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Managing a vast market is a continuous process and an intricate and complicated one. Pressures, both economic and political, build up until change in policy becomes inevitable. The biggest issue that is going to affect the future for milk policy is the GATT Agreement, which has already been referred to as affecting policy aims and objectives at the end of Ch. IV. The problems of adaptation in the longer term will be compounded by the problems of enlargement as the Central and Eastern European Countries (CEECs) enter the EU, and may even be affected in the medium term by the attacks likely to be made on the EU's ban on the use of BST (bovine somatotrophin). The EU quota policy under present legislation lasts until the year 2000. What will be the future of this part of the policy? How far is the GATT Agreement likely to change the residual nature of the world markets for dairy products? How can policy makers for the EU dairy sector adapt the policy to fulfil the core aims of the Community's agricultural policy? A brief examination of the main elements of the GATT Agreement and some comments on these wider issues will conclude this study.

The GATT Agreement requires the EU:

· to reduce export subsidies by 36 percent in six years from 1995 and the volume subsidised by 21 percent based on averages of 1986-90;

· to implement reductions in each of four commodity groups - butter and butter-oil, skim milk powder, cheese and "other products";

· to convert all non-tariff barriers into bound tariffs at a level corresponding to the difference between internal and world prices in a 1986-88 base period;

· to reduce all tariffs by an average of 36 percent over six years from 1995/96 with a minimum of 15 percent for each tariff line;

· to allow imports at reduced rates of duty for a volume of products accounting for a minimum of 3 percent of total milk requirements in 1993 and increasing to 5 percent of consumption over the six years;

· to reduce all subsidies affecting the level of production and therefore trade levels by 20 percent from the average of 1986-88. This is interpreted as a reduction in the "aggregated measures of support", but this is an area in which there were some differences of interpretation between the EU and other Contracting Parties.

It is not proposed to model each of these elements of the agreement in detail. Restriction of export refunds for the EU by 21 percent of the 1986-90 base will give, and is already giving, rise to problems. Some types of cheese to high-priced markets have been in the past, and will be more in the future, exported without refunds. However, there are two countries, Denmark and the Netherlands, that have by far the largest dependence on cheese exports outside the Community. Curtailment of export refunds for these countries is likely to result in some diversion of their exports, from third countries to countries within the Community, which will toughen competition on Community markets. In order to reduce cheese exports by the required amount for the Community as a whole, the Commission are seeking to implement the policy by a sharper reduction in export refunds for cheese than the agreement requires and a less sharp reduction in other products, thereby using export refunds themselves as an instrument to achieve the quantitative restriction and diversion. The effect of this has already been felt and is leading to marketing changes.

The impact of the sharp cut in export refunds to reduce cheese exports is eased considerably by the fact that butter and skim powder exports were significantly higher in the base period than they have been subsequently. The Community has scope to increase butter exports by over 200 000 tonnes and skim powder by over 130 000 tonnes compared with the levels in 1994/95 in the early part of the six-year period. Even by the year 2001 butter exports can be 130 000 tonnes higher and skim powder 80 000 tonnes higher than in the base period. Cheese exports receiving a refund have to be cut, however, by 120 000 tonnes. While Denmark exports the largest proportion of its cheese production to third countries, it is a small country in milk output terms. The largest exporters of cheese to third countries are Germany, France and the Netherlands and therefore these countries are going to have to make the largest adjustment.

Increased access at lower tariff rates has to be given on 104 000 tonnes of cheese, 69 000 tonnes of skim powder and 10 000 tonnes of butter. Current access for New Zealand butter also has to be restored to the 1986-88 base from which it was cut, meaning a quota increase from just under 52 000 tonnes in 1994 to nearly 77 000 tonnes in 1995. This extra amount into the UK clearly more than offsets the Community's commitment on butter, and will divert more UK-produced butter into exports, leaving New Zealand with a very high proportion of the UK packet-butter markets (probably around 40 percent).

It is difficult to predict the likely consumption changes in the Community in the next few years, but there is some general agreement amongst analysts and commentators that the net effect of the cut in export refunds and the resulting diversions of trade, together with the requirements of increased access, will require the Community to cut its overall quota for milk between 1998 and 2000 by up to 4 percent if a crisis is to be averted. There is not universal agreement about this, and some (including the UK Government) argue that a crisis could be avoided through downward pressure on prices to raise internal consumption. The likelihood of general Community quota cuts of up to 4 percent by the turn of the century is fairly high if there is not to be a decline in prices, and therefore in dairy farm incomes, which might not be considered desirable.

In the Commission's submission of the EU Schedule of Commitments to GATT, a measure of "aggregate market support" was used that made a separate calculation for butter and skim milk powder. The figures were not translated into a milk equivalent value and multiplied by total deliveries to dairies. (There was a big difference here between the EU and the US.) Taking the agreed cuts in tariff equivalents between 1995 and 2000, as long as world prices of butter and skim powder do not fall below the average of 1993-95 it would not be necessary to reduce intervention prices until the end of the period. But there will have to be some reduction at the end of the period, and possibly before then if world markets become very depressed. At the beginning of 1997 tariff protection was such that Community prices for dairy products were 20-35 percent below world prices plus the import duty.

Clearly the requirements of the GATT Agreement are going to tighten on the EU dairy industry round about the turn of the millennium, and the next round of GATT negotiations are scheduled to commence in 2000 and conclude by 2003. There can be little doubt that, if a negotiated settlement commencing in 2004 were similar to the 1992 settlement, prices to dairy farmers in the period 2004 to 2010 would fall quite considerably. The alternative, if quotas are retained in 2000 when they come up for renewal, would be to cut quotas and allow imports a greater share of a high-price market.

The problems of a further round of GATT negotiations will be compounded by Community enlargement to include the CEECs. Here the Commission's own projections of the effects for the milk sector in their Agricultural Strategy Paper (European Commission, CSE (95) 607) are pessimistic:

".....(assume) as a working hypothesis that the negotiations on milk production quotas would leave some limited room for further expansion of dairy production in the new member states. The increase in milk prices would... dampen domestic utilisation in the CEEC's which would lead to an increase in the milk surplus by over 50 percent in 2005 compared to 2000. This surplus would be added to a rising surplus in the EU-15 where the decline in per caput use is expected to continue...."

This statement is very pessimistic; across the CEECs as a whole milk output fell by more than one-third in the first half of the 1990s; rising domestic prices can be moderated by longer transitional arrangements; improving living standards should help demand; and it is to be hoped that these countries retain some of their trading links with Russia. Russia is, however, the last very big butter market in the world to be attacked by the margarine manufacturers. It would therefore be hard to argue that enlargement of the Community is not going to make a difficult situation yet more difficult. Even the implementation of the policy in anything like the present detailed form with 25 members would be extremely cumbersome. Various "solutions" are being canvassed to the Community's milk sector problems. One solution would be to reduce the support price drastically until surpluses disappeared and to compensate farmers by means of some form of grant (headage payments, transferable bonds, annual payments related to quota, etc). One of the variants of this proposal is that support prices should be reduced before enlargement but still leaving room for raising prices in new member states. The compensation payment would then apply only to producers in existing member states keeping the budget cost within reasonable bounds. This proposal would leave the enlarged Community with two classes of dairy farmer for a long period, which may give rise to problems either in initial negotiations or at a later stage. It would mean that the agricultural policy was being applied discriminately. Article 40 of the Treaty required that the "... pursuit of the objectives set out in Article 39... shall exclude any discrimination between producers or consumers within the Community".

Another proposal is that the quota policy should be changed to a two-tier one. Under this proposal there would be two types of quota: A Quota which would cover milk paid for at the full support price (or most of it) and B Quota which would be for milk used for producing products for export with no subsidy. A system of this type has been ably advocated by some quarters in the Community, and it would certainly modify the operation of the present quota system substantially - there would be no need to lease quota, for example, and the super-levy calculation would be modified. However, it would probably lead to a substantial lift in Community milk production, that would affect world markets and the cost of disposing of A-quota milk whose supply might then have to be reduced. Because the scheme would be output enhancing and likely to increase the overall costs of support (through the price effect), it would be likely to be incompatible with the EU's GATT commitments.

No blueprint for future Community policy in the milk sector will be attempted. It is highly likely, although not certain, that quotas will be rolled over again in 2000 with possibly a small cut either at the time or before. Producers in both France and Germany, where farmers' political influence is strongest, are certainly in favour of quotas, and on qualified majority voting on a proposal from the Commission in the Council quotas would probably be retained. The present GATT Agreement will not create anything like a genuine international global market in dairy products. Trade in dairy products represents no more than about 6-7 percent of world consumption, a proportion that is not likely to change greatly before 2000. An agreement to cuts in support arrangements from 2004 similar to 1992 would make a considerable difference before the end of the first decade of the 21st century. To enable a further GATT round to be successfully negotiated, an arrangement to reduce the milk support price with a compensation package (similar to the MacSharry reform for cereals prior to the 1992 agreement) will have to be negotiated. Such a package is likely to be difficult for milk, having regard to the Treaty obligations and other complications within the EU. Each of these major steps - dealing with quotas, dealing with an internal support package and negotiating a GATT deal that leads to equitable and politically acceptable arrangements - will be a difficult task. Success would lead to greater efficiency in the marginalist sense of coming closer to a free market by around 2010. The greatest difficulty may be in finding ways of ensuring that the aims of the Treaty remain achievable.

The Community is committed to the implementation of its policy of enlargement. There can be no doubt that this will force on the Community a policy of simplification in the running of the system. What was possible with six member states became strained with 15 member states and may be rendered impossible with 25. The Commission strategy paper already referred to recognises this. The most minute control of intervention management down to the smallest detail requiring hundreds of amending and re-amending Regulations will have to be reformed. Such reforms will need to ensure that the industry marketing organisations are much more involved than they have been, with better incentives to market products to best advantage. A lower-price milk regime in the 21st century would itself ease the path towards simplification and greater local control over the running of a common system.

Whilst simplification of the means of operating price support will be necessary in an enlarged Community, the same thing will apply to quota management, assuming it continues. The Community may have to accept the large amount of difference there is in the management of quotas between member states, and accept also that this is likely to happen in the eastern European countries as well. Retaining the quota system or rolling it over again is likely to result in its national basis remaining. Trading quota across national borders seems a very unlikely development. Indeed, some governments have already ring-fenced quota movement within their own countries to prevent quota moving out of difficult areas. Under these circumstances agreement to a policy allowing movement across national borders is unlikely.

Looking forward into the 21st century, will there be an end to the mercantilist style of agricultural policies of the 20th century? The EU through enlargement has gradually spread competitive marketing into a wider area of Europe while remaining faithful to the core aims of the Treaty. This seems likely to continue. Through the GATT (Uruguay Round) Agreement EU agriculture is starting to become inter-dependently integrated in the world trading system. If this is to develop further, there will undoubtedly be demands for some degree of equitable and agreed control over world trade in milk and dairy products, a control that will need to be exercised by the new World Trade Organisation (WTO). The outcome should be a much larger level of trade than the 6-7 percent of world consumption that has been traded throughout long periods of the 20th century. The rules of the WTO will have to be kept as simple as possible, but enforceable, with targeted and meaningful penalties for transgression. A controlling body with agreed representation, making decisions by qualified majority voting will need to link access to world markets to remaining support levels, and also agree a stock control policy for key products.

The major part of current world trade is carried out by large organisations that need to be consulted regularly. New Zealand's exports, for example, are all made through a single body, the New Zealand Dairy Board; Dutch and Danish exports are through a handful of large organisations. Information systems can be swift and accurate. An enlarged Community, dealing with other groupings of nations around the world that will also face problems with their dairy sectors, stands a better chance of establishing a globalised policy for this important sector of agriculture than has been the case throughout the 20th century.

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