TABLE OF CONTENTS "" ID="1">1. INTRODUCTION"> ID="1"> Seeking to restore balance to the market in milk products> ID="2">1.1 "> ID="1"> Previous work by the Court of Auditors> ID="2">1.2 - 1.3 "> ID="1"> The aims of the Court of Auditors' audit> ID="2">1.4 - 1.5 "> ID="1">2. THE MARKET IN MILK AND MILK PRODUCTS"> ID="1"> Milk and how it is used> ID="2">2.1 - 2.4 "> ID="1"> World production and world price trends> ID="2">2.5 - 2.8 "> ID="1"> Changes in milk production in the Community> ID="2">2.9 - 2.16"> ID="1"> Changes in the consumption of milk and milk products> ID="2">2.17 - 2.20"> ID="1"> Changes in exports and imports> ID="2">2.21 - 2.24"> ID="1"> Food aid> ID="2">2.25"> ID="1"> Imbalance in the market in milk and milk products> ID="2">2.26"> ID="1"> The Community's degree of self-supply in the various milk products> ID="2">2.27 - 2.30"> ID="1"> Changes in stocks of butter and skimmed-milk powder> ID="2">2.31"> ID="1"> Lack of solvent outlets for exports> ID="2">2.32"> ID="1"> The persistent imbalance> ID="2">2.33 - 2.39"> ID="1">3. THE COMMON ORGANIZATION OF THE MARKET IN MILK AND MILK PRODUCTS> ID="2">3.1 "> ID="1"> The objectives> ID="2">3.2 - 3.3 "> ID="1"> The means and the mechanisms> ID="2">3.4 "> ID="1"> Intervention prices> ID="2">3.5 "> ID="1"> Intervention measures> ID="2">3.6 "> ID="1"> Disposal measures> ID="2">3.7 - 3.10"> ID="1"> The trading system> ID="2">3.11 - 3.12"> ID="1"> Measures for controlling milk production> ID="2">3.13"> ID="1"> The linear levy or the co-responsibility levy> ID="2">3.14 - 3.16"> ID="1"> Other measures intended to restore balance to the market in milk and milk products> ID="2">3.17 - 3.19"> ID="1"> The quota system> ID="2">3.20 - 3.24"> ID="1"> Budgetary revenue and expenditure in the milk sector> ID="2">3.25"> ID="1"> Changes in budgetary expenditure> ID="2">3.26 - 3.28"> ID="1"> Changes in budgetary revenue> ID="2">3.29"> ID="1"> Budgetary booking of some revenue in the milk sector> ID="2">3.30"> ID="1">4. IMPLEMENTATION OF MEASURES FOR CONTROLLING MILK PRODUCTION> ID="2">4.1 "> ID="1"> Changes in production and quotas> ID="2">4.2 - 4.5 "> ID="1"> The non-application of the quota system by some Member States> ID="2">4.6 "> ID="1"> Measures affecting prices> ID="2">4.7 "> ID="1"> The relaxation of the quota system> ID="2">4.8 "> ID="1"> The relaxation of the Community system in favour of systems geared to national needs> ID="2">4.9 "> ID="1"> The complexity of the regulations and their disparate interpretations> ID="2">4.10 - 4.11"> ID="1"> The adjustments of the system to the Member States' national needs> ID="2">4.12 - 4.15"> ID="1"> The dilution of the dissuasive effect of the additional levy> ID="2">4.16"> ID="1"> Perpetuation of the general off- setting mechanism and the passing- on of the additional levy to individual producers> ID="2">4.17 - 4.21"> ID="1"> Transfers of direct sales reference quantities to deliveries> ID="2">4.22 - 4.26"> ID="1"> Delays in collecting the revenue deriving from the additional levy> ID="2">4.27 - 4.29"> ID="1"> Inadequate correction in cases where the fat content is exceeded> ID="2">4.30 - 4.34"> ID="1"> Mobility of quotas> ID="2">4.35 - 4.50"> ID="1"> Control measures> ID="2">4.51"> ID="1"> Management criteria and the Commission's monitoring of the various measures> ID="2">4.51 - 4.53"> ID="1"> Control measures in the Member States> ID="2">4.54 - 4.55"> ID="1"> Specific aid measures and the quota system> ID="2">4.56 - 4.57"> ID="1"> Impact of the quota system on the structure of farms> ID="2">4.58 - 4.63"> ID="1"> Review of the budgetary situation> ID="2">4.64 - 4.65"> ID="1">5. CONCLUSION"> ID="1"> The reduction in milk production and its inadequacy> ID="2">5.1 - 5.6 "> ID="1"> Weakening of the producer's responsibility> ID="2">5.7 "> ID="1"> National off-setting> ID="2">5.8 - 5.9 "> ID="1"> National transfers between deliveries and direct sales> ID="2">5.10"> ID="1"> Inadequate deterrent of the adjustment of deliveries or direct sales depending on the fat content> ID="2">5.11 - 5.12"> ID="1"> The financial advantage to traders of delaying payment of the additional levy> ID="2">5.13"> ID="1"> Disparate applications> ID="2">5.14 - 5.15"> ID="1"> Complexity of the measures> ID="2">5.16"> ID="1"> The risks and hazards of setting quotas for production> ID="2">5.17 - 5.18"> ID="1"> The quota system and farming structures> ID="2">5.19 - 5.21">

ANNEXES "" ID="1">I Table 1 - Budgetary revenue and expenditure of the common organization of the market in milk and milk products> ID="2">31"> ID="1">II Table 2 - Compensation for the definitive discontinuation of milk production> ID="2">32"> ID="1">III Table 3 - Situation regarding definitive transfers of guaranteed total quantities for direct sales to those guaranteed for deliveries> ID="2">33"> ID="1">IV Table 4 - Situation by Member State - Milk deliveries and guaranteed total quantities> ID="2">34"> ID="1">V Graph 1 - Deliveries of milk and guaranteed total quantities (in millions of tonnes)> ID="2">35"> ID="1">VI Graph 2 - Community milk production (in millions of tonnes)> ID="2">36"> ID="1">VII Table 5 - Distribution of the Community reserve between the Member States (Art. 5c(4) of Regulation (EEC) No 804/68)> ID="2">37"> ID="1">VIII Table 6 - Changes in prices> ID="2">38"> ID="1">IX Table 7 - On-farm own consumption> ID="2">39"> ID="1">X Graph 3 - Butter consumption in the Community (in millions of tonnes)> ID="2">40"> ID="1">XI Graph 4 - Consumption of skimmed-milk powder in the Community (in millions of tonnes)> ID="2">41"> ID="1">XII Graph 5 - Cheese consumption in the Community (in millions of tonnes)> ID="2">42"> ID="1">XIII Graph 6 - Public stocks of butter in the Community (in millions of tonnes)> ID="2">43"> ID="1">XIV Graph 7 - Stocks of skimmed-milk powder in the Community (in millions of tonnes)> ID="2">44"> ID="1">XV Graph 8 - Food aid (in Mio ECU)> ID="2">45"> ID="1">XVI Graph 9 - Changes in dairy cattle herds (in millions)> ID="2">46"> ID="1">XVII Graph 10 - Changes in the yield of dairy cows (in tonnes per cow)> ID="2">47"> ID="1">XVIII Table 8 - Milk production as a percentage of agricultural production> ID="2">48"> ID="1">XIX Table 9 - Fat content of cows' milk> ID="2">49"> ID="1">XX Table 10 - Situation regarding late payments as at 15 October 1991> ID="2">50"> ID="1">XXI Graph 11 - The CMOs - Payments (as a % of EAGGF-Guarantee payments)> ID="2">51"> ID="1">XXII Dilution of the levy> ID="2">52"> ID="1">XXIII Transfers of quotas between deliveries and direct sales - Application of the Article 6a procedure of Council Regulation (EEC) No 857/84 of 31 March 1984> ID="2">53"> ID="1">XXIV The specific aid measures: compensation for the definitive discontinuation and compensation for the temporary suspension of milk production> ID="2">54"> ID="1">XXV National programmes for buying-up quotas and for restructuring milk production> ID="2">57"> ID="1">XXVI Application in the Member States of Article 4a of Council Regulation (EEC) No 857/84> ID="2">58"> ID="1">The Commission's reply> ID="2">59">

SPECIAL REPORT No 4/93 on the implementation of the quota system intended to control milk production together with the Commission's reply (94/C 12/01)

1. INTRODUCTION

Seeking to restore balance to the market in milk products

1.1. The Community market in milk products is characterized by a tendency towards an imbalance between supply and demand which leads to structural surpluses. These surpluses have to be disposed of by means of various Community aid measures and subsidies whose financing requires considerable budgetary appropriations. In 1977, the Community established a more direct link between milk production and the cost of its disposal by introducing the linear levy, also called the co-responsibility levy. This levy, which is proportional to production, is not a true own resource within the meaning of Article 201 of the Treaty in the same way as the levies provided for as part of the common organization of the market in the sugar sector. It was introduced in order to make producers responsible for their surpluses and, by being incorporated into the system of aid measures provided for under the common organization of the market in milk and milk products, corresponds in practice to a reduction in the net prices paid to producers. In 1984, the Council found that, despite the imposition of the co-responsibility levy, the quantities of milk produced were continuing to increase at an unacceptable rate. In order to avoid choosing a measure which would have a drastic effect on farmers' incomes, such as a substantial reduction in intervention prices or other measures with a similar effect, the Council decided to impose a kind of strait-jacket on milk production by introducing a quota system(1) ()

which included, in the event of the quota being exceeded, a heavy penalty, the additional levy.

Previous work by the Court of Auditors

1.2. In its Special Report No 2/87 on the quota/additional levy system in the milk sector, adopted on 15 July 1987(2) ()

, the Court found that the objective of improving the balance between supply and demand had not been achieved because the quotas had been fixed at too high a level initially and because the dissuasive effect of the levy had itself been weakened by the interaction of the amendments described below (see paragraph 4.18), thus leading to a watering-down of the penalty. The system itself gave rise to considerable inequalities between producers, which were compounded by the failure on the part of various Member States to comply with the regulations.

1.3. Subsequently, in its Annual Report concerning the financial year 1988 (paragraphs 5.33 - 5.38)(3) ()

, the Court highlighted the practices intended to modify ex post facto the regulations governing quotas in order to regularize the cases where some Member States had failed to comply with the rules. These resulted in adverse financial consequences for the Community budget and unequal treatment of producers and Member States.

The aims of the Court of Auditors' audit

1.4. Bearing in mind the changes detailed elsewhere, some of which have already been described in the Court's 1987 Special Report, and in view of the fact that since the beginning of the financial year 1990 the market in milk products, one of the largest common market organizations (CMO), has once again been showing a worrying imbalance, the Court has conducted a new audit in order to assess the extent to which the revised system for controlling milk production is suited to the task of meeting the set objectives. The system has been examined from the point of view of not only effectiveness but also efficiency and economy. The common organization of the market in milk and milk products has also been examined from the point of view of the consequences of applying a quota system. This scrutiny has focused on the application of the large number of measures provided for in the regulations.

1.5. The Court of Auditors' observations are based on its investigations in the Commission and in the eleven Member States governed by the system for controlling milk production, application in Portugal of the common organization of the market in milk and milk products having been postponed by the Act of Accession until 1 January 1991. The audit inquiries concern the balance between supply and demand in the milk sector, the systems set up for applying the measures and the changes in the regulations which have tended to make the system more complex and more difficult to manage. 2. THE MARKET IN MILK AND MILK PRODUCTS

Milk and how it is used

2.1. Milk consists of a large number of components whose proportion may vary considerably depending on the breed and age of the animal and on the quantity and quality of the feed consumed. For cows' milk, whose density is 1,03 kg/l, the main components, apart from water, are fat (between 30 and 48 g/l or between 2,9 % and 4,7 %), lactose (between 47 and 54 g/l), and proteins such as casein (between 27 and 33 g/l) and albumin (between 4 and 6 g/l). The proportion in which these components are found in the milk has a direct influence on the profitability of the dairy industries. For example, in most countries the price paid to the producer for the milk depends on certain quality criteria such as the milk's fat content, protein content, acidity, etc..

2.2. Milk is either used on the farm or else is marketed. On the farm it may be used for animal feed, human consumption or processing into farm cheese or butter.

2.3. Milk which is marketed, except for small quantities of raw milk sold direct to the final consumer, is treated or processed by the dairy industry. Where these treatments make use of all the solid components of the milk at the same time, except for a variable proportion of the fat, the main final products are pasteurized milk, sterilized milk, UHT milk, concentrated milk and milk powder.

2.4. The components of milk may be used separately, by means of skimming or coagulation. Skimming separates the cream, which is churned to produce butter and buttermilk, and the skimmed milk, which may be broken down into caseins, milk wheys and skimmed-milk powder; by coagulating the milk, curdled milk is obtained, which is used for making cheeses.

World production and world price trends

2.5. On the world market, the Community and the former USSR are the two main milk producers. In 1990, Community production stood at 109 million tonnes and represented 22 % of world production, which in the same year, after a decade of low but steady growth, reached a record 476 million tonnes. An examination of the main geographical areas shows that in the Eighties milk production increased in the Third World and in the former USSR (109 million tonnes in 1990 or 22 % of world production), whereas in North America (85 million tonnes in 1990 or 18 % of world production) and in Oceania (14,5 million tonnes in 1990 or 3 % of world production) it levelled off and in Europe, particularly in the Community, it decreased.

2.6. Data on trading on the world market point to a downward trend in prices during the first half of the Eighties. This trend was then reversed, with prices picking up sharply in 1987, and this continued in 1988 and 1989.

2.7. In 1990 and 1991 there was a slight downturn in world prices of butter and skimmed-milk powder, but these prices were nevertheless still much higher than pre-1988 levels.

2.8. Even though the prices of butter and skimmed-milk powder on the world markets have virtually doubled from their 1986 level, they are still markedly lower than Community intervention prices. For butter, the intervention price (see paragraph 3.5) is in fact almost three times the world price.

Changes in milk production in the Community

2.9. Milk, which, in terms of value, accounted for 15,8 % of the Community's final agricultural production in 1991, is by far the most important agricultural product. There are one and a half million farmers in the Community producing milk.

2.10. Within the Community, the importance of milk varies considerably from one country to another: in the northern Member States, the share of the milk sector corresponds roughly to one fifth of final agricultural production, the highest proportions being in Ireland (31,7 % in 1991) and Luxembourg (47,3 % in 1991), whereas in the Mediterranean Member States the share of this sector is below 15 % (see Annex XVIII).

2.11. The Member States which are the main producers are France and Germany with a 1990 production of 26,5 million tonnes and 23,6 million tonnes respectively (excluding the former German Democratic Republic's milk production estimated at 4,9 million tonnes), i.e. 46 % of the Community's milk production.

2.12. Since 1983, the milk production of the Community, calculated for the Community of Twelve, has decreased from 118,8 million tonnes to 109,0 million tonnes in 1990, which is equivalent to a fall of 8,2 % during the period of application of the system for controlling milk production (see Annex VI). This reduction applies to most of the Member States. The fall in milk production was low in Ireland and Luxembourg. From the outset, these two countries received an additional quota deducted from the Community reserve because of the important role played by milk production in these two Member States (see Annex VII). It is difficult to evaluate the variation in production in Italy and Greece(4) ()

where the incomplete application of the system has stripped it of its dissuasive nature, thus making it ineffective. In Spain, the Court was not able to determine the true trend in milk production, which, according to the statistics sent to the Commission, remained below the guaranteed total quantity. In the absence of the statements stipulated(5) ()

, the Court was not able, during the inquiries it conducted in 1991 and early 1992, to obtain from the Spanish authorities the data which would have enabled it to verify whether the milk production exceeded the guaranteed total quantity.

2.13. Excluding the small quantities of milk consumed on farm, all the milk and milk products produced are either delivered to a dairy (about 90,5 % of milk production) or sold direct to consumers (about 3 % of milk production). Deliveries to dairies thus represent by far the main use of milk production and they are the use for which the most reliable data are available. According to the statistics available, the proportion of deliveries in relation to the total milk production shrank between 1983 and 1990, falling from 92,1 % to 90,5 % for the Community of Twelve.

2.14. In the Member States with the most efficient milk production, direct sales account for a negligible percentage of the production. Where statistics are available, which is not always the case, they show that direct sales are, to varying degrees, declining rapidly in all the Member States. If, in the case of those Member States which have not declared their direct sales, the guaranteed total quantities referred to in Regulation (EEC) No 857/84 are taken as the reference basis, it may be estimated that between 1985 and 1990 direct sales decreased from 3,5 % to 2,8 % of the Community's milk production, Portugal excluded.

2.15. On-farm own consumption is not included in the statistics. It is, however, possible to put a figure on it by calculating the percentage of the sum of deliveries and direct sales in relation to total production. Since this percentage fell from 94,8 % in 1985 to 93,4 % in 1990, own consumption has probably increased proportionally in relation to total production. It is likely even to have increased in absolute terms, rising from 5 970 000 to 7 089 000 tonnes (see Annex IX). The increase has probably been particularly high in Germany and the Netherlands, whereas in the Member States which have not implemented the quota system (Spain, Greece, Italy), own consumption is likely to have stayed at the same level as before the introduction of the quota system.

2.16. The figures in the table in Annex IX, estimated as described below, show that on-farm consumption by humans increased by around 20 % (+ 0,114 million tonnes), whilst the number of farms fell by 10 % between 1985 and 1987. This trend, which in all probability continued after 1987, is difficult to reconcile with farmers' tendency to make greater use of packaged milk products. One explication of this disparity may be that the declared quantities for direct sales are perhaps lower than is in the fact the case. Since some Member States do not have specific statistics for direct sales, it is difficult to investigate this aspect any more thoroughly.

Changes in the consumption of milk and milk products

2.17. Only about a quarter of milk production is consumed in the form of fresh products (milk for direct consumption, cream, yoghurt, etc.). The rest is processed into products which can be kept and stored more easily: butter (36 %), cheese (23 %), milk powder (5 %) and condensed milk (2 %).

2.18. Consumption of milk and milk products in the Community has been on the decline since 1987, decreasing from about 95 million to 91 million tonnes in 1990, whereas the amount produced and marketed still stood in 1990 at around 102 million tonnes. This imbalance between production and consumption is all the more worrying in that consumption includes large subsidized sales of butter and skimmed-milk powder for animal feed.

2.19. In the EEC, per capita consumption of all milk products expressed in whole milk equivalent currently stands at around 310 kg per year, whereas ten years ago it stood at only 300 kg(6) ()

. In general, consumption of milk products has increased in the Mediterranean countries, where consumption of milk products has always been lowest, and it has declined in the Member States where it was highest, particularly in Ireland, Denmark and the United Kingdom.

2.20. These changes in consumption are influenced not only by the prices of milk and milk products in relation to substitute products, but also by the alteration in consumer habits and by the availability of milk substitutes. Detailed examination of these changes shows a slight increase in the consumption of milk and fresh products (+10 % between 1983 and 1990), a rather larger rise in the consumption of cheese (+19,5 % between 1983 and 1990 - see Annex XII) and a sharp decline in the consumption of skimmed-milk powder ( 50 % between 1983 and 1990 - see Annex XI). Despite Community measures to promote the consumption of butter, the main milk product, the downward trend has speeded up during the last few years ( 12,7 % between 1987 and 1990 - see Annex X). The downturn in butter consumption is largely attributable to changes in the behaviour of consumers, who are tending to buy more competing products, such as margarine, reduced-fat butter and blends of milk fats and non-milk fats. These new products competing with certain milk products are continually appearing on the market; their market share is as yet quite small, but it is likely to expand to an extent which it is difficult to foresee.

Changes in exports and imports

2.21. Exports in terms of milk equivalent, after peaking at 16,5 million tonnes in 1988, of which about seven million tonnes of milk equivalent were exported to the former USSR in the form of butter, went down again to 12,8 million tonnes in 1990.

2.22. During the period following the introduction of the quota system, the Community saw its share of world trade rise from 42,9 % in 1985 to 48,1 % in 1990 in relation to a relatively stable total of between 27 and 30 million tonnes.

2.23. In 1990, imports of milk products into the Community may be estimated at over four million tonnes. Butter (88 728 tonnes in 1990, i.e. about 1,6 million tonnes of milk equivalent) is imported almost exclusively by the United Kingdom (62 159 tonnes in 1990). With regard to cheese, in 1990 Italy (36 787 tonnes), the United Kingdom (20 062 tonnes) and Germany (17 956 tonnes) accounted for two thirds of the 113 106 tonnes imported (more than one million tonnes of milk equivalent).

2.24. Even though some traditional flows of imports of milk products into the Community, particularly the United Kingdom's butter imports, have to date survived the Community preference as a result of international agreements, total imports from third countries account for only a very small proportion of Community consumption of milk products (about 4 %).

Food aid

2.25. Part of Community exports (about 10 %) can be attributed to food aid measures. In 1990, food aid to assist - usually the poorest - developing countries involved 8 885 tonnes of butteroil and 74 647 tonnes of skimmed-milk powder. This aid has shown a downward trend since 1982, with Community food aid programmes decreasing from 150 000 tonnes of skimmed-milk powder (about 1,6 million tonnes of milk equivalent) and 45 000 tonnes of butteroil (around 1,1 million tonnes of milk equivalent) to 94 100 tonnes of skimmed-milk powder (about 1 million tonnes of milk equivalent) and 18 000 tonnes of butteroil in 1990 (around 0,5 million tonnes of milk equivalent). In total, food aid exports have decreased from about 2,6 million tonnes to about 1,4 million tonnes of milk equivalent (see also paragraph 3.10). Budgetary expenditure to finance this food aid fell from 378,8 Mio ECU in 1984 to 103,3 Mio ECU in 1990 (see Annex XV).

Imbalance in the market in milk and milk products

2.26. In order to assess to what extent the market is in balance, it is necessary to look at various factors, namely the Community's degree of self-sufficiency in milk products, changes in Community stocks and developments in exports of milk products, including food aid.

The Community's degree of self-supply in the various milk products

2.27. For the three main milk products which are traded internationally, namely butter, skimmed-milk powder and cheese, the Community has far exceeded the level of self-supply.

2.28. During the period from 1983 to 1990, the output of butter sharply decreased. In 1983, butter production outstripped consumption by 50 %. Thanks mainly to the special measures to encourage butter consumption and because of the drop in production, the gap between butter output and consumption narrowed to 19 % in 1990.

2.29. In the case of skimmed-milk powder, consumption of which is still heavily subsidized, the imbalance worsened despite the considerable drop in production. In 1990, output exceeded Community consumption by 53 %, whereas up until 1988 the situation regarding production and consumption was distinctly more balanced.

2.30. In the cheese sector, the situation is less serious: as a result of a large increase in consumption, the latter is only 6 % to 8 % below production.

Changes in stocks of butter and skimmed-milk powder

2.31. In June 1991 stocks of butter and skimmed-milk powder reached a level equivalent to three and six months' consumption respectively. This level of stocks is not inordinately worrying. By contrast, the speed at which stocks can build up merely reflects the imbalance in the market in milk and milk products and reveals the Community market's dependence on export operations that can be carried out at a particular time, as shown by the fluctuations in the stocks of butter and skimmed-milk powder during 1990. Between 1987 and 1989 these stocks decreased sharply and then levelled out at a few thousand tonnes; as of the second quarter of 1990, however, they again started to increase rapidly, reaching 450 000 t for butter and 498 000 t for skimmed-milk powder by 30 June 1991 (see Annexes XIII and XIV). This increase in stocks is due to too great a gap (18 million tonnes in 1990) between production (109 million tonnes in 1990) and consumption (91 million tonnes) and to a fall in exports, particularly in 1991(7) ()

. By contrast, stocks are decreasing only slowly, even though their disposal within the Community is encouraged by considerable subsidies.

Lack of solvent outlets for exports

2.32. Exports to third countries cannot be developed much for various reasons, in particular because they already represent nearly half of the world trade in milk products. In other parts of the world where demand could be solvent, especially in Asia, people traditionally consume fewer milk products than in western industrialized countries. Exported milk products, particularly those exported as food aid, are often used in the importing country to reconstitute milk products which are called fresh, such as whole milk, yoghurts and 'fromage frais'. In the poorest developing countries, which receive the most food aid, however, the local people do not have the buying power nor are there the public resources to allow small undertakings reconstituting milk products to balance their books.

The persistent imbalance

2.33. Since 1984, the recitals of various Council regulations(8) ()

have regularly contained a description of the objectives to be achieved by the measures for controlling milk production.

2.34. Thus, in 1984, the Council stated that the market in milk products in the Community was suffering from structural surpluses as a result of an imbalance between supply and demand for milk products. It then noted that, despite the application of the co-responsibility levy introduced by Regulation (EEC) No 1079/77, quantities of milk delivered were increasing at a rate such that disposal of surpluses was imposing financial burdens and market difficulties which were jeopardizing the very future of the common agricultural policy(9) ()

. When the quota system was introduced, the Council considered that a careful examination of the different possible ways of re-establishing balance in the milk sector showed that, despite the administrative difficulties which its implementation might involve, the most effective method, and the one having the least drastic effect on the incomes of producers, was the introduction of an additional levy on quantities of milk delivered beyond a guarantee threshold(10) ()

.

2.35. Two years later, in 1986, the Council stated(11) ()

that market trends had shown that the level of guaranteed total quantities was higher than that deemed to be desirable for the purposes of striking a balance between supply and demand and that therefore the guaranteed total quantities ought to be reduced by 3 %.

2.36. Another two years later, in 1988, the Council stated again(12) ()

that it was then clear that the results obtained from these arrangements would not suffice to achieve the objective of adaptation of supply to demand by the end of the five-year period of application of the quota system and the duration of the said arrangement would have to be extended to eight 12-month periods.

2.37. In June 1991, the Council still considered that the market in milk and milk products was in persistent surplus and that to meet the imperative need of attaining some degree of balance between supply and demand the guaranteed total quantities needed to be reduced(13) ()

.

2.38. Thus, throughout the period of implementation of the measures for controlling milk production and in particular the quota system, the stated objective is the same, namely that of achieving some balance between supply and demand in the milk sector.

2.39. The Council's statements set out above show that the Community legislator, faced with the need to restrict the expenditure arising from the growing surpluses on the milk market, has chosen to introduce the quota system rather than reduce the support prices, even though the latter were in fact stimulating production which was often difficult to sell. By maintaining prices at levels that take account more of social needs linked to the maintaining of incomes than of the real situation on the market, the Community has, however, moved away from the logic of allocating resources according to economic performance, since producers have seized on the opportunity to produce a certain quantity of milk levy-free, which produces a guaranteed income regardless of their respective abilities. 3. THE COMMON ORGANIZATION OF THE MARKET IN MILK AND MILK PRODUCTS

3.1. The common organization of the market in milk and milk products was set up in 1968, at the same time as most of the other common market organizations, by Council Regulation (EEC) No 804/68 of 27 June 1968. This common market organization currently covers fresh milk, concentrated milk and powdered milk, as well as cream, butter and some types of cheese. Indirectly, all milk products benefit from the intervention system set up for butter and skimmed-milk powder.

The objectives

3.2. The common organization of the market aims to achieve the objectives defined in Article 39 of the Treaty. In order to fulfil these objectives, the Community regulations provide for a single trading system at the external frontiers and for intervention measures on the market to be taken in the Member States by intervention agencies. These measures need to be standardized so as not to impede the free movement of the goods in question within the Community.

3.3. By its management of the common organization of the market, the Commission therefore has to stabilize the market and ensure milk producers a fair income by maintaining the market price of milk at a target level specific to each milk year but standard for all the Community. It must also ensure reasonable prices for consumers.

The means and the mechanisms

3.4. It is by stabilizing prices, in particular of butter and skimmed-milk powder, that the Commission manages to keep the price of whole milk at the desired level. It was decided to concentrate intervention on these two products because, for the most part, any milk surpluses are processed into butter and skimmed-milk powder, as these products are easy to store.

Intervention prices

3.5. The main methods used to manage this common market organization are 'the annual fixing of a target price(14) ()

for milk, of threshold prices(15) ()

for pilot products of milk product groups... and of an intervention price(16) ()

for butter'(17) ()

, skimmed-milk powder and some cheeses.

Intervention measures

3.6. The purpose of the intervention measures is to guarantee a common target price for milk delivered to dairies. To that end, in addition to intervention in respect of butter and fresh cream, other Community intervention measures were required to enable the best return to be obtained from milk proteins and to stabilize the prices of products which have special importance in determining producer prices for milk (4). The intervention measures take the form of the buying-up at a predetermined price by the intervention agencies of surpluses of butter and skimmed-milk powder, and of cheese, in particular Grana Padano and Parmigiano Reggiano, which are offered to them when these surpluses bring about a significant drop in the market prices. The surpluses thus bought up are stored in public warehouses. Aid is also paid for the private storage of these products in order to deal with seasonal surpluses.

Disposal measures

3.7. Since 1974, the Community has been taking measures to restore balance to the market. In order to absorb surplus production, it grants subsidies for the use of skimmed-milk powder, aid for the use of butterfats (e.g. aid for the purchase of butter by institutions and non-profit-making bodies, butter for pastry products, etc.) and subsidies for milk for schoolchildren, with a view to stimulating internal demand.

3.8. Furthermore, exporters receive refunds for their sales on the world market. Production surpluses, which tend to be self-perpetuating, often have the effect of depressing prices on the world market and, by means of the refunds which are thus augmented, increase the Community's budgetary expenditure.

3.9. Food aid, in the form of butteroil(18) ()

(butteroil with a milk-fat content of not less than 99,8 %) and skimmed-milk powder, was, at least at the outset, also regarded as a way of disposing of surplus production, since consumption habits may change and the recipient developing countries may turn into solvent importer markets.

3.10. Despite these measures, sales to clear stocks at prices below intervention prices have in the past had to be held every so often (for example: the sale of 307 000 tonnes of butter to the former USSR in 1988).

The trading system

3.11. The creation of a single Community market for milk and milk products involves, apart from a single price system and intervention measures, the introduction of a single trading system at the external frontiers of the Community. This trading system is combined with the intervention measures and includes import levies and export refunds. The purpose of this regulated trading system is to stabilize the Community market, in particular by preventing price fluctuations on the world market from affecting the prices which prevail within the Community(19) ()

.

3.12. Community prices being far higher than world prices, exports are made possible only with the help of refunds paid to exporters. The cost of exports has increased, with spending on export refunds rising from 1 943,4 Mio ECU in 1984 to 1 945,8 Mio ECU in 1990, reaching a record 3 082,4 Mio ECU in 1988.

Measures for controlling milk production

3.13. As a result of experience acquired, the Community decision-makers came to realize that the market in milk and milk products could no longer be brought into balance by action relating solely to demand without also doing something about supply. They took the view, however, that a direct cut in prices sufficient to restore balance to the market could not be made without this resulting in a drastic reduction in farmers' incomes. Thus, as a first step, they introduced the linear levy, also known as the co-responsibility levy, and then finally the quota system.

The linear levy or the co-responsibility levy

3.14. In the knowledge that the net price received by the producer is the main factor profoundly influencing supply, it was decided to introduce a co-responsibility levy in 1977(20) ()

. At that time, the Council, which, at the beginning of each milk year, fixes the target price for milk for the forthcoming year, considered that a more direct link needed to be established between production and outlets for milk products by introducing for several years (no precise number has ever been specified) a uniform levy on all milk delivered to dairies and certain farm sales of milk products. Producers were thus forced to shoulder some of the financial responsibility for their surpluses.

3.15. The co-responsibility levy, which was fixed in September 1977 at a rate of 1,5 % of the target price, has been successively increased, reaching 3 % for the milk year 1984/85. Since 1 April 1989, following sales of butter to the former USSR, the introduction of the quota system and the favourable situation of the prices on the export markets, and with Community stocks being virtually non-existent, the Council has brought down the basic rate to 1,5 %. This levy does not apply to Portuguese producers nor to producers in mountain and hill areas and less-favoured areas(21) ()

.

3.16. In 1984, the Council stated that(22) ()

, over the years, the co-responsibility levy had lost its effectiveness and had failed to prevent the imbalance affecting the market in milk and milk products from worsening in the early Eighties. The effectiveness of the co-responsibility levy was definitely questioned, since, as part of the reform of the common agricultural policy, it was abolished.

Other measures intended to restore balance to the market in milk and milk products

3.17. The introduction of the co-responsibility levy was accompanied by 'specific measures... to encourage the expansion of markets and the disposal of surpluses on the Community and world markets'(23) ()

. The proceeds of the linear levy are incorporated into the intervention system and serve to finance measures on the market, to improve the quality of milk and to subsidize the sale of milk to schoolchildren. The application of these measures was examined in the Court's Special Report No 1/86(24) ()

.

3.18. The Council followed these measures with others also aimed at reducing supply, such as the aid to reduce the number of dairy cows, the premiums for the non-marketing of milk and premiums for the conversion of dairy herds(25) ()

.

3.19. Furthermore, the policy of intervention buying 'on demand' has also been altered, firstly by restricting intervention buying to one period of the year(26) ()

and secondly by allowing intervention buying to be suspended if the market situation so warrants. During periods when intervention buying is thus suspended, market stability may be maintained by making use of the technique of standing invitations to tender(27) ()

or by resuming buying-in when the market price has fallen to below a lower threshold (for example, 92 % of the intervention price) for a representative period.

The quota system

3.20. Lastly, another system for controlling milk production, which is generally known as the milk quota system, was introduced by the Council at the time of the fixing of prices for the milk year 1984/85 and has since then been the central measure for restricting supply. This system provides for an annual individual reference quantity to be established, which, if it is exceeded, is backed up in law by a financial sanction, known as the additional levy. Initially established for a five-year period, this system was extended, in 1988(28) ()

, until 31 March 1992. In 1992, the Council, as part of the reform of the common agricultural policy, retained the milk quota system for a further eight years.

3.21. The quota system makes a distinction between 'deliveries' to dairies and other types of industrial or commercial undertakings, which represent the main way of disposing of milk, and 'direct sales' to consumers of milk or derived farm products. For deliveries, Member States can choose (see Annex XXVI) between two formulas for applying the additional levy: Formula A, where the levy is payable by every producer who exceeds his quota, and Formula B, where the levy is payable by the purchaser (the dairy or other undertaking), which passes the burden on to the producers who have caused the overrun. Producers who have exceeded their specific 'direct sales' quota are obliged to pay the levy to a competent body. The Court considers that the Commission, bearing in mind the experience acquired over the past eight years in the various Member States, should examine which of the two formulas, A or B, is the most suitable, particularly from the point of view of sound financial management, for attaining the objectives of the quota system, i.e. bringing milk production under control. In December 1992, under the new system, the Council adopted the Commission recommendation of 1991 concerning a single formula.

3.22. For the milk years from 1984/85 to 1988/89, the guaranteed total quantity for deliveries to dairies has in principle been fixed at the level of the 1981 deliveries increased by 1 %. The guaranteed total quantity for deliveries for the Community of Ten was thus 99,5 million tonnes, except for the milk year 1984/85 where provision had been made for a transitional period with a quota of 99,9 million tonnes in order to make it easier for the sector to adapt.

3.23. Any exceeding of the individual reference quantity is 'penalized' by a Community levy, borne by the producers, called the additional levy. This levy, introduced with effect from 1 April 1984(29) ()

, hits hard at the quantities marketed in excess of the quota. The amount of the levy should, in principle, cancel out the revenue corresponding to all milk delivered to dairies or sold directly by the producer over and above the individual reference quantity allocated previously.

3.24. The financial penalty imposed on quantities of milk delivered by producers in excess of their quota was originally fixed, per kilogram in excess, at 75 % of the target price for milk(30) ()

for deliveries under Formula A and for direct sales, and at 100 % of the target price under Formula B (see paragraph 3.21). Since 1987 it has been the same for both formulas (100 %, then 115 % in 1990). The financial penalty (75 % of the target price) has remained unchanged for direct sales (see Annex VIII). Thus, for example, for the milk year 1990/91 the target price for milk was fixed at 268,1 ECU per tonne. For overruns of the specific quota for direct sales the additional levy is 268,1 x 75 % = 201,1 ECU per tonne, whereas for the two delivery formulas, the financial penalty payable in the event of an overrun is 268,1 x 115 % = 308,3 ECU per tonne. In its July 1991 Communication to the Council and the European Parliament on the development and future of the common agricultural policy, the Commission recommends that in the event of overrun of the individual reference quantity the penalty to be imposed on producers who have a direct sales quota be the same as that imposed on the other producers.

Budgetary revenue and expenditure in the milk sector

3.25. Until 1989 the milk sector was the most costly (about 20 % of EAGGF-Guarantee expenditure) of all the sectors of the common agricultural policy. It is only since 1990 that payments to the common organization of the markets in oils and fats and in protein plants have exceeded those relating to the market in milk products (see Annex XXI).

Changes in budgetary expenditure

3.26. Whereas between 1983 and 1991, total EAGGF-Guarantee expenditure doubled to stand at 31 527,8 Mio ECU in 1991, payments made in the context of the common organization of the market in milk and milk products have remained at more or less the same level since the introduction of the quota system. However, from 1983 to 1984 expenditure increased by 1 371,9 Mio ECU (+27,8 %). This rise in spending may be explained by an increase of 611,4 Mio ECU in storage costs and of 616,6 Mio ECU in export refunds (see Annex I), which reflects the problems encountered at that time in this market.

3.27. Total expenditure in the milk sector in 1991, prior to off-setting with the linear levy and the additional levy, was 6 786,3 Mio ECU, a rise of about 700 Mio ECU in comparison with the previous financial year, but at the same level as the spending of the financial years 1988 and 1989, which had been marked by particularly high export refunds (see Annex I). Current expenditure is, however, close to the nominal level recorded in 1984, i.e. when the quota system was introduced. It should nevertheless be pointed out that since the financial year 1989 quite a large item of expenditure, namely the refunds to Member States for the measures to dispose of butter in public storage (3 200 Mio ECU to be refunded over four years), has been entered in the accounts elsewhere than in Chapter 20 'Milk and Milk Products'; in 1991, this item amounted to 797,4 Mio ECU.

3.28. An analysis of the different types of expenditure for this market organization shows that expenditure on intervention gradually decreased from 2 729,7 Mio ECU in 1983 to 2 133,9 Mio ECU in 1991. Expenditure on disposal varies between 400 and 900 Mio ECU per year, to which must be added the four annual tranches of some 800 Mio ECU to reimburse the Member States, as of 1989, for the advance financing of the costs of disposing of public storage butter incurred in 1987 and 1988. The costs generated by the measures for controlling milk production, especially in the form of compensation for the definitive discontinuation or temporary suspension of milk production, amounted to 688,3 Mio ECU in 1991.

Changes in budgetary revenue

3.29. On the revenue side, the linear levy, which is the main item, decreased from 527,4 Mio ECU in 1983 to 292,0 Mio ECU in 1991. The additional levy has been subject to considerable fluctuations, which are due to the varying degree to which quotas are exceeded and to variable off-setting on the same budget heading, examined in paragraph 3.30 of this report, against expenditure permitted by Regulation (EEC) No 857/84 for financing the buying-up of quotas for the restructuring of milk production; in 1985 in particular, the levy ended up as an item of expenditure because Germany was reimbursed for the levy which had been wrongly paid to the EAGGF in 1984. The co-responsibility levy and the additional levy combined represent only about 5,9 % of the total expenditure in the milk sector, leaving aside the specific measures to assist the reduction of production.

Budgetary booking of some revenue in the milk sector

3.30. The additional levy, like the co-responsibility levy, is not a Community own resource within the meaning of Article 201 of the Treaty. It is regarded as negative expenditure entered under Chapter 20 'Milk and Milk Products' of Title 2 of Part B of the budget. The Court must reiterate its earlier criticism of the use of the 'negative expenditure' method which involves some revenue being entered in the budget net of expenditure (see the Court's Annual Report concerning the financial year 1990, paragraphs 3.21 - 3.22)(31) ()

. The practice of including negative items in the expenditure budget contravenes the budgetary principle that there should be no off-setting between income and expenditure, as laid down in Article 4(1) of the Financial Regulation in these words: 'all revenue and expenditure shall be entered in full in the budget and in the accounts without any adjustment against each other'(32) ()

. 4. IMPLEMENTATION OF MEASURES FOR CONTROLLING MILK PRODUCTION

4.1. Initially fixed at too high a level in relation to demand, the guaranteed reference quantities have been successively reduced by the Council since the quota system came into force (see Annex IV).

Changes in production and quotas

4.2. By way of an interim review of the situation, it is helpful to examine whether the quota system, particularly its 'deliveries to dairies' aspect, the system's biggest component, has succeeded in the course of successive milk years in controlling production.

4.3. After the system's first year of application (1984-1985), deliveries remained constantly in excess of the guaranteed total quantities for all the Community, even though they decreased from 99,2 million tonnes in the first milk year to 93,3 million tonnes (excluding Spain and Portugal) in the seventh (1990/91). The fall in production occurred mainly in the fourth (1987/88) and fifth years (1988/89), for which the quotas were reduced at the same time as measures relating to the definitive cessation and the temporary suspension of milk production came into force. From then until 1991, Community production was virtually stable.

4.4. With regard to relative quota overruns, it has been found that, for the fifth milk year (1988/89), the guaranteed total quantities were exceeded by far greater amounts than in the periods before or after (see graph in Annex V).

4.5. For the sixth milk year, i.e. 1989/90, deliveries totalled 98,7 million tonnes (Spain included), in comparison with 97,7 million tonnes of total quantities available. It should, nevertheless, be noted that the ceiling would have been exceeded by twice as much had the 'Nallet package' measures(33) ()

not caused an overall increase of one per cent in the quantities available in the Member States at the time the milk year 1989/90 came to an end.

The non-application of the quota system by some Member States

4.6. The Court found that in the Member States where the major milk-producing regions are located, namely in the north of the Community, the measures for controlling milk production are applied relatively strictly, whereas in Spain, Greece and Italy the quota system is applied only in a fragmentary fashion (see paragraph 4.55).

Measures affecting prices

4.7. The measures for controlling milk production, of which the quota system is the cornerstone, reflect the legislator's desire to achieve a levelling-out and even a quantitative reduction in milk production, without necessarily, however, having to make cuts in Community prices. Since the introduction of the quota system in 1984, the target prices have gone on being fixed for each milk year at a level which has remained more or less the same, i.e. 278,4 ECU per tonne for the milk years 1985/86 to 1989/90 and 268,1 ECU per tonne since the milk year 1991/92. Thus, from 1984 to 1987, the prices of milk paid to producers remained stable in most of the Member States. In the period 1988-1989, by contrast, they rose substantially in the Benelux, Germany, Denmark and Ireland. In this same period, the prices of milk paid to German, Danish and Luxembourgish producers even exceeded the target price of milk. In 1990 and 1991 the prices paid to producers in all the Member States except for Italy fell back down to below the target price (see Annex VIII). The prices paid to producers vary from one country to another and the price disparities may be quite large: in 1990 Italy had the highest price paid to producers with 34,48 ECU/100 kg, whilst the lowest price was in Ireland with 22,14 ECU/100 kg. These price differences are influenced above all by the Member States' level of self-sufficiency in milk products. In general, the prices paid to producers are lowest in Ireland, a country with a surplus of milk products and which exports them, whereas the prices paid to producers are highest in Italy, a country with a deficit of milk products and which imports them. With regard to the fluctuations over the years in the prices paid to producers, it has been found that the prices fall when Community stocks of butter and skimmed-milk powder increase and vice versa.

The relaxation of the quota system

4.8. The quota system has undergone successive modifications in order to reduce its constraints: this may be seen in the relaxation of the Community system in favour of systems geared to national needs and in the watering-down of the dissuasive effect of the additional levy.

The relaxation of the Community system in favour of systems geared to national needs

4.9. This relaxation of the quota system has two aspects: the complexity of the regulations and their disparate interpretations, and the adaptations of the quota system to national needs.

The complexity of the regulations and their disparate interpretations

4.10. The Community regulations, which were already highly complex when the Court's Special Report No 2/87 was published, have been subject to supplements and adjustments(34) ()

which have made it even more difficult to put control of milk production into practice. In fact, the quota system is regularly made more complicated by additional measures, such as the schemes for the definitive discontinuation of milk production, which are often tailored by each Member State to suit its own requirements (see Annex XXIV, paragraph 5), or the mobility of quotas in all forms of transfers. Thus, the large number of Community measures applied 'à la carte' in all their various forms by the Member States is only the tip of the iceberg as regards the complexity of these measures, which sometimes became more relaxed and sometimes more restrictive (see paragraphs 4.12 - 4.15).

4.11. The high number of appeals shows that milk producers have a great deal at stake and that the application of the regulations leaves enough room for differing interpretations to justify a request for a preliminary ruling. Without counting the judgments handed down by national courts, the Court of Justice of the European Communities has ruled on about 30 disputed cases concerning for the most part the allocation of individual reference quantities. The Court of Justice's decisions on the 'SLOM'(35) ()

cases (see paragraph 4.65) have had considerable consequences for the quota system in so far as about one million tonnes had to be reserved ex post facto for the 'SLOM' producers. On 29 January 1992, 102 appeals brought by natural or legal persons were still pending at the Court of Justice. Furthermore, the Court of Justice granted the 'SLOM' producers the right to receive damages and interest. In fact, by its Judgment of 19 May 1992 in Joined Cases C-104/89 and C-37/90, it ordered the Community to make good the damage suffered by the 'SLOM' producers by the fact that they were not allocated a reference quantity right from the introduction of the quota system in 1984. Some 800 applications for damages and interest have been made to the Commission(36) ()

.

The adjustments of the system to the Member States' national needs

4.12. Whilst the principles themselves are relatively simple, putting them into practice has gradually become more and more complex. For the initial allocation of the individual quotas, the Community regulations(37) ()

fixed the reference periods and set a ceiling on the individual quotas per Member State in the form of a guaranteed total quantity (one for deliveries, which is directly derived from the basic Regulation, and one for direct sales(38) ()

).

4.13. The provisions have been amended several times: the first modifications were made between 1984 and 1986 in order to extend the Member States' power to adjust and modulate the quotas for the benefit of some categories of producer, whilst the second lot of amendments have been made on a number of occasions since 1984 in order to reduce or increase the Member States' guaranteed total quantities, to which must be added a reserve managed by the Community (see Annex VII).

4.14. Provision has been made in the above-mentioned Regulation (EEC) No 857/84 from the outset and subsequently in a wide variety of ways for measures allowing the Member States to set up national schemes for encouraging farmers to give up milk production and for reallocating quotas to farmers classified as priority. The Member States have made very varied use of these possibilities of buying up and reallocating quotas (see Annex XXV). They can buy up quotas by granting compensation paid in one or more instalments to producers who undertake to discontinue all or part of their milk production. The reference quantities thus released are, if need be, added to the national reserve with a view to reallocation according to criteria determined to this end.

4.15. The notion of the 'liable' Member State became reality as soon as provisions were introduced allowing Member States to off-set individual producers' overruns against their shortfalls in relation to their 'deliveries' quotas in various ways and, for the first two periods of application of the quota system, to pay into the Community budget only the levy corresponding solely to the amount by which the guaranteed national reference quantity was exceeded. Furthermore, the Member States have been granted the possibility of using the revenue from the additional levy that they have collected for financing national schemes for the cessation of milk production or for restructuring milk production when, overall, the maximum quantities of the said Member State have not been exceeded(39) ()

. These provisions increase the emphasis put on national responsibility. As a consequence, the geographical distribution of milk production tends to remain the same instead of developing in those regions where it has proved to be economically the most justified. Thus, regional specialization will be possible only at best within the Member States.

The dilution of the dissuasive effect of the additional levy

4.16. The Court has found that the dissuasive effect of the additional levy is watered down by several factors: the perpetuation of the general off-setting mechanism, the passing-on of the additional levy to individual producers, the way in which the transfers of reference quantities are made between direct sales and deliveries, the delays in collecting the levy, the inadequate adjustment in the case of overruns of the fat content, and quota mobility.

Perpetuation of the general off-setting mechanism and the passing-on of the additional levy to individual producers

4.17. The provision concerning the off-setting mechanism(40) ()

, which was introduced as a provisional measure in 1985 and which authorizes the Member States to allocate the unused reference quantities of producers or purchasers to producers or purchasers in the same region and, if need be, in other regions, has been extended several times. Originally restricted to the first milk year (1984/85) because of producers' difficulties in adjusting to the new regulations on quotas, the so-called 'Article 4a' mechanism was prolonged for the second year, as of 1985, for the following three in 1987(41) ()

, and in 1988(42) ()

until the expiry of the system (1992). This arrangement has thus taken on a permanent, structural nature, 'given its flexibility,... in view of certain situations'(43) ()

. It applies to both deliveries and direct sales and may be adjusted according to certain criteria (special situation of various categories of persons liable for the levy, or of certain regions). The Article 4a mechanism, which has thus been repeatedly renewed by the Council, has a number of consequences with regard to the original objective of controlling milk production. On a general level, the wording of the text as amended in 1987(2) and then in 1989(44) ()

allowed - and allows - the Member States to restrict the additional levy payable by the producers or purchasers to just the overrun of the guaranteed total quantity, i.e. the national quota. There has thus been a move right away from the notion of an individual quota, i.e. the idea which prevailed initially at the time of the introduction of the quotas and which aimed to make milk producers responsible for their surpluses by imposing on them, if they exceeded their quota, the penalty of the additional levy. By allowing overruns of quotas to be traded off against cases of quota shortfalls, however, the impact of the additional levy has been undermined.

4.18. In its Special Report No 2/87 on the quota/additional levy system, the Court pointed out that the joint application of the principle of national off-setting of quotas (see paragraph 4.17) and of Formula B (purchaser quota) had resulted in the dissuasive effect of the additional levy being weakened in the event of an overrun. In fact, the interplay of these mechanisms led to a 'dilution' of the levy (see Annex XXII), reflected in a reduction in the effective rate of the levy actually payable in the end by those producers who exceeded their quota.

4.19. In concrete terms, the way in which Article 4a is applied varies considerably from one Member State to another (see Annex XXVI). In most of the Member States, the producer does not know his final quota until the end of the milk year. Some Member States have set up systems for forecasting the potential amounts which will be available for distribution under the off-setting mechanism at the end of the milk year. One such country is Denmark, which has set up a forecasting system of this kind in order to minimize the risk of exceeding the individual reference quantity as supplemented by the off-setting procedure. In the Member States where off-setting is applied according to a system which favours certain priority producers, the latter feel encouraged to exceed the individual reference quantity which was allocated to them at the beginning of the milk year by the amount of off-setting they expect to benefit from at the end of the milk year.

4.20. The dilution effect was partly rectified by the change in the way of calculating the levy which was introduced in 1987(45) ()

and became applicable as of the milk year 1986/87. For Formula B, it is a case of implementing the 'Danish' system, i.e. distributing the reference quantities that have not been used by producers within the dairies (purchasers) in proportion to the quotas of the producers who have overrun. Thus, only those producers who have recorded the biggest relative overruns in comparison to their quota pay the levy. Furthermore, a number of corrective provisions were introduced by the same amending Regulation, and again in 1988(46) ()

, with the aim of imposing a 'surcharge' on the biggest overruns.

4.21. In Italy and Belgium, the additional levy was stripped of its dissuasive effect on milk producers for one of its first years in so far as it was the Member States themselves who, after much procrastinating, paid this levy out of their national budget. In addition, corrections carried out during the clearance of accounts procedure concerning the additional levy were not, generally speaking, passed on by the Member States to the producers.

Transfers of direct sales reference quantities to deliveries

4.22. In addition to their 'deliveries' quotas, the Member States have distributed amongst their producers the 'direct sales' quotas which have been allocated to them by the Community regulations. As mentioned above, the size of these quotas is small in comparison to deliveries (about 3 % of milk production); furthermore, there is insufficent information about the actual amounts of direct sales and they are not properly checked. Community regulations provide for transfers between the two categories of quota to be made in two ways:

(a) under an amendment made in 1985(47) ()

(Regulation (EEC) No 804/68, Article 5c), at the request of the Member States the Commission can 'adjust' the national quotas for deliveries and for direct sales on the basis of objective data to take account of structural changes affecting these two categories of milk disposal by producers; several amending regulations have been adopted since 1985 and have resulted in net transfers of quantities available from direct sales to deliveries. These successive transfers quite obviously show, at least to a certain extent, how generous the level was at which the direct sales quotas were originally fixed and their downward trend;

(b) pursuant to an amendment (Regulation (EEC) No 857/84, Article 6a) also made in 1985(48) ()

, individual producers who have two reference quantities (one for deliveries and one for direct sales) may, by a decision of the competent national authorities, obtain an increase in one of the reference quantities (and a corresponding decrease in the other) within a 12-month period to enable them to adapt to changes in their marketing requirements. The text provides for the corresponding movements to be entered in the national reserve which the Member States are required to constitute within each of the main categories. The way in which this procedure is interpreted varies considerably from one Member State to another, but on the whole they use it as a means of minimizing the amount by which they exceed their guaranteed total quantity for deliveries. Here again, this results in the impact of the individual quotas being reduced.

4.23. The case of Greece illustrates par excellence the uncertainty surrounding the volume of direct sales allocated at the outset as a specific quota. For the milk year 1984/85, the guaranteed total quantity for deliveries was fixed at 472 000 t and that specifically for direct sales at 116 000 t. In accordance with the provisions of the Regulation(49) ()

, the Commission transferred, in several stages, 110 000 t of the guaranteed total quantity specific to direct sales to the guaranteed total quantity for deliveries. Thus, for the milk year 1991/92, the two guaranteed total quantities, allowing for the reductions which have been decided in the mean time, are 525 985 t and 4 528 t respectively. These transfers were made by the Commission with much hesitation, especially the last transfer which it adopted(50) ()

.

4.24. A similar case to that of Greece is Spain. The guaranteed total quantity for direct sales fell from 750 000 t in 1986 to 527 500 t in 1989. These transfers made it possible to a large extent to off-set the reductions imposed by the Community regulations on the guaranteed total quantities for deliveries. The transfer decisions were taken in a climate of some uncertainty, given that the Spanish authorities have not allocated milk producers individual reference quantities for direct sales. The statistical data available show that, for the milk year 1989/90, direct sales exceeded their guaranteed total quantity by about 27 000 t(51) ()

. Spain, however, had not yet collected any additional levy at the time the audit was carried out in 1992. Milk producers who sell direct to consumers cannot after all be made responsible for any overrun at national level so long as they have not been allocated individual reference quantities for direct sales, which the Spanish authorities have still not done.

4.25. A review of the transfers adopted by the Commission (see Annex III) shows that most of the Member States have used the procedure described in paragraph 4.22(a).

4.26. Article 6a of Regulation (EEC) No 857/84 is a method which is being used more and more to limit the impact of the additional milk levy. Member States are inclined to use this method in preference to the inevitably cumbersome and restricting procedure of definitive transfers referred to above in paragraph 4.22(a); furthermore, the producers and purchasers have every interest in using the system of provisional transfers in preference to definitive transfers, which for them involves the risk of being deprived of a proportion of their total quotas for the benefit of the national reserve, which is then reallocated to priority producers. In this way, the field of application of the Article 6a procedure goes far beyond that for which it was intended. The application of Article 6a in the Member States is shown in Annex XXIII.

Delays in collecting the revenue deriving from the additional levy

4.27. Pursuant to the provisions of the Community regulations(52) ()

, purchasers and direct sellers are required, within three months of the end of each 12-month period, to pay the competent agency of the Member State the amount of any additional levy which may be due.

4.28. With a very few exceptions, no payment was made by the purchasers within the time-limits stipulated. In some Member States, purchasers are several years in arrears with payment of part of the addditional levy. Even though the purchasers are debtors to the competent agencies of the Member States, the latter do not take steps to collect the money due to them within the stipulated time-limits using the means at their disposal. In general, the purchasers refuse to pay until they have received the amounts due by the producers concerned. No Member State has imposed specific penal or administrative sanctions in cases where neither the purchaser nor the producer has settled his debts within the set time-limit. The introduction, as provided for in Commission Regulation (EEC) No 1432/88 laying down detailed rules for applying the co-responsibility levy in the cereals sector (Article 4(4))(53) ()

, of penalties for overdue payment imposed on the producer and, if need be, on the purchaser, would undoubtedly ensure payment of the additional levy within the set time-limit and would boost the dissuasive impact of the levy.

4.29. The Commission has exerted pressure on the competent national agencies by deducting from the advances paid to the Member States the greater part of the revenue which the latter ought to have collected in additional levy. Italy and Germany have questioned whether the Commission has the right to do this and have summoned the latter before the Court of Justice of the European Communities. The Judgment handed down by the Court of Justice on 17 October 1991 (Cases C-342/89 and C-346/89) confirms that the Commission may, in the circumstances specified, reduce the advances paid to the Member States. The table in Annex XX summarizes the situation with regard to payments in arrears at 15 October 1991.

Inadequate correction in cases where the reference fat content is exceeded

4.30. The Commission determines 'the characteristics of the milk and, in particular, the fat content thereof, considered to be representative in order to establish the quantities of milk delivered or purchased'(54) ()

. In the event of the reference fat content(55) ()

being exceeded for a given milk year, the quantity of milk delivered is increased according to a pre-determined formula. Such an increase may lead to quotas being exceeded or to an existing overrun being worsened. This may consequently result in the person concerned having to pay an amount of additional levy or may increase the amount for which he is already liable. Thus, the additional levy has not only a quantitative aspect but also a qualitative aspect in that it penalizes cases where the reference fat content is exceeded.

4.31. In spite of the numerous amendments made to this provision, it has proved difficult to implement(56) ()

. To put it simply, the Article in question has been made progressively stricter in its wording, more precise in the rules for calculating the final account but at the same time less severe in its consequences. The main points to note are as follows:

(a) the clause which initially allowed the producer concerned to escape the levy increase if he could provide evidence that the excess (fat content) was a normal result of production conditions has disappeared;

(b) in the event of the fat content being exceeded, the corrective mechanism is now applied if the fat content varies by 0,1 gram instead of by one gram per litre as previously; by contrast, as part of the penalty, deliveries are increased proportionally by 1,8 % per additional gram of fat instead of the previous 2,6 %, which is equivalent to reducing the penalty itself by some 30 %;

(c) the decision, as of 1989, to take into account a negative difference with respect to the average reference content makes it possible, amongst producers delivering to the same purchaser, to off-set the differences with regard to the fat content of the year considered as representative.

4.32. These changes are tantamount to creating the notion of a national average fat content and, consequently, by the interaction of off-setting, they diminish the impact on individual producers of any overrun of the reference fat content. These amendments have the effect of undermining the liability of milk producers who are contributing to surplus production.

4.33. An examination of the application of the 'fats' mechanism, starting with the first milk year that may be regarded as 'normal' after the critical experiences of the first years, i.e. 1987/88, has revealed the extent of the difficulties encountered in the course of its implementation:

(a) in France, the authorities refrained from applying the mechanism until the milk year 1989/90, putting forward as their reason the talks held with the Commission to obtain changes in the Regulation and the difficulties in determining the purchasers' reference fat content. The mechanism is admittedly particularly complex to implement, but this is no justification for the failure to declare actual overruns of the reference fat content for the period in question, which the intervention agency was aware of at least for the milk year 1988/89, and which results in the effectiveness of the additional levy being curtailed still further;

(b) in Italy, the fats mechanism has not yet been applied. For all that, applying this mechanism would pose problems at a practical level because of the failure on the part of some purchasers to take milk quality criteria into account;

(c) in the other Member States, except for Spain and Greece, the fat content of the milk was measured when the milk was delivered to the dairies. Thus, the systems already in operation lent themselves more to implementing the regulations on this subject, which does not, however, mean that there were no difficulties in applying them.

4.34. The upward trend in the fat content shown by the results since the introduction of the quota system leads to doubt also being cast on the dissuasive effect of the increase in the quantities of milk delivered following the overrun of the reference fat content. In several Member States, the penalty inflicted in the form of an additional levy depends wholly on the increase in the fat content over and above the reference rate. For the Community as a whole, half of the total overrun of the guaranteed total quantities can be attributed to the increase in the fat content. At the same time as milk production has been decreasing in volume, there has been an increase in the fat content, which has risen in the period from 1983 to 1990 from 3,86 % to 4,01 % of the weight of the milk (see Annex XIX). This improvement in the quality of the milk - which has in any case been sought - does, however, correspond to an additional production of about 178 000 t of butter, i.e. it represents 10 % of total butter production or two thirds of the surplus butter produced in 1990 and sold into intervention. This increase in the fat content is equivalent, ignoring the corresponding production of skimmed-milk powder, to roughly an extra four million tonnes of milk(57) ()

, in relation to a total production of 109 million tonnes in 1990.

Mobility of quotas

4.35. All the provisions relating to various transfers of quotas between individual producers have tended to undermine the effectiveness of the quota system.

4.36. The mobility of quotas is regulated as regards definitive transfers and temporary transfers (leasing) but less as regards the reallocation aspect, which is regulated in particular by means of the national restructuring schemes. By virtue of the principle whereby a reference quantity may not be transferred without the land(58) ()

, the purchase and sale of individual quotas without land is forbidden, but the Community regulations do not stipulate any penalties to be imposed on those who infringe this rule.

4.37. At the time of the introduction of the quota system(59) ()

, provisions were laid down governing transfers of quotas in the event of all or part of a holding being sold, leased or transferred by inheritance.

4.38. According to Commission Regulation (EEC) No 1546/88, 'temporary transfers... shall be recorded... (by) 31 July (at the latest) of each 12-month period of the additional levy arrangements'. For the fourth period (1987/88), this time-limit is extended to 31 December 1987 and for the seventh period (1990/91) Commission Regulation (EEC) No 2333/90 postpones the deadline until 30 September 1990.

4.39. In the United Kingdom and the Netherlands, the temporary transfer scheme, also called leasing, is used incorrectly. A number of producers who have ceased milk production lease their quota each year to another producer. This practice, against which the Commission initiated infringement proceedings in April 1992, results in producers being kept in work who do not in fact produce milk themselves but just exploit the income generated by the quota system.

4.40. Pursuant to Council Regulation (EEC) No 763/89, the Council may, where necessary, set limits to the temporary transfers, in accordance with the voting procedure provided for in Article 43(2) of the Treaty(60) ()

. In application of this procedure(61) ()

, temporary transfers were not permitted for 'SLOM' producers(62) ()

. In fact, the Council considered that the 'SLOM' quotas had to be subject to certain restrictions because these quotas were not intended to give those to whom they were allocated an undue advantage but to cover the actual production of the 'SLOM' producers.

4.41. With regard to the redistribution of quotas freed as a result of the Community programme for restructuring milk production, which was restricted to 500 000 t and to four Member States (Spain, France, Ireland and Italy), Regulation (EEC) No 1183/90 lays down criteria, which may be adjusted by the Member States, for allocating additional individual reference quantities.

4.42. By virtue of the obligation to tie transfers of quotas to transfers of land, all transfers of quotas have to be monitored by the national authorities in charge of administering the quota system.

4.43. Nevertheless, in some Member States transfers of quotas are made in roundabout ways:

(a) in the Netherlands, the land to which a transfer of quotas has been linked at the time of the transaction may be ceded back or resold without the quota only one year after its acquisition. The price differential between land with a quota and land without a quota represents a good estimate of the intrinsic value of the quota. Thus, in the past, milk producers have paid, per litre of quota and depending on the region, as much as six times the price they received per litre for their deliveries of milk to dairies. If, in the transaction contract, the value of the quota is indicated separately, the price of acquiring the quotas may even be recouped fiscally by the milk producer within a period of five years;

(b) in the United Kingdom, the procedure for transferring quotas without land is similar. In the first phase, a farmer merely has to lease or sell part of a farm with an individual reference quantity attached to it. A minimum of ten months later, the land thus sold may, if it has not been used for milk production during this period, be ceded back to the seller or lessor without a quota.

4.44. In order to prevent quotas from being transferred between producers without a corresponding transfer of land, some Member States (including Germany, Ireland and Luxembourg, but not the Netherlands) have, in the case of leasing or selling of land, introduced free transfers of quotas to the national reserve. During the first years of application of the quota system, some Member States withdrew and allocated to the national reserve a substantial part of the quota which was the subject of the transaction (in Germany and Luxembourg up to 80 %, in Belgium up to 90 %). In Ireland, up to 25 % of the quota transferred is made over free of charge to the national reserve in the event of leasing and, until the milk year 1989/90, in the event of sale.

4.45. In order to prevent milk production from being concentrated on very small agricultural areas, i.e. to prevent transfers of quotas from being made without land, several Member States have fixed an upper limit on the individual reference quantity that may be transferred per hectare (5 000 kg/ha in Germany and Luxembourg, 20 000 litres/ha in Belgium). Other Member States, in an effort to reduce the number of quota transfers, have decided not to transfer quotas for land transfers involving less than a set minimum area, for example, five hectares in Luxembourg. In some Member States, in the case of leasing, quota transfers may be made only once a year, whereas in others (e.g. Ireland), such transfers may be made several times a year, but on set dates.

4.46. The variety of administrative measures taken by the different Member States which apply the quota system effectively shows that the national authorities have, on the one hand, tried to protect themselves against a proliferation of administrative decisions and, on the other, sought to help milk producers to minimize the impact of the quotas themselves and the additional levy payable in the event of the quota being exceeded.

4.47. Redistribution from a national reserve has the effect in most cases of giving the weakest producers in each Member State an advantage by allocating them additional individual reference quantities. Imposing minimum amounts on transfers is tantamount to putting small producers at a disadvantage, whilst imposing maximum amounts is virtually the same as curbing restructuring in favour of the producers with the highest yields.

4.48. With regard to temporary transfers, the implementing measures also differ from one Member State to another:

(a) in the United Kingdom, any producer may lease his individual reference quantity, except for 5 000 litres which he must keep, to another producer for a period not exceeding the end of the milk year;

(b) in the Netherlands, the individual reference quantities which may be offered for temporary transfer, solely by the producer to his purchaser for a 12-month period, are limited to an absolute minimum of 10 000 kg and an absolute maximum of 75 000 kg;

(c) in Belgium, temporary transfers are allowed in so far as individual reference quantities allocated for deliveries are exchanged between producers delivering to the same purchaser provided that the quantities transferred do not exceed 35 000 litres for producers with an individual reference quantity of less than 300 000 litres;

(d) in Ireland, temporary transfers are limited to a percentage of the individual reference quantity of the producer, who may offer the temporary transfer solely to his purchaser;

(e) in Germany, temporary transfers have been permitted solely since the milk year 1990/91;

(f) in Denmark and Luxembourg, no use is made of the possibility of temporary transfers;

(g) in the other Member States, temporary transfers cannot be made because no national implementing provisions have been laid down.

4.49. For each milk year, which begins on 1 April, temporary transfers have to be recorded by 31 July at the latest(63) ()

. In some cases, temporary transfers have, by way of derogation, been definitively recorded as late as December, i.e. three months before the end of the milk year.

4.50. Temporary transfers help farmers to plan their annual milk production properly. This is the case both for the farmer who transfers his individual reference quantity and for the farmer who acquires it temporarily. Conversely, if temporary transfers are not permitted, the unused reference quantities are redistributed according to the ex post facto off-setting procedure (see paragraphs 4.17 ff). In this case, producers know in advance that at the end of the milk year they will receive free of charge an addition to their quota which will be allocated to them by way of ex post facto off-setting. Thus they have a two-fold advantage: on the one hand, part of the speculative overrun of the initial individual quota is not penalized by the additional levy stipulated by the system and, on the other, this overrun, provided that it is covered by a free quota allocated by way of ex post facto off-setting, is very profitable. By contrast, a priori temporary transfers against payment require better planning of production. In fact, if there is no ex post facto off-setting, any overrun is penalized financially. Furthermore, the profitability of the additional production is reduced by the leasing cost (the cost of the guaranteed income on the quota) paid for the quota which is acquired temporarily. Thus, a priori temporary transfers make producers who comply with the rules of the system more responsible for their production and penalize those speculating on ex post facto off-setting.

Control measures

Management criteria and the Commission's monitoring of the various measures

4.51. The Community regulations require the Member States to notify to the Commission a whole series of data on the national measures adopted for the application of the system in the Member States, as well as the results in figures of the implementation of the quotas and more specifically of some provisions of the regulations.

4.52. An examination of the files at the Commission has shown that the Member States do not systematically notify the Commission within the time-limits stipulated either of the national implementing regulations or of the amendments which they have made thereto. As a result, all too often the Commission becomes aware of these regulations only when it comes to clear the accounts, i.e. two years after they first came into force. This being so, the Commission is unable to monitor fully and effectively the way in which the system is being managed in the Member States.

4.53. The Commission has drawn up a form for the Member States designed to obtain information on deliveries and direct sales relating to each milk year which has just ended, as required by Article 19(3) of Regulation (EEC) No 1546/88. In many cases, these notifications arrive at the Commission well after the time-limit of within three months of the end of the milk year: for the milk year 1990/91, only nine Member States had sent the form in by the end of 1991. Some of the forms, moreover, were incomplete. In general, the Member States fail to notify the Commission of cases where Article 6a of the above-mentioned Regulation is applied, of the list of groups of purchasers and/or producers and of the quarterly figures for deliveries and direct sales (Article 19(3), first and third indents, of Regulation (EEC) No 1546/88). Lastly, there is the problem of direct sales, for which the quantities have been communicated by only five Member States. This state of affairs confirms the difficulties experienced by the Member States in exercising control over this aspect of the system, which lends itself to being easily evaded by the producers.

Control measures in the Member States

4.54. According to Commission Regulation (EEC) No 1371/84, replaced by Commission Regulation (EEC) No 1546/88, 'Member States shall adopt whatever additional measures are required:

(a) to ensure collection of the levy, in particular inspection measures and measures ensuring that interested parties are aware of the penal or administrative sanctions to which they will be subject if they fail to comply with the provisions of this Regulation;

(b) to deal with cases where milk production is totally or partially discontinued under Article 4(1)(a) of Regulation (EEC) No 857/84, should the provisions thereof be applied'.

4.55. In some Member States (Spain, Greece, Italy), not all the producers have yet been allocated individual reference quantities (see paragraph 4.24), and the lack of checks or the lack of strictness in the supervision and control exercised by the competent agencies of these Member States strip the quota system of all its effectiveness. The systems actually set up by the Member States for checking whether the regulations concerning the common organization of the market in milk and milk products are being complied with differ both in their conception and in their effectiveness:

(a) in Germany, the fact that powers are dispersed makes checks rather difficult. The control authorities do not systematically crosscheck the various sources of information during the on-the-spot checks. On the basis of the information made available to it by the various bodies, the Court was unable to reconstruct the exact amounts of the milk deliveries to purchasers in Germany, because the data were gathered at different times and for different purposes.

The national auditors also do not check the materiality, i.e. they do not compare the inputs with the finished products, bearing in mind the processing coefficients, in order to ascertain whether, under normal production conditions, the finished products tally with the milk collected. Checks on farmers making direct sales are often difficult to conduct because there are inadequate bookkeeping records. The national auditors do check with those receiving compensation for the definitive discontinuation of milk production that the stipulations of the regulations are being fulfilled;

(b) in France, deliveries to dairies are not subject to sufficiently thorough scrutiny with regard to the stock accounting or physical crosschecks, which are obviously essential for verifying the actual quantity of milk collected, particularly where the dairies are part of a complex economic structure (for example, a company with subsidiaries in one or more Member States). The system of managing and checking direct sales does not give reasonable assurance of sound financial management in terms of Community rules. Checks on the compensation for the definitive discontinuation of milk production reveal an incomplete national picture. Some 'départements' either do not make any checks or have not replied to the French Ministry of Agriculture's questionnaire about checks. At local level, in one of the three 'départements' visited by the Court, the situation is plainly inadequate;

(c) in Denmark and the United Kingdom, the checks are generally well established and formalized, well planned and documented and cover all aspects of the quota system. The arrangements include a strict check on the quantities of milk sold and full, speedy collection of the additional levy;

(d) in Spain, the checks carried out by the SENPA(64) ()

departments concerning those receiving compensation for the definitive discontinuation of milk production or compensation for the temporary withdrawal of a proportion of the individual reference quantities are not sufficiently effective; out of 110 on-the-spot checks carried out by the SENPA departments, only two cases of irregularities were found. Moreover, only one of the five cases checked by the Court met the conditions for granting the compensation at the time of the audit;

(e) Ireland has set up a network of regional and local inspectors who are responsible for checking all aspects of milk production. These inspectors check the quality of the milk, the quantities of milk delivered to the purchasers, all forms of transfers, the individual reference quantities, the recipients of the compensation for the discontinuation of milk production and the activities of those selling direct; scrutiny of the checking system has shown that the few direct sellers are seldom checked and even then very belatedly;

(f) in Belgium, the emphasis of the audit methodology ought to be on assessing the overall transparency of the management of quotas and deliveries, i.e. the auditors ought to concentrate more on evaluating the reliability of the figures which they collect. The auditors who examine the accounts of a large dairy, especially where it is part of a complex economic structure, all ought to receive specialized training; there are insufficient staff to carry out the checks as frequently as required;

(g) in the Netherlands, the checks on the quota system are, on the whole, satisfactory. This does not, however, apply to the direct sellers to whom a specific reference quantity of less than 25 000 kg has been allocated: they are never checked;

(h) in Luxembourg, the administrators themselves check the purchasers and direct sellers, but these checks do not, however, concern materiality, i.e. they do not compare the inputs with the finished products to verify whether, under normal production conditions, the finished products tally with the inputs, bearing in mind the processing coefficients;

(i) in Italy and Greece, there are no checks on cases of individual reference quantities being exceeded because, at the time of the on-the-spot checks in 1991, the producers had not yet received any quotas.

Specific aid measures and the quota system

4.56. In order to make it easier to cut back milk production, the quota system was supplemented as of 1986 by two special measures, namely compensation for the definitive discontinuation and compensation for the temporary suspension of milk production, which are described in Annex XXIV.

4.57. With regard to the programme of aid for temporary suspension, the scheme, as it stands, may result in a producer who exceeds his quota paying the additional levy due if the Member State to which he belongs has exceeded its quota and at the same time being able to receive the compensation for temporarily discontinuing delivery. Even though the legal structure of the Community regulations allows it, it is not logical for one and the same individual producer to be both obliged to pay a financial penalty and entitled to receive compensation. The Court has, however, found this state of affairs in the Member States visited in the course of auditing individual accounts at the dairies. It also found that the cash funds supplied by the compensation helped some producers in excess of their quotas to pay the levy which was imposed on them. It is thus apparent that in this case the quota system here too loses its effectiveness since the actual financial penalty is in many instances thereby considerably reduced.

Impact of the quota system on the structure of farms

4.58. Contrary to the Council's fears that measures taken to control the increase in milk deliveries could prevent the structural changes which are required(65) ()

, the milk quota system, supplemented in most Member States by national schemes for the cessation and restructuring of milk production, has not, at the level of individual undertakings, halted progress in the milk production sector.

4.59. In fact, the yield of dairy cows has increased by around 10 %, rising from 4 285 kg of milk per cow per year in 1984 to 4 719 kg in 1990 (see Annex XVII). It should be noted that the increase in yield has been highest in those Member States which had previously shown good results, such as Denmark (6 162 kg per cow), the Netherlands (5 998 kg per cow) and France (4 885 kg per cow). These very Member States have, moreover, always been the Community's main exporters of milk products.

4.60. The Court has also found that the quality of the milk has improved given that, since the introduction of the system, the fat content of the milk has increased (see paragraph 4.34).

4.61. Furthermore, since the introduction of the quota system, structural changes in the milk production sector have speeded up: the number of dairy farms has dropped from 1 621 261 in 1983 to 1 241 627 in 1987 (EUR-10), i.e. a fall of 23,4 % in four years, whereas between 1979 and 1983 the decrease was only 14,7 %. This reduction in the number of holdings was facilitated in particular by the introduction of the Community scheme of aid for the definitive discontinuation of milk production and by the many national restructuring schemes which have accompanied the implementation of the Community scheme for controlling milk production.

4.62. It should be noted that, whereas up until 1985 this process involved a reduction in the number of dairy farms with fewer than 30 cows and an increase in the farms with more than 30 cows, between 1985 and 1987 it consisted of a decrease in all classes of farms, including those with more than 100 cows (down by 10 %). Most of the Member States with high milk production have laid down rules for the transfer of quotas to the national reserve which are unfavourable to big farms, a fact that has contributed to the drop in the number of large farms. When individual reference quantities are transferred (sale or leasing of land), large farms are obliged to transfer to a national reserve a bigger proportion of the individual reference quantities purchased or leased than small producers (see paragraph 4.44). Furthermore, large farms are not allowed to receive additional quotas taken from the national reserve.

4.63. The discontinuation aid introduced in 1986, as applied in most Member States, was in fact a scheme for social purposes which allowed many elderly small producers, some of whom were already retired, to receive an extra pension. In Ireland, many small producers, even elderly ones, who received the compensation for the definitive discontinuation of milk production, converted their few dairy cows into breeding cattle and thus received both their discontinuation compensation and the premium for suckler cows, plus, where appropriate, the premium for male bovines.

Review of the budgetary situation

4.64. Overall, since 1984, the quota system together with the aid schemes for the definitive discontinuation and temporary suspension of milk production have involved additional expenditure of 2 784,5 Mio ECU for the Community budget and have earned an extra 920,3 Mio ECU in the form of the additional levy. Leaving aside the expenditure committed by the Member States and the costs not identified in the Community budget, the reduction in annual milk production by about eight million tonnes has cost 1 803,8 Mio ECU up until 1991, i.e. about 225 ECU per tonne, compared with the target price for the milk year 1991/92 of 268,1 ECU per tonne. The final cost of this reduction must, however, be increased by the cost of the aid measures to be paid until 1993. If, in addition, account is taken of the adjustment for the increase in the average fat content, then production has been cut by only 4,2 million tonnes (without taking into account the corresponding production of skimmed-milk powder) and the cost of the aid measures per tonne of milk not produced is twice as high. It should be remembered that the reduction in milk production has co