Opinion of the Economic and Social Committee on:

- the 'Proposal for a Council Regulation (EC) on the common organization of the market in milk and milk products`, and - the 'Proposal for a Council Regulation (EC) amending Regulation EEC No 3950/92 establishing an additional levy in the milk and milk products sector` () (98/C 407/33)

On 3 July 1998 the Council decided to consult the Economic and Social Committee, under Articles 43 and 198 of the Treaty establishing the European Community, on the above-mentioned proposals.

The Section for Agriculture and Fisheries, which was responsible for preparing the Committee's work on this subject, adopted its opinion on 24 July 1998. The rapporteur was Mr Kallio.

At its 357th plenary session of 9 and 10 September 1998 (meeting of 9 September), the Economic and Social Committee adopted the following opinion by 101 votes to two, with 13 abstentions.

1. Introduction

1.1. In the Agenda 2000 document published in July 1997 the European Commission put forward proposals for the reform of the common agricultural policy (CAP) in the period 2000-2006. In March 1998 the Commission published more detailed proposals in the form of a set of proposals for Regulations, which differed in important respects from those set out in Agenda 2000. The proposed reform is a continuation of the 1992 CAP reform, which led to cuts in the prices of several agricultural products. The new proposals provide for a further sharp reduction in institutional prices and a partial increase in direct support. In addition to detailed sectoral proposals, Agenda 2000 includes proposals concerning horizontal questions, EU enlargement, the budget and reform of the Structural Funds. The present opinion takes a position on these aspects only to the extent that they have a significant impact on the milk sector.

1.2. The Commission argues that reform is necessary in order to address certain negative features of the common agricultural policy that were only partially corrected by the 1992 reform. For example, support is distributed unequally, being concentrated on regions and producers which are not among the most disadvantaged. According to the Commission, this has led to a decline in agricultural activity, with adverse effects in many areas. At the same time, the concentration of products in certain regions has, in the Commission's view, resulted in excessively intensive farming practices, which has contributed to the negative image of the CAP prevalent among the general public.

1.3. The Commission further contends that reform is warranted for external reasons. One of these is the enlargement of the Union, which makes the proposals for market management and simplification all the more necessary. Pressure for reform also derives from the EU's obligations under the World Trade Organization (WTO) and the forthcoming round of talks under WTO auspices. Similarly, world market conditions and prices have implications for Europe.

1.4. The Commission's main proposals concerning the milk products sector are as follows: it is proposed to extend the quota scheme until 31 March 2006. The Commission proposes a 2 % increase in the total milk quota for the EU, with half of the additional amount being allocated to young farmers and the other half to farmers in less-favoured upland areas in proportion to production. It further proposes to reduce intervention prices by 15 % and the target price for milk by 17 % over a four-year period starting on 1 July 2000. The proposal fixes support prices for the entire Agenda 2000 period. The proposed price cut is five percentage points larger than that proposed in July 1997. The price cut is to be partly offset by phasing in a dairy cow premium and, by way of a departure from Agenda 2000, the retention of the crop premium for silage maize. It is implied that the extension of the premium for silage maize is the basis for the larger reduction in prices.

2. General assessment

2.1. The present opinion builds on the Committee's opinion of 10-11 December 1997, insofar as it deals with the milk products sector, and takes into account the main changes presented in the proposals for Regulations published in March 1998. In the view of the Committee, the March 1998 proposal is, in some respects, even more difficult to accept than the July 1997 proposal. Accordingly, the Committee proposes that the Commission continue the drafting of the proposal, paying due regard to the points raised in this opinion.

2.2. The Committee endorses the Commission's proposal for the continued application of the quota scheme, but feels the Commission should give a clearer picture of what will happen to the scheme after 31 March 2006. The quota system is of great economic significance for milk producers. Moreover, EU enlargement has implications for future milk policy. In its present form, the proposal leaves much room for speculation and makes long-term planning difficult for milk producers and industry alike.

2.3. The Commission should pay due regard to the quota problems in areas of underproduction highlighted by some Member States so that the stable market conditions in the EU's milk sector can be retained.

2.4. The Committee takes the view that the proposed price cut in the internal market is large since the level of food prices is not a major issue. The Committee feels that the Commission's proposal puts too much emphasis on achieving international competitiveness, leaving no scope for the European model of agriculture. Agenda 2000 does not pay adequate attention to agriculture which is environmentally friendly, multifunctional and based on sustainable development but which at the same time guarantees farmers a fair level of income.

2.5. The Committee feels that milk producers should be compensated in full and on an equal basis for the proposed price cut. Milk producers and the dairy industry in less-favoured and upland areas, in particular, will suffer as a result of this price cut, as well as those in other regions which cannot benefit from the silage maize premium. This will lead to job losses in regions where jobs are most sorely needed and where there are few opportunities for other types of economic activity.

2.6. The Committee is not convinced that a reduction in support prices would lead to lower consumer prices and thereby higher consumption. The Commission must have a monitoring system which is both rapid and effective.

2.7. In the view of the Committee, the Commission proposal will not solve the problems in areas where the Commission argues reform is necessary for internal reasons, in particular. One of the reasons cited is the unequal distribution of support, whereby the main beneficiaries tend to be regions and producers which are not among the most disadvantaged. An example of this is the crop premium for maize silage, the main recipients of which are producers in less disadvantaged regions, whereas no proposal has been put forward for the provision of support of comparable economic importance to areas where maize cannot be grown or the feeding regime is different.

2.8. The Committee calls for the extension of support for hay and grass corresponding to the maize silage premium to areas which, because of climatic conditions or the milk production system, are unable to benefit from the maize silage premium. The sustainable development of dairy farming requires that special attention be paid to the relative prices of various types of coarse fodder. This is a special problem which is particularly acute in northern and other less-favoured areas where the poor competitiveness of grass in relation to grain is accentuated. Milk producers must be in an equal position as regards profitability regardless of whether production is based on maize, grass or types of coarse fodder other than grain. The decisions taken at the Luxembourg summit presuppose such solutions.

2.9. The Committee is not convinced that the proposal realizes the Commission's objective of simplifying market management. Some of the specific measures proposed require complex administrative arrangements.

2.10. The Committee would especially like to emphasize the importance of milk as the largest single sector of EU agricultural production. Milk production is common to all areas, and its importance is all the greater in less favoured areas in most European countries.

3. Specific comments

3.1. Quota scheme

3.1.1. Member States' views on the quota scheme differ significantly from each other. Abolition of the quota scheme is advocated mainly by countries where the structure of the milk production and natural conditions are favourable and exports are of major importance. This group includes countries which are not nationally self-sufficient in milk. By contrast, countries where the structure of milk production or natural conditions impair competitiveness support the retention of the scheme. The defenders of the scheme argue that the removal of quotas would boost production particularly in areas where conditions are favourable to milk production at the expense of disadvantaged areas. Higher production would lead to lower prices, thereby exacerbating the situation for all producers and particularly those in the less-favoured areas who would run into special difficulties.

3.1.2. The planned enlargement of the EU also has implications for the quota scheme. It is to be noted that many of the prospective new Member States have the potential to increase milk production substantially from present levels by applying new technology and production methods. Similarly, existing price arrangements favour higher production in prospective new Member States. If quotas were abolished and prices fell, it might be difficult for present Member States to counter such a development, which could have a destabilizing impact on the market.

3.1.3. The European model of agriculture proposed by the Commission differs from the model applied by our major competitors. The European model is consistent with moderate growth in volume of production and thus conducive to price stability. Although the quota scheme has weaknesses, it has kept market conditions stable. The proportion of the EU's agricultural budget which goes on the milk sector has declined significantly.

3.1.4. The Commission proposes linking quotas together with the dairy cow premium via the 'virtual cow` scheme. This linkage could have the additional effect of enhancing the present economic value of quotas. Low-yield countries see the virtual cow system as unfair. Producers who intend to develop milk production and therefore wish to acquire quotas are uncertain as to whether it would be more worthwhile for them to acquire quotas, and hence the dairy cow premiums that come with them, during the Agenda 2000 reference period or to wait until it has ended. The uncertainty surrounding the future of the scheme must be removed.

3.1.5. The Committee supports the allocation of additional quotas only to the extent that the market situation provides scope for such an increase. Under such circumstances, the Committee endorses the Commission's proposal for special arrangements designed to help young farmers, for example in the form of additional quotas, but takes the view that the proposed allocation of additional quotas to producers in upland areas is not comparable to the silage maize premium in terms of its positive impact on profitability in less-favoured areas. The Commission should find mainly internal solutions to quota-related issues raised by individual Member States such that market stability is not undermined throughout the EU.

3.1.6. Bearing in mind the comments presented above, the Committee supports the extension of the quota scheme until 2006 as the quota scheme has proved to play an important and effective role in controlling the market.

3.2. Reduction in prices

3.2.1. The Commission proposes that intervention prices be reduced by 15 % and the target price by 17 % in four stages, which goes beyond the 10 % cut proposed in July 1997. The Commission justifies the proposed cuts on the grounds that they will boost the competitiveness of milk products and by the fact that milk quotas will be increased and the crop premium for silage maize retained. In addition, the enlargement of the Union will make it even more necessary for a new market organization, an integral element of which would be a reduction in prices, which may in future even make it possible to export some products without the need for support operations.

3.2.2. In the opinion it adopted in December 1997 the Committee endorsed the proposals designed to improve competitiveness provided that producers' incomes were stabilized and milk production secured throughout the EU, and especially in disadvantaged regions and upland areas. The price reductions and compensation now being proposed by the Commission do not meet the conditions laid down in that opinion, especially as regards stabilization of milk producers' incomes in less-favoured regions and upland areas. In the view of the Committee, direct income support must be increased. Should the Council favour the system proposed by the Commission (reduction in prices - compensatory payments for cows - increased quotas), full compensation for the price cuts would be absolutely essential.

3.2.3. The Committee does not believe that the proposed price cut will lead to increased consumption. In many countries consumption of milk products is at a high level and there is very little scope for price flexibility, especially as regards basic products. The Committee therefore takes the view that the impact of the price cuts will be felt mainly by milk producers and that, in the internal market in particular, the principal beneficiary will be the trade sector. The Commission should therefore provide further proof of the impact of the price cuts on the market and consumption.

3.2.4. A reduction in prices will make it easier for new Member States to join the Union. Prices of agricultural products in the applicant countries are, without exception, clearly lower than those in the present Member States. Since the sharp reduction in prices of agricultural products which the Commission is proposing will only be partially compensated, some of the resultant savings can be used to fund the arrangements needed in connection with the accession of new Member States. In the view of the Committee, enlargement must not take place at the expense of agriculture in the present Member States. It must be possible to implement enlargement within the framework of the proposed stringent budget plan.

3.2.5. The aim of reducing prices is to improve the competitiveness of EU milk products on the world market. These prices do not correspond to production costs in even the lowest-cost countries. The Committee feels that there are insufficient grounds for a reduction in prices of the order proposed by the Commission. It is also doubtful whether the proposed price reduction can actually achieve the objectives of the reform. Whilst it is important to improve the international competitiveness of EU milk products, it should be remembered that some 90 % of EU milk production remains within the internal market. It is this vast market which determines the profitability of the milk sector.

3.3. Compensation

3.3.1. The Commission proposes the following forms of support to compensate farmers for the reduction in the level of price support: a basic premium and premium supplement for dairy cows to be paid per holding and a beef premium for dairy cows. The Committee takes the view that compensation must be in full and permanent for all farms.

3.3.2. In the view of the Committee the basic supplement for dairy cows, calculated on the basis of individual reference quantities and the average milk yield in the Community, is technically a fair way to compensate holdings for the cut in the milk price, insofar as it is not possible to pay compensation more simply in terms of the price of milk. The Committee finds it unacceptable that the amount of compensation, which is to be paid to all dairy farmers, has not been raised from the level established in the July 1997 proposal despite the fact that the reduction in the milk price is now larger than originally proposed.

3.3.3. The Committee feels that the Commission is right to allow Member States to make additional payments for dairy cows either in the form of a premium supplement per animal or an area payment. The new proposal differs in this respect from the July 1997 proposal.

Each Member State will indeed be able to exercise a degree of discretion over the payment of this direct aid. This constitutes a renationalization of agricultural policy by stealth which is bound to bring about distortions in competition between Member States and between regions of one and the same Member State; such distortions in competition would be quite astonishing bearing in mind that the EU is supposed to represent a single market.

3.3.4. Because of the way permanent pasture is defined in the proposed Regulation, area payments per hectare of permanent pasture are not suitable for application in all Member States. Accordingly, the Committee proposes that the definition be widened to include 'temporary pasture`. In northern arable areas in particular, conditions are such that grass has to be regularly replaced after a specified number of years because of the short growing season and damage caused by soil frost.

3.3.5. To compensate for the cut in beef prices, the Commission proposes the payment of a beef premium for dairy cows and the payment of additional support from the national meat envelope. Setting the beef premium in inverse proportion to the average milk yield is, in the Committee's view, a factitious way to determine a fair level of compensation for the cut in beef prices. The Commission should try to find a simpler method which would establish, in a more equitable way, a link between support and the amount of beef sold by a holding. The Committee endorses the Commission's proposal to allocate additional support in accordance with national priorities on the basis of dairy premium units or area, provided due account is taken of the change in the definition of pasture proposed in the previous point. It cannot, however, accept the proposed cut in support from the level foreseen in the July 1997 proposal.

3.3.6. The Commission further proposes that both milk and beef producers should receive partial compensation for the extension of the support payment for silage maize. The Committee believes a support scheme should be established for coarse fodder in areas outside the maize-growing zone so as to make coarse fodder prices outside the maize-growing zone competitive with maize. One solution might, for example, be to increase the national envelope. This is essential for open competition in milk products since the cost of animal feed is the largest component of milk production costs. The Commission must solve a problem which is specific to some less-favoured regions, namely that the price of coarse fodder for cattle is significantly higher than Community grain prices. Such regions include the Nordic regions, upland or lowland hill regions and other types of less-favoured regions, to be found in most producer Member States, in which the intensive rearing system based on the cultivation of silage maize is not practicable.

3.3.7. In the view of the Committee, the proposed additional quota for upland areas, which does not include any premiums, is not fair compensation for the retention of the support payment for silage maize. The additional quota is directed at peripheral areas which are beset by profitability problems and are primarily looking for means of improving profitability so as to prevent a fall in production. The additional quota for upland areas essentially amounts to 'more work for less pay`, and the Committee does not consider that it compensates producers for the cut in milk prices in the same way as does the support payment for silage in less disadvantaged maize-growing areas.

3.4. Other specific comments

3.4.1. The Committee notes with interest the Commission's proposal to give Member States a free hand in determining the payment of certain premiums. The Committee welcomes the idea of paying greater attention to specific areas and special characteristics. This must not, however, lead to a situation where the income milk producers receive under support schemes is progressively cut at national level within the framework of this decentralized model or that this arrangement becomes a factor distorting competition.

3.4.2. The Committee endorses the European model of agriculture presented by the Commission. However, some of the proposed reforms are at odds with the objectives of the model, and therefore the Committee doubts whether the stated basic objectives can be achieved. How is it possible in Europe to reconcile an agricultural sector which is competitive internationally and operates on a low level of support with the maintenance of diverse production methods which are rich in tradition and environmentally friendly? Moreover, the Commission believes these objectives should be pursued whilst safeguarding farmers' incomes. Similarly, the retail trade in Europe is continually placing greater demands on the food industry and farmers as regards the value-added component of products, but when the question of costs is raised it is countered with the threat of cheap imports from world markets. In the Committee's view, the Commission cannot hope to achieve all this at once. The Committee feels that the EU, as the world's largest milk producing region, must purposefully defend the European model of agriculture, which is based in large part on family holdings and in which agriculture is adapted to local conditions in sustainable way and seeks to produce safe food and preserve the vibrant and diverse character of agriculture and the rural community.

3.4.3. In the Committee's view, reform of the common organization of the market in milk and milk products must allow the European Union to retain its shares on the relevant Community and international markets. In order to enhance the future prospects for the EU dairy sector, reform of the CMO for milk must secure economic flexibility in regard to the way markets for dairy products are currently organized, with a view to making it possible, in particular, to export additional quantities of dairy products, without having recourse to refunds, by offering a lower-cost commodity (marginal quantities).

4. Conclusions

4.1. In the view of the Committee, the proposal for the reform of the milk products sector presented in March 1998 still contains some points where further drafting is needed, since in its present form the proposal is not enough to secure the future of the milk sector. The Committee feels that the proposal cannot be approved in its present form, because it does not meet the decisions of the Luxembourg European Council or the overall objectives for Agenda 2000 set by the Commission itself. The Committee calls for 100 % compensation of milk producers' lost income.

4.2. Finally, the Committee believes that if such a reform were implemented, it would make producers dependent on direct aid for their income; the ongoing availability of such aid cannot be guaranteed for at least two reasons:

- budgetary cost;

- the fact that the introduction of the notion of 'virtual cow` would make the amount of direct aid paid dependent on the quantity of milk produced.

Brussels, 9 September 1998.

The President of the Economic and Social Committee

Tom JENKINS

() OJ C 170, 4.6.1998, p. 38-60.