in 1970 were 23 000 tonnes and 121 000 tonnes in 1995.

Table 6 Italian Cheese Supplies and Disappearance 1993

'000 tonnes

Opening stock








Closing stock



1 061


79 percent

(b) Conduct of Price Support

With Italy's unique market and milk utilisation structure, the Community's policy of support for the butter and skimmed powder markets did not have great relevance when the system was designed in the 1960s. Prior to 1968 the Italian dairy industry had received some support through the liquid market. Municipal dairies were given exclusive rights of sale within regions and provinces at politically controlled prices. In the establishment of Regulation (EEC) 804/68 the Community abolished all local liquid milk market support arrangements of this type (which also existed in Germany -Article 22.2) in favour of a common system. The difficulty in Italy was its market structure.

In order to free the liquid market the Community decided to cover the principal Italian cheeses of Grana Padano and Parmigiano Reggiano by support price arrangements (804/68 Article 8) as the best means of providing general support for the milk price to producers throughout Italy and fulfilling the general aim of 804/68 of ensuring that producers to the south of the Alps had the same chance of obtaining the Target Price on "the aggregate of milk sales". Accordingly, the Council of Ministers has fixed intervention prices each year for Grana Padano both at 30-60 days and at 6 months, and for Parmigiano Reggiano at 6 months, at the same times as fixing a Target Price for all milk and intervention prices for butter and skimmed powder.

Details of conversion factors (milk to products) and processing margins used by the Commission (along the lines of Table 2 for butter and skimmed powder in Chapter VIII) are not available for Grana Padano cheese. The intervention price for Grana Padano at 30-60 days has been fixed in recent years at between 757 and 869 ECU per 100 kg, well above the intervention prices for butter and skimmed milk powder. Intervention prices for Grana Padano and Parmigiano Reggiano at six months are both considerably higher (an additional 91 ECUs per 100 kg for Grana Padano and almost 140 ECUs per 100 kg for Parmigiano Reggiano). These amounts would presumably allow for shrinkages during ripening and other storage costs, and the size of the differences in support prices at one or two months and six months indicates that these are very important elements of cost.

In practice there has been very little use of intervention for Italian cheese because market prices have usually been well above intervention levels. The industry has, however, had the benefit of Private Storage Aid (PSA), known in Italy as a "ripening subsidy", paid on Grana Padano and Parmigiano Reggiano cheeses and in more recent years also on Provolone and Pecorino Romano cheeses. For Grana Padano a daily rate applies for cheese of at least nine months old put into store for between 90 and 180 days. For Parmigiano Reggiano a daily rate also applies, but the cheese must be at least 15 months old and stored for 90 to 365 days (Council Regulation (EEC) 972/68). Since 1991/92 the Commission has reduced the daily rates from 2.91 and 3.09 ECU per tonne for Grana Padano and Parmigiano Reggiano respectively to 1.45 and 1.55 ECU per tonne currently. As this is a relatively important part of Community budgetary expenditure for the milk sector in Italy, it has probably contributed to a reduction of producer prices in ECU terms from 1993 compared with earlier years.

Exports of cheese, as have been shown, are of importance to the cheese industry in Italy. Just over one-third of exports go outside the Community and the rest to other Community countries. These figures may be affected by the fact that exports to other Community countries are sometimes for export outside the EU when the export refunds in those countries are paid more quickly than in Italy. Either way, export refunds and cheese prices in other parts of the EU are important to Italy, and the general milk price is to dairy farmers.

In July 1994 the Council of Ministers decided to abolish the intervention system for Italian cheeses but to continue efforts to stabilise the market through Private Storage Aid for such cheeses (Council Regulation (EC) 1880/94). Quota controls on milk output will limit to some extent the production of most cheeses, and market prices are high because of strong demand. The need for intervention has therefore virtually lapsed. The Italian government has over the years allowed the weakness of the Lira to be felt in the green ECU/Lira exchange rate, even before the new monetary arrangements in January 1995. This has tended to increase product prices in Italy even when Community institutional prices have been stable or reduced. The attitude of the Italian authorities on this matter reflects the country's very large milk deficit: there is every point in discouraging demand and encouraging local milk supply by passing on to both consumers of milk products and producers of milk the Community's institutional prices through a reduction in green rates as market exchange rates weaken.

Italy has had by far the highest producer prices in the Community as a result of the unique circumstances described. As a rough guide, if 4 percent is added to the ex farm price for 3.7 percent fat milk shown in the Eurostat tables, it will approximate to a delivered dairy price and can be taken as a percentage of the Target Price. (Co-responsibility levy would make little difference in Italy as the vast majority of small farms were exempt.) In the early 1990s (and before) the Italian price was around 130 percent of the Target Price, about 20 percent more than the Danish price, which is the next highest, and almost 40 percent above the Irish. In 1993 the Italian price in ECU terms fell and again in 1995. It has been affected by the reduction in PSAs (Private Storage Aids) in 1992, the abolition of the special intervention system for Italian cheeses in July 1994, and the realignment of intervention prices and the value of the ECU in all currencies at the beginning of 1995. Despite all this, the devaluations of the Lira against the ECU in each year between 1993 and 1996 have been such that the Italian producer price in national currency has increased each year.

Table 7 Producer Milk Prices in Italy 3.7 percent Fat. Ex Farm







Lire per 100kg







ECU per 100kg







(c) Conduct of Quota Policy

Italy did not apply reference quantities at the beginning of the quota policy in 1984/85 as required by the general rules Regulation (EEC) 857/84. After an exchange of correspondence between the Italian government and the Commission in 1984 and early 1985, the Commission issued a reasoned opinion under Article 169 in March 1985 and the matter was submitted to the Court in December 1985. The Court judgement (Case 394/85 - Report of cases before the Court pp 2741-2754) issued in June 1987 argued that failure to comply with obligations under Community law could not be justified by circumstances in a member state. While deliveries to dairies appeared not to exceed deliveries quota and direct sales were falling during the first four years of the policy, the Court argued that meeting objectives by alternative means could not justify non-compliance, and found in favour of the Commission. Subsequently, quota cuts (in 1987/88 and 1988/89) applied to Italy, as elsewhere, meant that Italian deliveries to dairies did exceed deliveries quota in 1988/89. The Italian authorities, however, were still unable to distribute individual reference quantities to producers to ensure that the additional levy was collected from those who exceeded their quotas. The monies due nationally were paid by reduction in the clearance system from payments due for export refunds and storage subsidies through EIMA (the Italian intervention agency) and the Finance Department. By 1992 (eight years after the EU had instituted the policy) the Italian authorities had still not distributed individual reference quantities to producers although the legal framework for doing so had been created by December of that year. This framework required UNALAT (the association of producer groups representing the majority of milk producers) to collect the levies from producers and manage quotas, but no individual reference quantities had been fixed by the organisation. An assessment of the situation in 1991 had shown that Italy appeared to be in excess of its national guaranteed quantity by million tonnes and the budget cost of this had soared.

The Italian authorities argued that the very large excess quantity that appeared to be being produced by 1991 and 1992 was not due to an increasing gap between demand and supply since the beginning of the quota policy, but to the weakness of their national statistics which had seriously understated the national quota to which Italy would have been entitled in the beginning. By 1992, it was impossible to impose a national quota for distribution that was as defective as it appeared without considerable destructive effect, particularly as the industry had undergone considerable structural change in the previous eight years.

In December 1992 the Council of Ministers agreed to consider an increase in the total guaranteed quantity for Italy in order to permit the system to operate quickly with effect from 1st April 1993. The Italian law of December 1992 had created the framework for establishing individual quotas. Producers belonging to producer groups would be treated slightly differently from producers who did not. The former were given quota in two parts, A and B. The A Quota was to correspond with sales in 1988/89 and the B Quota was to correspond with the amount by which quantities marketed in 1991/92 exceeded those in 1988/89. Non-members of producer groups may have quota allocated to them according to quantities marketed in 1988/89, which must not exceed quantities marketed in either 1990/91 or 1991/92. Reference quantities were allocated subject to a decision of the Council regarding Italy's guaranteed total quantity. National measures were to be introduced through EIMA to buy up quota through a voluntary discontinuation programme to find part of the milk required for B quotas. For non-members of groups, purchasers were required to draw up lists with declarations of the quotas of their individual suppliers based on 1988/89 if these were not in excess of either 1990/91 or 1991/92.

The Council of Ministers in July 1994 agreed an increase in the national guaranteed quantity allocated to Italy for 1993/94 of 0.9 million tonnes, subject to proper implementation of the quota scheme. The figure of 0.9 million tonnes included a reserve of 347 701 tonnes for allocation to the many producers who would have been entitled to reference quantities in the base period, but had subsequently given up production and then taken proceedings against the Italian government and obtained judgement in their favour. Such cases were to be agreed with the Commission for reserve allocation (Regulation No., 1883/94 Article 1). Implementation was to provide an independent framework for maintaining the system, which would establish individual reference quantities to include individual references for butterfat, and set up a central agency to verify production records and collect levies from producers. From the 1995/96 marketing year the total sum of individual reference quantities has to correspond to the national guaranteed quantity set by the Council for Italy.

There were further delays in the settlement of individual quotas for producers in Italy, principally because of the very large numbers of appeals against allocations. With the agreement of the Council, the administrative procedure for dealing with appeals was vetted by the departments of the Commission. Out of 110415 producers to whom quota was allocated, there were 40 843 appeals, of which 24 030 were found to have reasonable prima facie justification. Some producers obtained judgements in their favour through legal proceedings in cases where grant-aided expansion plans were in progress and quota allocation inadequate.

Quotas for direct sales were allocated on the same basis as deliveries quota. Italy has agreed a large number of requests for transfer from direct sales quota to deliveries quota, as allowed under the Community rules. The Commission accordingly authorised the adjustment of national quotas in March 1995 by transference of 420 000 tonnes form direct to deliveries quota.

The allocation of individual reference quantities at the end of March 1995 to 110415 producers was as follows:

A Quota

B Quota


National Quota

000 tonnes



1 084



Direct Sales







1 109



Note: The above is taken from Commission document COM (95) 147 final which has also been used in the description of this section.

Deliveries and direct sales in 1993/94 and 1994/95 fell below the national quota figures so in these years there was no application of the additional levy. Italy exceeded its national guaranteed quantity for the first time with the system in full operation in 1995/96. Some 15 000 producers are in a levy-paying situation and by mid-1997 around 8 000 producers are said to have paid, leaving 7 000 who are refusing, with civil disturbances reported in the media.

The United Kingdom

(a) Market Structure

The UK's unique market and dairy industry structure results from a history that was quite unlike anything elsewhere in the Community at the time of Accession in 1973. In the early 1970s more than 60 percent of the UK's relatively large milk output from farms was used for the liquid market, with the product sold to consumers "as from the cow" (i.e., with natural fat content and "unstandardised"), very little sale of skim as drinking milk, and no sales of reduced-fat milks. A high proportion of the UK's substantial requirements of dairy products was imported, especially butter (90 percent) and cheese. These imports were particularly important in the very narrow "world market", especially to New Zealand, with whom the UK had a special understanding regarding milk policy, but also to Ireland, Denmark, Australia and other countries. The record of understanding on milk policy between the UK and New Zealand governments in the 1960s could be regarded as New Zealand's contracted right to supply the British market. For a very long period, imports of dairy products were allowed freely into the UK and prices to consumers were consequently low. In response to requests from New Zealand and Denmark as traditional suppliers, and complaints by them against "dumping" on the butter market, the UK government introduced limited control on imports in 1962 but not such as to raise prices substantially. Trade in liquid milk was impossible by virtue of sanitary regulations requiring all premises used for pasteurising and packaging liquid milk for sale to UK consumers to be licensed by a local authority who was responsible for hygiene standards. Double pasteurisation was not permitted, and drinking milk had to be pasteurised and packaged (mostly in bottles) in the same premises. Foreign supplies were therefore excluded from the UK liquid market either as bulk milk or packaged milk. While dairy product prices to consumers were low, prices of liquid milk tended to be higher even though they were politically controlled and subsidised for long periods after World War II and before entry into the then EEC in 1973.

Consumption of liquid milk and butter were both high by international standards and the markets were therefore large. Apart from controlling the retail liquid price the government also subsidised the market through a welfare scheme for expectant mothers and children under five years (one pint a day at half price) and a school milk scheme for all school children.

The structure of the dairy industry itself in the UK differed from that of continental Europe in so far as it was dominated by large private and public companies with scarcely any farmer-co-operative enterprises except in Northern Ireland (although consumer co-operatives were strong). The large dairy companies and consumer co-operatives were nearly all involved in a doorstep delivery service for bottled milk, usually by running their own rounds services, and in some parts of the country also selling bottled milk to "bottled milk buyers", who ran small private delivery businesses but were not large enough to run capital-intensive pasteurising and bottling plants efficiently. Sales of milk through shops was very small.

Dairy product manufacture in the UK was a relatively small industry. Large companies made a complete range of dairy products in addition to distributing liquid milk. Priority of manufacture would usually be given to cream when there was a range of products, then cheese, mainly cheddar but also a range of hard, pressed "territorial" varieties. Butter manufacture was very much a residual usage of milk. With the bulk of milk all the year round going to the liquid market, dairy product manufacture tended to be seasonal and fluctuating. As a result it has a history of being relatively high cost, which, together with very low market prices, meant that milk prices to producers for the main products of butter and cheese were very low.

Following the great depression of 1929 and the early 1930s, the UK government enacted the Agriculture Marketing Acts of 1931 and 1932. These Acts enabled farmers' representatives to establish statutory approved Milk Marketing Schemes to constitute Milk Boards that would have the exclusive right to market all milk produced in an area, provided the Scheme received the approval at a poll of a two-thirds majority of all producers in the area producing at least two-thirds of the milk. Five Boards were established in the UK under this legislation, one for England and Wales (in 1933), three in Scotland (one main Board plus two independent small ones for Aberdeen and District and the North of Scotland in 1934) and one for Northern Ireland (in 1955). Detailed histories of the activities of the Boards from different perspectives can be found in Baker [1973], Strauss [1972] and Empson [1996].

The most essential features of the Milk Marketing Boards in the UK were that they controlled all milk sold off farms in their areas; they negotiated terms of sale of all milk to buyers in their areas; and the prices at which they sold milk to the dairy trade varied according to the usage of the milk by the company. The highest price was charged for liquid milk, with a range of prices for manufactured products varying from cream at the top to butter and skim powder at the bottom. The receipts from all sales were "pooled" with the average pooled price being paid to farmers. Thus the Milk Marketing Boards were non-governmental, farmer-owned and farmer-controlled, but derived their power and authority from Parliamentary statute. Their constitutions and rules of governance in the form of the Milk Marketing Schemes had to be approved by Parliament. Throughout most of their history the UK government maintained close control over key prices in the system, including liquid wholesale selling prices of the Boards and the retail price by the dairy trade from the beginning of World War II. Farmers were given a guaranteed price which was limited after 1954 to a "standard quantity" loosely related to liquid sales. Trade margins were controlled by elaborate costings systems, and the guaranteed price was related to income objectives for agriculture as a whole through negotiations between the government and the National Farmers' Union. The system was elaborate but completely dependent on the Boards as the policy delivery agents.

(b) Implementation of Community Price Policy

The implementation of the Community's price policy for milk clearly presented difficulties in the UK given the very low prices of dairy products, the position of New Zealand in the butter market, and the position of the Milk Marketing Boards which appeared to run counter to the whole thinking behind Regulation (EEC) 804/68.

The Treaty of Accession provided for the free movement of goods in the enlarged Community from the date of accession (1st January 1973) and established formulae for the gradual alignment of prices over a transitional period of five years. Free movement was to be achieved by "accession compensatory amounts" on products imported into the UK from other member states. These were subsidies to importers (and taxes on exporters) to bridge the gap between prices in the UK and the rest of the Community which would be reduced in steps as intervention prices in the UK were aligned to full Community levels in January 1978. At the same time, the guaranteed price in the UK was raised each year by the milk equivalent of the alignment of intervention prices, and the system was phased out by the beginning of 1978.

New Zealand was dealt with by means of Protocol 18 attached to the Treaty. Maximum quantities of butter and cheese were allowed in under this Protocol for each of the calendar years 1973 to 1977. Special levies were to be applied to these imports into the UK and the products allowed in were not to become the subject of intra-Community trade or of re-export to third countries. The sales of the New Zealand butter and cheese were therefore confined to the UK market and not part of the Community market as a whole. The agreement in Protocol 18 was extended for New Zealand in 1978, 1981, 1984, 1989 and 1992, the size of the quota being reduced on each occasion with concessions on the size of the levy for reduced quantities. (Details of quantities can be found in EC Dairy Facts and Figures, 1994 Edition pp 143-144.)

The sharp rise in butter prices in the UK resulting from Community membership has greatly reduced the size of the market from 500 000 tonnes in 1973 to around 180000 tonnes now. At the height of the Community's butter mountain problem in the mid-1980s, butter stocks in the UK exceeded 320000 tonnes, almost 15 months' consumption. Two publications of the Milk Marketing Board ([1977] and [1987]) give a detailed account of the development of the market, and the operation and cost of the Community's support and stock disposal programmes. At the same time, UK milk output was stimulated by the relaxation of the UK government's deliberate policy of restraint on milk production in the 1950s and 1960s, and dairy farmers' expectations of their business prospects within the EC. With liquid sales falling slightly, butter production in the UK increased to over 200 000 tonnes by the mid-1980s which, together with New Zealand quota (which had been cut to 78 000 tonnes by 1985), meant that total available supply of butter in the UK was much greater than consumption. This market situation was undoubtedly a major factor leading to the quota policy, and also to the UK government's support for it. The most difficult problem for the Community at the start of UK membership was the Milk Marketing Boards. As we have seen, UK policy had supported the farm price (although at a low level) through political control of the liquid market with the Boards as the principal agents in the policy delivery system. Such support systems had been specifically legislated out of existence by the Community in Italy, Germany and the Netherlands as part of 804/68. The problem in the UK was different, essentially because it was on an altogether different scale, and it was important that the UK liquid market should not be damaged. It was regarded as very complex in the negotiations for British entry to the Community with the result that the matter was shelved by a Declaration of Understanding attached to the Treaty of Accession by both sides. Clearly these declarations were not intended to have legal force, and left the problem unsolved. (Treaty concerning the Accession ... (1972) pp 122-124.)

Fearing that leaving the matter unresolved after the end of the transitional period might lead to a challenge to the Boards in the European Court, the Commission produced draft proposals for legislation at the end of 1977 amending Regulation 804/68 to accommodate the special position of the UK Boards and "laying down general rules" for their operation to bring them specifically within the Community framework, albeit an altered one. The matter was hard fought in the Council and in the discussions surrounding it, with some member states who hoped for an improved market situation for their exports to the UK striving to reduce any advantage they thought the Boards gave to UK milk producers.

In June 1978 the Council adopted Regulation (EEC) 1421/78 which legalised the Boards' exclusive right to purchase milk within an area and the right to "equalise the prices paid to producers" subject to certain conditions. The main conditions were:

1) that such bodies may be authorised if they represent at least 80 percent of producers who produce at least 50 percent of the milk in their area;

2) that in the member state concerned the proportion of milk used for direct human consumption when compared to the total quantity used in all forms was at least 150 percent of the same proportion averaged over the Community as a whole;

3) per capita consumption of milk for direct consumption had to be greater than the Community average;

4) the producer organisations themselves had to operate within the rules to be laid down which would ensure that the principles of the Treaty regarding free movement of goods were maintained, that competition was not affected "more than is absolutely necessary" and that intervention arrangements were not interfered with.

These were tough conditions to be written into the general rules, but, as a Regulation changing 804/68, Regulation (EEC) 1421/78 presents in its Preamble another shift by the Council in the conduct of policy for the milk sector. The Council state in the Preamble that there are "other mechanisms for attaining" the objectives of Article 39 of the founding Treaty which for "reason of the high cost to the Community of the... intervention system... appear (s) appropriate...". There can be no doubt that this statement in June 1978 represented a big modification in thinking about policy, particularly when considered against the fact that the original version of 804/68 specifically legislated against policies in other member states that were now being provided for the United Kingdom. It was the first legislation to specify "the high cost... of the intervention system..."

The negotiation of the general rules and conditions which became Council Regulation (EEC) 1422/78 and the detailed rules Commission Regulation (EEC) 1565/79, was undoubtedly a messy political process. Many groups with an interest beat a path to the Commission's open door: several succeeded in their mission and enforced changes in the operation of the

Milk Marketing Boards that weakened them and led to their eventual demise in 1994. Since the story has already been told by the present author in previous publications (Williams [1986] and Williams [1993]), suffice it to say here that Regulation 1422/78 exacerbated the difficulties of contracting to sell milk between the Boards and the dairy trade to the point where it became almost impossible within the legislative framework provided, and a fresh start became necessary. The fresh start meant in fact sweeping away a number of the accumulated rights that the dairy trade in particular had succeeded in establishing in the old system to the detriment of the main intended beneficiaries of the Community's support system.

The Milk Marketing Schemes in the UK were revoked by government legislation in 1993, and the Boards were invited to put forward a scheme of re-organisation for approval by the Minister that took "account of the interests of the purchasers of milk". Once again this was legislation under duress. The UK government and the Boards were fighting cases in the European Court that if lost "would force change" upon the industry, according to the then Minister of Agriculture, Mr John Gummer, "not in an orderly way but by damaging and random impact" (quoted in Williams [1993]). The Boards responded with schemes to turn themselves into voluntary co-operatives. However, in order to take account of the interests of the dairy trade, as required by legislation, the government insisted that the main Boards should divest themselves of their commercial businesses and form co-operatives selling only farmers' raw milk. The Board in England and Wales ran the National Milk Records service and large breeding, veterinary and advisory services which the government ordered it to set up as separate businesses. The England and Wales Board's commercial enterprise, Dairy Crest, was the largest dairy company in the country and has now become a public company listed on the Stock Exchange. All dairy farmers were given shares in the public company according to their sales to the Board in its final year, 1992/93, but to raise further equity and repay the revolving fund used to finance the business, one-third of its shares were sold to institutional investors prior to flotation. The farmers therefore lost once again the opportunity of forming a system that would parallel that of continental Europe through the establishment of a large, producer-controlled, all-through marketing co-operative.

Milk Marque was successfully launched, and two-thirds of deliveries to dairies in England and Wales are sold through this organisation. But private companies are constantly seeking to persuade producers to contract directly with them for the promise of a contract based on "Milk Marque plus" price terms. Clearly such a system is not stable and would be put under strain in the event of the Community disbanding or substantially relaxing its quota controls on production after the year 2000. It is a question for serious consideration whether the whole Community system of support would not be undermined after the year 2000 if quota controls are lifted and there is no farmer stakeholding in the market system in the UK.

The marketing system in the UK has not at any time since accession delivered a particularly favourable price to British producers vis-a-vis other member states, and the reasons for this in the Board era have been the subject of debate (see Pitts, Haines and Jenkins [1987] and Williams [1987]). Indeed, notwithstanding the Community's support arrangements, particularly since the mid-1980s returns to the England and Wales Board for manufactured milk were as low as 74 percent of the Target Price (Williams [1993] and Milk Marketing Board [1992]). The overall returns to producers in the 'New World' of 1995 and 1996 have shown some improvement, but it has been small and has still left prices to producers in the UK at a similar level to Ireland and well below Denmark, Germany, the Netherlands and France, despite the favourable price of liquid milk.

Community expenditure for the conduct of support arrangements in the milk sector in the UK is not amongst the highest relative to the level of milk deliveries to dairies (see Table 5). In the case of the UK, however, even more than of Italy, this may be very misleading. With half the UK's deliveries to dairies going to the liquid market, the Community's expenditure goes on the half that is manufactured, on export refunds, and aided support for butter, particularly Private Storage Aid. The major part of UK exports, particularly of butter but also of cheese, go to other Community countries and much of this is probably re-exported thereby enhancing export refund costs from those member states. The heavy costs of support for manufactured dairy products and the inefficiency of the processing industry in the UK became disguised in the Community budget and partially disguised also in the average price paid to producers through high returns from the liquid market. Neither the 'New World'/post-Board marketing structure nor competition policy at UK or EC level seems to have made much impression on this situation.

Whilst it is not proposed to enter into the details of contracting to sell milk by the new predominant organisation 'Milk Marque' (these are discussed in Williams [1993] and set out in detail in Milk Marque [1993]), it can be noted that the UK situation illustrates the considerable difficulties there are in contracting to sell raw milk from farms. The system in place has already given rise to considerable controversy (see House of Commons Agriculture Committee, Session 1995-96 pp xliii-lxiv). Milk Marque contracts are based on "service" as the main area of variability and market value in UK circumstances. However, milk is sold by Milk Marque (as it was by the Milk Marketing Boards) entirely by volume even though payments to farmers vary according to butterfat and protein levels, total cell counts and somatic cell counts. So the system encourages high quality in these respects from farmers, but does not attempt to reflect it closely in the market returns from individual buyers. It is fair to say that, while the present system is controversial, the "transaction cost" and the contracting difficulties of a system that took account of all the elements of variability with a market value would be even more difficult and controversial. Nevertheless, the system of selling through a co-operative based on service contracts, although sanctioned within EC law, is not primarily based on the main pillars of the support system for butterfat and solids-not-fat in the Community. All the evidence is that the constituents of milk have low value, and are therefore not handled efficiently by the processing industry in the UK. Moreover, the service basis of Milk Marque's contracting to sell milk has, since its inception, come under increasing strain and is weakened the more milk has to be sold on "spot" contract terms.

(c) The Conduct of Quota Policy

The United Kingdom implemented the Community's quota policy (as has already been discussed in Ch. VIII Section B) in a fairly orthodox way. Details and analysis of effects have appeared in a number of publications and it is not proposed to provide much further detail here. (See for example MMB [1989] and Ch. 3, 4, 7 and 8 in Alison Burrell Ed. [1989].) The preferred political choice for solving the surplus problem by the UK government and even some sections of the farming community would have been to reduce the support price rather than implement a quota system. But it was accepted from the beginning of discussions that this was not an option, and the UK government were fully prepared to ensure that, once agreed, a quota system would be applied vigorously. The immediate announcement of a base of "1983 calendar year wholesale deliveries minus 9 percent" was a tremendous shock to dairy farmers. The Community base of 1981 had been a very poor year for British dairy farmers with the west of England (the main milk producing area) hit by a freak snow storm in April 1981. Although 1983 was chosen for structural reasons to allocate individual reference quantities, the cut-back had to be particularly harsh because of the special circumstances that applied to 1981.

It is not surprising, therefore, that the number of appeals in the UK for special treatment was high. Some 23 000 producers in England and Wales applied for additional quota as "special cases", which amounted to almost 60 percent of the 3 8 900 producers registered with the England and Wales Board at the time. British priority in the debate about quotas was not concern for its farming interest, but to ensure that the policy was put in place brought budget spending on the CAP under control. With milk at the time being the largest item, and Britain a net contributor, controlling budget expenditure, which milk quotas would certainly do, was considered paramount for ensuring that a larger share of the Community budget went on non-agricultural spending. If obtaining agreement of the French government to a quota policy meant giving way on the base period, then so be it. (UK aims regarding overall Community budget policy are discussed in Margaret Thatcher [1993 p.62].)

The UK government quickly introduced in May 1984 an "outgoers' scheme" under Article 4 of Regulations 857/84. It offered 13p per litre, payable in equal instalments over 5 years, to small producers (initially those with less than 200 000 litres) to give up milk production for at least as long as a quota scheme or any successor scheme lasted. Expenditure on the scheme was limited and less generous than schemes introduced in other Community countries which bought a larger share of national quota for redistribution. (Details are tabulated across countries in International Dairy Federation Bulletin No. 245 (1989) Table 2 p.20.) With only a small initial allocation of quotas released in the UK by the initial outgoers' scheme, and so part of the applications for treatment as special cases either denied or scaled down, the rapid development of a market in quotas is not surprising. The price of quota quickly increased, and reached more than twice the milk price especially after the Community cuts in quota in 1986 and 1987.

Large numbers of producers had difficulty in the early years in keeping their milk output within 5 percent over or under quota [MMB 1989]. After a sizeable under-shoot of national quota in the first year, each subsequent year has resulted in a small super-levy payment until 1994/95 and 1995/96. By the third year of the policy (1986/87), the UK had a leasing scheme in operation that gradually gained in usage. In the first year of operation, 195 million litres in England and Wales (1.5 percent of total deliveries quota) was leased. This figure grew to 880 million litres or 7.9 percent of deliveries quota in 1993/94. Through the Milk Boards, the UK also had a good information system almost ready made, and did not have to set up a purpose-built one as did the Danes (see Ch. VIII).

In April 1994 the Intervention Board took over the management of quotas. With the demise of the Milk Boards and the UK using Formula B, dairy farmers found themselves facing 80 or so registered quota holders. The fine tuning of "over and unders" that had been possible with the Milk Boards because all dairy farmers received information about their own exact position as well as accurate estimates of the national position with their monthly milk cheque, supplemented by weekly information conveyed through the press and on-line computer systems, suddenly changed. It became much more difficult to obtain a complete and accurate picture. In 1994/95 and in 1995/96 the UK made record super-levy payments to the Community of over £44 million in both years, representing a substantial loss to dairy farmers, and the country, because the information that the Milk Boards had made freely available at minimal cost was no longer provided.

Leasing schemes have continued and the amount of quota leased rose from 880 million litres in 1993/94 to 1 040 million litres in 1994/95 and 1 143 million litres in 1995/96, according to the Intervention Board's figures. Producers leaving the industry are allowed under the rules to lease their quotas to other producers, regardless of the dairies being supplied. No data are available on the short-term movement of quota between different parts of the country.

Finally there is the problem of long-term transfers of quota. The restrictions imposed in the UK on long-term transfers of quota with land have been less than anywhere else in the Community. In consequence, since the introduction of quotas producer numbers have continued to go down and those that remain in production have been getting larger. The system of selling quota runs through specialist agents and land agents, advertising in the farming press and offering a complete service of negotiation and arrangement of transactions. Each year long-term transfers have been at a level of between one-third and one-half of the amount of quota leased. In 1994/95, for example, 562 million litres were sold compared with 1 038 million litres leased; in 1995/96, the figures were 600 million litres and 1 143 million litres. Leasing can sometimes be a half-way house for producers who are running down in preparation for leaving milk production.

Quota prices and leasing prices are variable and in some years volatile. Generally sale prices for long-term transfer have been increasing over the years. In 1984/85 prices of around 10p per litre were common; by 1986 this advanced to 12-14p per litre and by spring 1987 it reached 30p per litre. In the last few years prices have been as high as 70-80p in February/March to drop back again to 45-50p per litre in April/May. Leasing prices in most years have been in a range of 5-7p per litre. In the last year or so once again prices have fluctuated wildly but are probably averaging around 12p per litre.

Sales of quota and leasing are privately run schemes, but regulated. Until 1994 the information system was privately run by the Milk Boards and, on the evidence, well done. Since April 1994 the job has been taken into the public sector and run by civil servants; it is clear that large sums of money have been wasted. With a British government ideologically committed to the privatisation of the implementation of services that had been publicly provided, the taking back into the public domain of an essential servicing element in the system, with disastrous consequences, is a strange reversal of direction.

The Netherlands

(a) Market Structure

The most distinguishing feature of the market structure of the Dutch dairy economy is that it is export and trade orientated. The butterfat self-sufficiency ratio was 229 percent in 1993, indicating that Holland exports more than twice as much butterfat as it consumes. This ratio, which has varied little in the last decade or so, has not been reduced by the quota policy. The comparable ratio for solids-not-fat, on the other hand, was 101 percent in 1993, had been about 80 percent in a number of years during the previous decade. The main reason for the differences in these two ratios lies in the fact that Holland is the EU's largest importer of skimmed powder, which it takes mostly from other Community countries. Substantial quantities of skim powder imports are re-exported outside the Community, but substantial quantities are re-constituted and used for animal feed, particularly calf feed for the calf export trade in which Italy is the largest market. The Netherlands does not have a large beef industry, and a high proportion of its calf crop is used for veal for export.

Dutch milk production is also heavily dependent on trade. Deliveries to dairies are about 10 ½ million tonnes from a dairy cow population of about 1¾ million cows that is steadily decreasing as yield per cow rises. Stocking density is nevertheless exceedingly high, with heavy fertiliser use. Milk yield per cow in the Netherlands is one of Europe's highest, and is heavily dependent on concentrate feeding to highly bred dairy cows. Herd size structure is good compared with other member states, the majority of family dairy farms (60 percent) having herds of 30-100 cows. (National Dairy Council [1996] Table 143 p.214.)

Since the Netherlands produces very little cereals, its milk output depends on a high import content in compound feed mixes. Manioc imported from south-east Asia has been an important source of cheap, imported energy supplies in concentrate feed. It requires specialised handling facilities that are available in Dutch ports and so the Netherlands was not much affected by the world cereals and protein crises in the 1970s. Dutch milk producers benefited greatly from the common dairy policy during the 1960s and 1970s. Their prices rose initially to bring them into line with the rest of the Community and they were less affected than other countries by the rise in costs in the 1970s. The 1960s and 1970s were therefore prosperous years for Dutch dairy farming, and the growth of deliveries to dairies between 1968 and 1983 was, not surprisingly, faster than any other Community country.

At all levels the structure of the Dutch dairy industry is geared to international trade. Just under two-thirds of milk deliveries to dairies are used for butter and cheese manufacture. Butter production is just under 150000 tonnes (much of it made from fat released from milk in the manufacture of other products), but imports are also substantial, especially from other EU countries (126 839 tonnes in 1993), and exports at 258 000 tonnes are well above production. It is convenient for other EU countries to export butter through the Netherlands where export refunds are paid much more quickly than elsewhere. Cheese production is around 650 000 tonnes and, with imports of around 75 000 tonnes from other EU countries, total exports are around 465 000 tonnes. As with butter, a large part of Dutch production is exported but other member states' exports are passing through Dutch ports. The Netherlands also produces substantial quantities of condensed milk and whole milk powder, using about 13 percent of the country's whole milk supply for these two products. Once again, however, both products are imported and exports represent a very large part of production. Exports of whole milk powder have been particularly important in recent years, and exports of condensed milk have been historically important in the Dutch traditional trade links with south-east Asia.

Consumption per head of liquid milk (in all forms) is around the EU average but tending to fall (84 kg per head in 1993). Cheese consumption is slightly below the EU average (15.8 kg in 1993 against an EU average of 17.4 kg). Consumption of butter is low at 3.3 kg per head in 1993, while consumption of margarine at 12.0 kg per head is one of the highest in Europe.

According to the 1991 structural survey of Dr J Gay (already referred to) there were only 22 enterprises handling milk and producing dairy products in the Netherlands, and this number may have been reduced by 5 or 6 since. Most of these enterprises are co-operatives that take about 90 percent of the milk deliveries from farms. The three biggest enterprises, Friesland Dairy Foods, Campina Melkunie and Coberco, are large cooperatives who together handled 80 percent of all milk processed in 1995 and are deeply into the marketing chain as manufacturers and exporters of milk products. An outstanding feature of Dutch dairy enterprises is their size. The average size of enterprises producing liquid milk products, butter and cheese is all very much greater than most of their rivals in other member states. It is reasonable to suppose that, as the great bulk of output of butter and cheese is in the largest factories, the Dutch dairy industry makes more efficient use of both labour and capital resources in the manufacture and marketing of dairy products, and achieves greater overall economies of size than is achieved by dairy product manufacturers in any other member state of the EU.

(b) Conduct of Price Support

The implementation of policy at national level in the Netherlands is divided between two principal agents, the Ministry of Agriculture and the Productschap voor Zuivel. The Ministry of Agriculture runs the Intervention Bureau and has overall responsibility for ensuring that the system as a whole is implemented according to Community Regulations. Decisions on the sale of butter from intervention through the Community disposal schemes are taken by the Ministry, which supervises the acceptance of product into intervention and the payment of Private Storage Aid for butter and cream. (The Dutch dairy industry makes good use of the storage aid for cream over the spring peak.)

The Productschap, which is a semi-public body, is responsible for administration of policy in the area of trade (under Ministry supervision). Certificates are issued to exporters verifying the product and the amounts that have been traded and compliance with GATT rules. When the certificates have been granted, payment of refunds is made within 3 weeks and claimed against the Community's "own resources". The system is quick and efficient and results in payments to exporters that would take as many months through the Customs and Excise departments in their own member states. The Productschap also administers the school milk scheme in Holland and is responsible for the calculation and collection of the super-levy in close co-operation with the private and co-operative dairies.

It has already been pointed out that about one-quarter of the budget cost of the EU dairy support policy is actually incurred in the Netherlands. It is, however, totally misleading to infer from this that the expenditure is all on Dutch dairy products. A considerable part of what appear to be Dutch exports of butter and cheese to non-Community destinations originates in other member states. Exports of whole and semi-skimmed milk powder, for example, outside the Community are considerably greater than Dutch production. Normal published trade-flow tables are inadequate for estimating the EU expenditure on support for indigenously produced Dutch dairy products, and the effort is not worthwhile. It is clear enough that the returns to dairy farmers in the Netherlands are heavily dependent on the Community system of support as a whole. Much Dutch produce is exported to other member states and is therefore dependent on the prices of dairy products and the operation of the support system in those states. At the same time, it might also be said that the efficiency of the Dutch export system itself would appear to lend support to producers in other countries where some leakage in the efficiency of the operation of agents in the system appears to take place. The secret of Dutch efficiency is the close co-operation between the Ministry, the Productschap and the marketing organisations. The rules are applied flexibly and practicably with less bureaucracy than in a large government department acting alone.

The Netherlands has been part of the Deutschmark group of countries and, as one of Europe's strong currencies, the Dutch guilder has not had problems of devaluation. On the contrary, the Dutch have had the problem of how to avoid situations in which revaluation would lower support prices in the national currency. The strong and stable Dutch guilder has not, however, posed a serious problem for Dutch dairy farmers.

The policy delivery system as a whole might be said to work at its best in the Netherlands. The efficiency of the agencies implementing EU policy, combined with the efficiency of the operation of Dutch dairy co-operatives and the highly competitive nature of the rest of the dairy trade, come together to deliver to dairy farmers a milk price that has been very close to the Community's Target Price for 3.7 percent fat milk. There have been variations over the years, but they have not been large. There is also some variation between the prices paid by dairies, but the high level of competition has kept these relatively small. Price data is published and fully available to the industry. Such differences as exist may be due to many factors over which management has varying degrees of control. Among the three big co-operatives, Friesland Dairy Foods pays the highest price, with Campina Melkunie and Coberco slightly lower. The Friesland price may be related to its cheese production and exporting position, but the advantage is not great and in some years Melkunie and Coberco have achieved the best price.

(c) Conduct of Quota Policy

The quota policy in the Netherlands was applied in an orthodox way. Formula A was chosen initially and individual reference quantities were based on sales in 1983. Producers with development plans and special circumstances in the base period were able to appeal against initial allocations, and in handling these appeals the Dutch authorities over-allocated 1 to 1 ½ percent in individual quotas more than their national guaranteed quantity for the first two years. This situation was corrected by three generous national outgoers' schemes that targeted small producers initially, those producing a maximum of 250 000 kg in a year, and then older producers, first those over 55 years' old and then those over 50 years'.

The Netherlands changed from the use of Formula A to Formula B at the beginning of the 1988/89 milk year, which meant that the dairies became collectively responsible for the management of the quotas of their supplying producers. The management of quota nationally was done by the Productschap through a committee of representatives of dairies that coordinates information across the country. Even so, the payments of super-levy by the Dutch dairy farmers seem to be quite high in recent years. Information available for the period 1989/90 to 1993/94 indicated the following sums of money paid each year:

Million Guilders















These sums indicate amounts in excess of quota nationally of 0.8 and 0.7 percent, except in 1993/94 which amounted to 0.3 percent. This is a modestly good record, but less so than Denmark's and the UK's before 1994/95. Quota management nationally with Formula B is more difficult when there are a number of dairies, many of which want more milk in any case to keep their plant running close to capacity and meet market demand. Small dairies can be well under quota, even when quota is being exceeded nationally.

The Netherlands introduced a leasing scheme for the first time in 1989/90, and leasing quickly rose from 1.1 percent of total national quota in the first year to 4.3 percent by 1993/94. The amount of quota leased each year is greater than the amount that is permanently transferred, and there is a relatively free market in each type of transaction as there is in the UK. With permanent transfer there is a land link in the Regulations, but it is honoured more in the spirit than the letter which means that quota transfer is more or less a free market. Leasing transactions were twice as great in 1993/94 as transactions for permanent transfer. This is similar to the UK where transactions in both types of transfer are also fairly free. Leasing in the UK is also approximately half as large as permanent transfer. In the Netherlands the quota price for permanent transfer is about four times the milk price, whilst in the UK it is about 2-2 ½ times the milk price. In the Netherlands the leasing price is less than 10 percent of the milk price, whilst in the UK it has generally been a much higher proportion, around one-quarter but getting up to one-half in the last year or so. In the UK the balance of advantage might seem in favour of buying than leasing, whereas in the Netherlands the reverse might be true. However, as has already been pointed out, the Dutch transfer prices are inflated artificially by the favourable tax treatment of quota purchase and probably also influenced by the efficiency of Dutch dairy farming and the good herd size structure of the owner-occupied family farms that typify the industry.

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