X. ECONOMIC ANALYSIS OF POLICY

In Chapter III of this study the performance criteria for the analysis of public policy (Effectiveness, Efficiency, Enforceability and Equity) were discussed broadly in the light of Sandiford and Rossmiller [1996] and EU policy making. In this chapter the performance criteria (the 4 Es) will be used to assess the policy delivery system (PDS) for the milk sector in the EU. The performance criteria are here being used endogenously: the focus of attention is a judgement of how effective and efficient the policy and its delivery system is in fulfilling the stated aims. Many discussions of the CAP (especially those emanating from the UK) usually implicitly adopt a marginalist approach in which judgement is passed on the system in relation to what the writer believes would be the outcome of a free-market situation. Such discussions frequently dismiss the aims of the policy without discussion and never consider the PDS. Nevertheless, the policy exists to fulfil the requirements of Article 39 of the Treaty, which remains in its original form and as such is part of "the economic constitution" of the 15 member states. Moreover, the narrower aims of the policy legislation, particularly as stated in the articles of 804/68, remain the law of the EU. The EU has an agreement with the Contracting Parties of the GATT: this may require fundamental modifications to the milk policy but not to the Treaty, as Article 39 is not currently on the agenda of the Inter-Governmental Conference for the revision of the Maastricht Treaty. Therefore the analysis of the milk policy in this chapter simply considers the policy in relation to its aims and does not question the aims themselves.

Effectiveness The policy establishes (see Ch. IV above) the achievement of the Target Price for "the aggregate of producers' milk sales" as a principle aim, particularly having regard to the farm income objective. Producers should be able to attain the Target Price both "in the Community market and on external markets during the milk year". The first question therefore is to examine how far this has been achieved and then how far it results in "a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture". Some attention has to be given to the "stability" aim and finally the aim of ensuring "that supplies reach consumers at reasonable prices". These are the desired results of the system and it can only be judged "effective" ("the top-level criterion") in so far as it delivers them.

Taking the Target Price levels first. Table 8 sets out the results of an analysis of the price of milk paid to producers by countries in the EU. No data is published of milk prices "delivered to dairies". Eurostat (the Communities' Statistical Office) publish data of ex farm prices for milk of 3.7 percent fat (excluding VAT and co-responsibility levy) in each country of the Community. For a number of countries some data on ex farm transport cost has been available through ASSILEC (now EDA). Although some years out of date, if taken as a rough proportion on historic series and projected it can be used as a reasonable approximation. Data on co-responsibility payments (in the relevant years) is available from national sources and, when not, can be estimated from partial and full exemption limits. No data on the cost of delivering to dairies was available for Italy. In the absence of information a figure of 4 percent of the ex farm price has been used, which could be too small for Italy's very small herds or too large when milk is delivered by farmers themselves. More details of the making of the calculations in Table 8 have been set out each year in the annual editions of EC Dairy Facts and Figures down to the last year of its publication in 1995 (Residuary Milk Marketing Board [1995]).

The figures in Table 8 have already been the source of much debate in previous publications (e.g., Williams [1986] and [1993]). In the present context they suggest that, so far as the Community's first objective is concerned, the Target Price that it is aimed to achieve is more or less achieved. The countries analysed in Table 8 cover 92-93 percent of the milk supply in the Community, and the average price achieved (by weighting prices across countries in the columns) has been reasonably close to the Target Price. (Greece, Spain and Portugal have not been included; in Greece and Portugal producer prices are probably a little above the Target Price and in Spain somewhat below.) Although from the average of the figures in Table 8 it can be concluded that the system is quite clearly effective, the amount of variation in the system throughout the Community is very considerable. The end two columns of the table provide a mean of the figures for each country together with a standard deviation for the years shown. At one extreme, the Republic of Ireland has generally had the lowest price (and also a high standard deviation) with prices sometimes below 90 percent of the Target Price, i.e., below the intervention milk equivalent price. At the other, Italian producers have had prices estimated to be as high as 130 percent of the Target Price. The most extreme range shown here occurred in 1991 with a difference of 44 percentage points between the Italian and Irish prices. The smallest range, in 1995, shows a difference of over nine percentage points as the Italian price has come down (see Ch IX). Ranges of this magnitude and variability could not reasonably have been said to have been the intention of the original designers of the policy who sought to eliminate variations that might occur through any arrangements that would protect local liquid milk prices. Explanations of price differences are complex and may relate to many structural differences between countries, the size of processing/marketing organisations and economies of size (where the Dutch have an advantage), product differentiation especially in the cheese market (where the Italians appear to have had the biggest advantage although Denmark and the Netherlands also have a high utilisation of milk for cheese), brand loyalty, and finally the management and ownership of marketing organisations. Where the marketing system is owned by farmers through their co-operatives the return on their capital in the business is part of the price of milk returned to members (see Ch VII). (Previous publications by the present author have shown the disadvantage that UK producers have in this respect: Williams [1987] and the debate with Pitts, Haines and Jenkins [1987].) In so far as these are the reasons for the wide differences in prices received by farmers, it has to be said that, no matter what the conduct of the policy, it is difficult to see that much could be done. The system has achieved the broad aim of the Target Price, as well as reasonable stability in so far as the doubling and halving again (twice) of the prices of butter and skim powder on world markets in the decade from 1986 to 1996 was only mildly felt in producer prices in the Community.

Table 8 Producer Milk Prices as a Percentage of the Target Price for Milk of 3.7 Percent Fat

	1989	1990	1991	1992	1993	1994	1995	Average	Standard Deviation
Italy (1)	129.2	131.9	131.0	130.0	110.6	113.1	102.6	121.2	11.2
Denmark	109.2	108.5	107.8	105.3	101.5	100.1	99.4	104.5	3.9
Germany	107.3	101.2	99.0	100.1	98.6	96.8	98.1	100.2	3.2
Netherlands	104.3	96.7	98.9	101.4	100.7	99.5	96.9	99.8	2.5
France	93.8	93.3	91.5	93.0	93.3	94.3	95.5	93.5	1.1
Belgium	100.4	91.9	89.4	91.5	92.9	92.3	94.9	93.3	3.3
Ireland	101.1	89.7	86.5	92.9	89.8	90.2	93.9	92.0	4.3
UK (2)	95.3	93.6	92.8	90.1	91.3	92.3	93.9	92.8	1.6
Average	103.1	100.5	99.1	99.7	97.1	97.1	96.9	99.1	2.1

Notes:

(1 Author's estimate.
(2) An England & Wales figure is used for the UK.
(3) End two columns suggested to the author by G.E. Rossmiller.

Sources: EC Dairy Facts and Figures and Eurostat.

What of the achievement of the income aim? An in-depth and up-to-date analysis of dairy farm incomes is a substantial task and outside the scope of this study. However, Table 9 uses data from the Farm Accounts Data Network (FADN) for dairy farmers in the Community as a whole to show the trend over 12 years in the Net Value Added (NVA) per dairy farm and per annual work unit in ECUs. NVA represents the total return for all factors of production at factor cost used on the farm.

What represents "a fair standard of living" in different parts of the Community, and whether 25-28 000 ECUs per farm or 10 500 to 12 500 ECUs per work unit (in Sterling £7 500 to £8 500) is in fact "fair" is impossible to say. In any case, the variability in income between different parts of the Community and even individuals within the same areas is enormous. The most interesting feature of Table 9 is that although incomes fluctuate they have gone up over the period 1983/84 to 1990/91 (and have indeed about doubled) while the price paid to producers in ECUs has moved very little. Inflation in the 1980s has been at a much lower level than in the 1970s, which has made it easier for farmers to retain more of the benefits of productivity growth. It is in the period of the quota policy that incomes started to move up. The statistics are not complete and publication is always a number of years in arrears, but farmers have had relatively good years since 1990/91. The quota policy does appear to have been flexible enough, both in the manner of its introduction and in the operation of the transfer system since, to have assisted the income aim of the overall policy. With the introduction of quotas, large numbers of very small producers left the industry with the assistance of outgoers' schemes that were very generous in some countries, and made quota available to assist those remaining to become larger. The subsequent transfer systems in most countries appear to have enabled the industry as a whole to take advantage of rising productivity while price has been stable. Producer numbers have, as a result, continued to decline and the incomes of farms remaining in production have increased. The pace at which farm incomes rise would seem, therefore, to depend very much on the speed of structural adjustment, which is of course assisted by stability. Violently fluctuating prices can give false hopes and wrong signals. It could be good luck that the quota policy was established in a more stable and less inflationary period than the 1970s. Howsoever, the policy has been effective in its broad aim of bringing "the financial burden and market difficulties" of the late 1970s and early 1980s under control. At the time the intention was to have "the least drastic effect on the incomes of producers" compared with possible alternatives. Once stocks were reduced the budget cost was effectively contained, and the improvement of farm incomes might even be said to be an unexpected bonus. Moreover, most member states have succeeded in keeping to within one percent of their national reference quantities in most years. The effectiveness of the policy, especially in the avoidance of structural rigidity, has almost certainly been greater than most of those close to its initial design and implementation in late 1983 and early 1984 would have predicted.

Table 9 Income of Dairy Farms in the European Union

	Farms Represented	Sample	Income per Farm		Target Price ECUs per 100 kg
			(1)	(2)
1978/79	514180	4406	14200	8400	-
1979/80	524 900	5 119	12200	7300	21.4
1980/81	531369	5627	12500	7500	22.3
1981/82	538 783	6050	14 700	9000	24.3
1983/84	521 546	7299	19606	8079	27.4
1984/85	517709	7680	20338	8238	27.4
1985/86	518981	7625	22077	9 153	28.5
1986/87	524310	7592	22425	9483	28.7
1987/88	585 737	9084	25091	10966	28.5
1988/89	576 619	9209	28840	(12 605) (3)	27.8
1989/90	592 162	9679	28320	(12378)	27.8
1990/91	589 863	9457	24260	(10 603)	26.8

Source: FADN/Commission of the European Communities.

Notes:

(1) Net Value Added (NVA) per farm at factor cost - ECUs.
(2) NVA per Annual Work Unit per farm at factor cost - ECUs.
(3) Bracketed figures are estimates not found in original source.

Type 41 Holdings: Mainly dairy/specialist dairy. 63-66 percent of gross output = milk and 19-20 percent beef and veal. 14-18 percent of output is other products.

The free flow of goods and services within the Common Market has also been a principle aim of the Treaty. Whilst the milk sector has not yet developed large pan-European marketing organisations, the free flow of products in the dairy sector has been achieved. Trade flows between member states for the main dairy products demonstrate this. Almost one-third of cheese consumed in the EU as a whole is cheese that has been traded between member states. This proportion has gradually risen over the years, as has cheese consumption, and it is a reasonable presumption that widening consumer choice has been favourable to increased consumption. High proportions of butter and preserved milks are also traded between member states, as are skimmed milk powder and casein. The policy has, therefore, been effective in establishing an integrated milk and dairy products market in the EU as a whole.

Efficiency Has the policy achieved its aims at the least possible cost to taxpayers, consumers and other parties? The total cost of the policy is taken by some experts to be the budget cost plus the cost to consumers which is measured by the difference in prices on world markets and the internal level in the Community. There are few things in public debate more misleading. No-one could seriously believe that "the value of total monetary transfer from consumers and taxpayers to producers in 1994 came to more than 21 billion ECUs... or 63 percent of the total value of milk production in the EU". (Evidence of MAFF to the House of Commons Agriculture Committee, First Report, Session 1995-96 quoted para 27 p.xxiii.) That is a figure calculated by taking the difference between Community and world prices multiplied by the level of Community milk output and then added to the budget cost. The world market for dairy products is a small residual market resulting from the protectionist policies of all the main milk producing and consuming countries in the world. Low world prices are the result of not only the Community's policies but also the United States' tight import quota controls that have virtually excluded imports of significant quantities of heavy milk using dairy products from the US, as well as the policies pursued by Canada, Scandinavia and other countries. There is no such thing as a global integrated economy so far as milk products are concerned. The only country to live by trade in dairy products on world markets, New Zealand, has a unique industry that produces milk highly seasonally entirely off grass from large herds of low-yielding but high-butterfat cows; annual fluctuations can be sharp, according to the effects of weather and grass growth.

The FEOGA budget cost of the milk price policy has been brought down from around 6 billion ECU in the mid-to-late 1980s to just over 4 billion ECU in the last few years. The farm price has been held steady or reduced slightly, while total quota has been reduced and farm incomes improved. Clearly efficiency has been improved, but the policy could still have some way to go before it might reasonably be judged "efficient". Taxpayers' money has been wasted in the disposal of large stocks of product: in the case of butter, the policy itself has destroyed the market, and in the case of skim powder it has led to the production of large quantities of a product for which there never has been anything but a very small market in commercial terms.

What of the efficiency of the implementation system itself with all its detail and complexity? The costs of storage and disposal schemes are, as has been shown, subject to tight central control by a small but powerful Commission staff and are met from the Community's own resources; but part of the administrative costs are incurred by national governments and on this there is no centralised information on staff numbers and costs. The total overall costs to taxpayers are therefore not known.

The system of producing product for intervention rather than the market certainly does not encourage efficiency, as it takes away from the industry's management part of their essential job, i.e., marketing the products they produce effectively. When product is not produced for the market, the organisations concerned are left with a deadened, purposeless feeling which is bad for morale and staff management throughout.

The big differences in the time period for payment of export refunds, which discussion of the PDS in different member states has exposed, seem very questionable on efficiency grounds. The movement of milk products from Italy to the Netherlands and from the UK to the Netherlands (assuming the products do in fact move) in order to export to third parties would certainly appear to be giving rise to excess movement and uneconomic routes. It would be reasonable to suppose that the more efficiently intervention agencies and the agencies paying export restitutions are managed, the lower will be the costs of support to the taxpayer and the consumer. All agencies should then make the payments due as fast as possible. If this results in improvement of producer prices, then support prices should be reduced by an offsetting amount. Producers would be no worse off while consumers and/or taxpayers would be better off. The idea that either the Commission should attempt to depress prices by "playing the rules" or that individual member states should do so in implementing the system is to introduce deliberate management inefficiency to offset the inefficiencies of the political system in any fine tuning of support levels.

An important part of the policy in financial terms since 1977 was the co-responsibility levy until its abolition in March 1993. The substantial funds raised in some years were used to finance the school milk scheme and other projects, some of which were mere substitutes for the Commission's disposal schemes. Far too little of the money raised was used for commercial publicity, advertising, merchandising schemes and market research. The central control of the use of a very small part of the funds to improve markets and marketing (even to central approval for the smallest market research project) was a lost opportunity in the development of an efficient and imaginative policy. The dairy industry faces tough competition from substitute products produced by large and powerful global organisations, and such pressure is going to continue. The dairy industry is still national and in parts fairly fragmented, and it needs a much more imaginative policy from the centre to assist the branding and marketing of its products than it has so far received.

Enforceability The policy for the milk sector has proved to be enforceable even when there have been disputes and difficulties. The main means of settling disputes in the Community is through the European Court, which has had to deal with a number of important cases in the milk sector (some of which have been mentioned in the course of this study). The "dual pricing" of milk for butter in the UK (Case 23/84. Commission versus the Government of the United Kingdom) was a case brought and won by the Commission. The right of the UK Milk Boards to require contributions from producer-retailers selling "heat-treated" milk was settled by the Court in the Boards' favour. The right of the Boards to require contributions on "low-fat" milk sales from producer-retailers under Regulation (EEC) 1422/68 was challenged by the Commission in the Court and in this instance the Commission lost. (Case 40/92. Commission versus the Government of the United Kingdom.) These instances, like others affecting the running of the policy, have been relatively clear cut in their outcomes. Community law has been settled by the Court and the outcome enforced.

Cases of enforcement brought by the Commission involving the failure of a member state to fulfil its obligations are preceded by the delivery of a reasoned opinion in the matter, giving the state concerned the opportunity to submit its observations (Article 169). In the sphere of quotas the Court has settled cases relating directly to individuals that have had a policy-making effect. The most spectacular example from this point of view was that of Mr J Mülder versus the Dutch Government in which the Court found in favour of Mr Mülder. (Case 120/86. Mülder J versus Kingdom of the Netherlands (Minister van Landbouw en Visserij).) The substance of this case has already been discussed (see Ch VI); it was politically highly inconvenient as its effect was to give quota to a group that had been excluded, and this forced the need for adjustment on other producers right across the Community. In this instance the Court's decision limited the power of the government of a member state in implementing Community policy.

The Community's most difficult case in applying the quota policy occurred, as we have seen, in Italy (Case 394/85. Commission versus the Republic of Italy) although there were also difficulties in Greece and Spain that have not been examined in this study. Each of these countries experienced considerable difficulty in applying the quota policy, partly through a lack of an adequate data base, and it took considerable political will and administrative effort to implement the policy fully. Nevertheless, it has been done. The Italian authorities experienced some civil disorder when payments were finally enforced at the individual level for the 1995/96 year. There is, however, no reason to believe that this will not be resolved. The system has proved enforceable in Italy as elsewhere.

Equity Equity as a criterion must concern itself with the redistributive effects of the policy. It has been pointed out already (Ch II) that it was the original intention of the CAP to target the family farm and to deliberately redistribute resources in its favour. Given this aim, many analysts argue that it would best be done through income grants of some kind met out of general taxation. A policy that uses high prices to achieve this end hits large families where food expenditure is a high proportion of family income particularly hard, and is inefficient as a policy because it benefits small farmers less than large farmers (who, arguably do not need help or, if they do, much less of it).

This is familiar and politically much fought over ground, and milk, being a labour-intensive agricultural product, is central to the argument. The distribution of gains and losses from the policy affects regions within member states and not merely contributions and receipts by member states to the FEOGA budget. High milk prices have undoubtedly been beneficial to the development of the rural economy in certain regions of the European Community. The rural economy in the regions of southern Ireland, northwest France, south-west Wales and Bavaria has benefited from the encouragement of milk production. To have designed an income grant system that might have done the same thing would certainly have been a difficult task, even if it were possible. High milk prices encouraged milk production in these far-apart areas and enabled farm units to grow in size and efficiency.

The EU has already implemented the 1992 MacSharry reforms that reduced cereal support prices with a compensation package for farmers to make agreement in the Uruguay Round of GATT possible. To fulfil its commitments under the GATT Agreement, modification is likely, as we shall see in the next chapter, to have to be made to the price and quota policy in the milk sector. Equity issues will probably remain in the forefront of the debate over the future policy for the milk sector, as support has to be "decoupled" from the price to reduce the output enhancing (trade reducing) nature of the support.

The Maastricht Treaty lays down (Article 130a):

"In order to promote its overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion.

In particular, the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions, including rural areas."

The Community undertook in the Treaty to use its main Structural Funds (the European Agricultural Guidance and Guarantee Fund, The European Social Fund and the European Regional Development Fund) for supporting the achievement of regional growth and social cohesion. The Agricultural Guidance and Guarantee Fund is taking a gradually reducing share of overall Community funds, but still accounts for about half of total EU funds. Policies that satisfy the so-called "green box" criteria will need to be thrashed out if the EU commitments in the 1992 GATT Agreement of reducing support prices and export refunds, and increasing market access are to be fulfilled and a second round along similar lines is to be negotiated.

To satisfy the equity criterion, the policy has also to be seen to work reasonably even-handedly throughout the territory of all the member states of the EU. On this test it could be said that the policy is open to criticism. Disparities in prices obtained by producers have been wider than might be expected in a common market with free movement of goods. In the UK the government's policy on green rates of exchange has enhanced price differences in an effort to hold the balance of losses and gains from the system in favour of UK consumers. The operation of quotas shows many disparities of detailed treatment of producers between member states. The extent to which quotas may be exceeded without penalty by individual farmers varies widely between countries; the treatment of member states in the choice of Community base did rough justice; the differences in the handling of transfer issues varies enormously; fiscal treatment of quotas varies; member states' own government contributions to outgoers' schemes varied widely in generosity; and there have been many other disparities. Nevertheless, quotas have brought benefits to farmers that have been large enough to push these disparities into the background so far as farmers have been concerned, and there is therefore a high level of support for quotas among the farming community throughout the EU.

Finally, there is the issue of reasonable prices to consumers, a subject little discussed except in the UK. The CAP'S opponents (ignoring the aims of policy) will always argue that the only reasonable or fair price is that of a free market. Defenders of the CAP can argue that what consumers spend on food as a proportion of their incomes in the EU is not only low but has declined considerably everywhere since 1968. The unequal effect on small and large families is also partly offset in many countries by social programmes. Consumer prices of food, moreover, in most countries of the EU (the UK excepted) are subject to value added tax (VAT), which means that the CAP is not the only government policy raising the price of food to consumers. For most governments of the EU consumer prices of food are not the most sensitive political issue surrounding the CAP.