Impacts of different policy options on the EU dairy market

The economic effects of certain changes in the EU dairy regime and of market liberalization are analyzed within the framework of a partial equilibrium model. Using a joint-input, multi-product formulation the model confronts the agricultural production of raw milk with the processing and the final consumption of five milk products. While the two valuable components of raw milk (fat and protein) are kept in balance at all levels of the marketing chain the model describes the economic and technical relations between input and output quantities. Although the model is non-spatial (in the sense of transpotation costs being omitted) there is a regional aspect with 14 EU regions (member states) and all other countries as a whole (rest of the world). Simulation of prospective policy effects in 2005 necessitates a projection of supply and demand for this year, starting from 1993 as a base year. Different scenarios were considered: Expanding the EU milk quota by 2 % and cutting the intervention prices by 15 % (Agenda 2000) compared to the base year will result in decreasing EU producer prices by 6-7 %: Cutting intervention prices by 15 % compared to baseline will lead to a producer price reduction of more than 10 %. The influence of the rest of the world is very small. The abolition of the milk quota regime and the intervention system will lead to a producer price decrease of 18 %, but the milk production in the EU will increase. When a very low world market price for dairy products is considered (starting from the world market situation in 1993), market liberalization results in a market decrease of EU producer price of about 40 %. The decreasing milk production coupled with rising demand makes the EU a net importer of dairy products (with the exception of skinmed milk powder and other milk products). These imports will lead to an increase in producer prices in the rest of the world. If in the latter case consumer preferences for fresh milk products and cheese allow for price differentials to the benefit of EU producers there are considerably less pressures on EU markets but still big changes in the pattern of trade to the detriment of butter and skimmed milk powder.