REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on certain aspects of the markets for preserved milks and drinking milks

TABLE OF CONTENTS

1. Introduction

2. Regulatory framework - Different aspects of protein standardisation

3. Market effects of protein standardisation

4. Impact on the competitiveness of European companies

5. Protein standardisation and support measures in the milk sector

6. Regulatory framework - Fat content of drinking milk

7. Conclusions

1. Introduction

1.1. The present report honours a number of Commission declarations in the framework of Council legislation on drinking milk and preserved milks.

In December 1997, the Council reached a political agreement on a recasting of the rules on the production and marketing of drinking milk. These rules are contained in Council Regulation (EC) No 2597/97 laying down additional rules on the common organisation of the market in milk and milk products for drinking milk [1]. The agreement on these rules was linked to three Commission declarations, the first of which was worded as follows:

[1] OJ L 351, 23.12.1997, p. 13.

"The Commission intends to follow attentively developments on the drinking milk market and, notably, the aspects related to the protein content of milk. In this respect, the Commission will examine the consequences of decisions on the Code of Principles adopted in the framework of the "Codex Alimentarius" and will report on this to the Council."

In December 1999, the Council reached a political agreement on a recasting of the rules on the production and marketing of preserved milks. These rules are contained in Council Directive 2001/114/EC [2]. The agreement on these rules was linked to a declaration worded as follows:

[2] OJ L 15, 17.1.2002, p. 19.

"The Commission intends to follow attentively developments on the preserved milks market and in particular the aspects related to the protein content. In this respect, she will examine the consequences, notably in relation to:

- the competitiveness of European companies,

- the rules on preserved milks adopted in the framework of the "Codex Alimentarius",

- the image of the product,

- the appropriateness of an adequate labelling,

- the incidence on the Community budget.

The Commission will report to the Council in the course of 2000 and will, eventually, propose amendments to the present directive".

Also in December 1999, the Council adopted Regulation (EC) No 2703/1999 amending Regulation (EC) No 2596/97 extending the period provided for in Article 149(1) of the Act of Accession of Austria, Finland and Sweden [3]. Under this derogation, Finland and Sweden are authorised to produce drinking milk that is not complying with the rules on fat content provided for in Regulation (EC) No 2597/97.

[3] OJ L 327, 21.12.1999, p. 11.

The extension of the derogation was linked to a provision inviting Finland and Sweden to "notify the Commission before 31 December 2001 of the measures adopted with a view to adapting to the Community rules. On that basis the Commission shall present to the Council a report on the progress made by the Member States concerned".

2. Regulatory framework - Different aspects of protein standardisation

2.1. It follows from the provisions of Regulation (EC) No 2597/97, Article 3(2) and Directive 2001/114/EC, Article 3(1) and Annex 1, that drinking milks and preserved milks produced and sold in the Community should have a protein content that corresponds to the protein content of the raw milk that was used for their production. This equivalence rule relates to both the total protein content and to the ratio of the two types of milk protein, casein and whey proteins.

In principle, this restriction does not apply to products manufactured in the Community but sold on third country markets. However, for commercial and practical reasons - such as the fact that the end destination of products is unknown at the moment of manufacture - it may be assumed that almost all of the drinking milks and preserved milks produced in the Community comply with the non-standardisation.

2.2. In line with the preserved milks Directive, intervention measures for skimmed milk powder in the framework of the common organisation of the market in milk and milk products are restricted to products with a natural protein content.

In particular, Article 7 of Council Regulation (EC) No 1255/1999 [4] provides that skimmed milk powder offered for public intervention shall not be standardised as regards its protein content and must have a minimum protein of 35.6% by weight of the non-fatty dry extract. However, a reduced purchase price applies for powder whose protein content is at least 31.4% and less than 35.6%.

[4] OJ L 160, 26.6.1999, p. 55.

Equally, Article 2 of Commission Regulation (EC) No 2799/1999 [5] provides that skimmed milk powder subsidised upon use in animal feed shall not be standardised. Again, a reduced aid amount is granted for powder whose protein content is at least 31.4% and less than 35.6%.

[5] OJ L 340, 31.12.1999, p. 3.

It is important to note that the requirements on minimum protein content applied in the framework of the milk CMO differ from those foreseen by the relevant Codex Standard (see point 2.4 of this report).

2.3. The "Codex General Standard for the use of dairy terms" provides in Section 4.2.3 for rules to be respected for milk that is adjusted for protein content:

- such product can only be sold where such adjustment is permitted in the country of retail sale;

- the minimum and maximum limits of protein content of the adjusted milk are specified in the legislation of the country of retail sale. In this case the protein content shall be within the limits of natural variation within that country;

- the adjustment has been performed according to methods permitted by the legislation of the country of retail sale, and only by the addition and/or withdrawal of milk constituents, without altering the whey protein to casein ratio;

- the adjustment is declared in accordance with Section 4.2.2 of the standard.

Section 4.2.2 provides that milk which is modified in composition by the addition and/or withdrawal of milk constituents may be identified with a name using the term "milk", provided that a clear description of the modification to which the milk has been subjected is given in close proximity to the name.

2.4. The Codex Standards for Milk Powders and Cream Powder (207-1999), for Evaporated Milk (A-3-1971) and for Sweetened Condensed milks (A-4-1971) provide that the protein content of the milk may have been adjusted, only to comply with the compositional requirements in Section 3 of the Standards, by the addition and/or withdrawal of milk constituents in such a way as not to alter the whey protein to casein ration of the milk being adjusted. Section 3 of the Standards requires a minimum protein content in milk solids-non-fat of 34% (m/m).

3. Market effects of protein standardisation

3.1. Drinking milk and preserved milks production absorbs a substantial part of the Community's milk deliveries. In 2001, drinking milk production was around 28.6 Mio tonnes, milk powder production around 1.9 Mio tonnes and condensed milk totalled 1.25 Mio tonnes. The manufacture of all these products together requires a combined milk pool of around 50 Mio tonnes, which accounts for around 43.5% of total milk deliveries.

3.2. Furthermore, as mentioned under point 2.4, the minimum protein content foreseen by the Codex standards is 34% m/m expressed on solids-non-fat. Based on the average composition of milk collected in the EU and assuming a certain safety margin, this corresponds to around 2.9% protein on product weight. For the year 2000, the average protein content of milk collected in the EU was 3.35%. This means that protein standardisation potentially could result in extracting important quantities of protein from the milk used for drinking milk or preserved milk manufacture, making it available e.g. for increased cheese production. Consequently, protein standardisation would impact on the existing surplus for milk in the Community.

3.3. With a view to assessing the possible impact on the dairy market of protein standardisation for drinking milks and preserved milks, the Commission contracted an external expert study, the results of which became available in November 2001. The purpose of this study was to achieve a realistic impact assessment notably based on a range of interviews with the different players on the dairy market.

3.4. As regards preserved milks, the findings of the study can be summarised as follows:

(a) the manufacturers of preserved milks are unanimous in their support of protein standardisation. Their main arguments are: legislation in force prevents the producers from integrating technological progress in the production process, following the adoption of the 1999 Codex rules other major dairy producing countries practise protein standardisation thereby placing EU producers in a disadvantaged position, detecting illegal protein standardisation requires complex control procedures and can therefore hardly be prevented;

(b) the users of preserved milks (feed producers, confectionery industry, dietary food producers) would generally be interested in using a standardised product. Some of these users would need to compensate for a protein content reduced to 34% by using additional quantities of preserved milks. For exported preserved milks, the study estimates that around 60% would be standardised.

Based on this analysis and using data for 1999, the study concludes that protein standardisation of preserved milks could release a surplus of milk protein of around 46 000 tonnes, which is the equivalent of 140 000 tonnes of skimmed milk powder. It should be underlined that this estimate does not take account of existing selection of raw milk according to its protein content (milk with a high protein content being destined for cheese production) nor of illegal standardisation.

3.5 As regards drinking milk, the findings of the study can be summarised as follows:

(a) the position of the manufacturers of drinking milk is far from being unanimous and positions depend on the nationality of the company and on the type of drinking milk produced. In general, producers of UHT milk are more inclined to defend protein standardisation than producers of pasteurised milk, producers in the Scandinavian and Mediterranean countries attach great importance to the image of freshness, pureness and naturalness of milk and therefore reject protein standardisation. But even within Member States different positions appeared;

(b) the position of consumer organisations is reluctant, fearing a deterioration of quality and nutritive value of drinking milk and insisting on a clear labelling of standardised products.

Due to these imponderables, the study concludes that a precise estimate on the market consequences of protein standardisation for drinking milk cannot be made and that at best the surplus of protein released can be estimated in a margin ranging between 61 000 and 84 000 tonnes of protein. This is the equivalent of 188 000 to 258 000 tonnes of skimmed milk powder. Again these estimates do not take account of possible selection of raw milk nor of illegal standardisation.

3.6. Therefore, on a global level, protein standardisation of preserved milk and/or drinking milk is not neutral vis-à-vis the market balance on the EU market. Within a given milk production quota, protein standardisation would allow the dairy industry to increase the total output of dairy products thereby adding to an existing surplus that already requires substantial internal and export subsidies for its disposal. The modest increase in internal unsubsidised consumption would not suffice to absorb this additional output and, consequently, recourse to intervention measures could be inevitable. Deteriorating markets in 2001/02 underlined the need for a cautious approach on measures that affect supply so as to avoid important budgetary consequences.

4. Impact on the competitiveness of European companies

Generally, the price of milk at farm level is based on the protein and fat content of the milk. Dairy companies paying a higher price for milk rich in protein are clearly interested in passing this extra cost on to the purchasers of their products. In certain cases, the latter may be willing to pay a higher price for products with a higher protein content. But for most of the preserved milks and for all drinking milk, the selling price does not take account of the protein content.

Dairy companies collecting milk in regions characterised by high protein contents, therefore claim to be in a disadvantaged position when competing on the same market with products having a fairly low protein content. This is typically the case for drinking milk in certain regions of the Community, but also on the world market for milk powders where products with 34% protein (the Codex minimum) are setting the standard.

5. Protein standardisation and support measures in the milk sector

5.1. A possible amendment of Directive 2001/114/EC, with a view to legalising protein standardisation for preserved milk, cannot be considered in isolation from other legislation, notably in the framework of the milk CMO. The Commission indeed believes that there should be consistency between the production standards and the definition of products covered by the CMO. Consequently, should the Community accept protein standardisation in line with the Codex standard this would need to be accompanied by changes to other legislation.

5.2. As regards public intervention, this would involve amending Article 7(1) of Council Regulation (EC) No 1255/1999 so as to limit intervention to skimmed milk powder with a protein content of at least 34% (instead of 31.4%, which is the current minimum requirement). Moreover, the full intervention price now applies to powder with a minimum protein content of 35.6%. Products with 34% protein are purchased at a price equal to 97.2% of the full intervention price. Consequently, should skimmed milk powder with 34% protein become the new intervention standard, the intervention price should be reduced by 2.8%. This in turn could reduce slightly the budgetary costs resulting from increased milk product availability following protein standardisation. In any case the standardisation could create an additional milk protein surplus equivalent to 140 000 tonnes of SMP with a disposal cost estimated at more than 130 Mio EUR.

5.3. As regards skimmed milk powder subsidised upon use in animal feed, the link with the preserved milk directive is not evident because the latter relates to products intended for human consumption. Nevertheless, for the sake of consistency and simplification, Article 2 of Commission Regulation (EC) No 2799/1999 could be amended with a view to reserving aid for powder with at least 34% protein. The aid amounts specified in Article 7 of the Regulation should then be adjusted in consequence.

5.4. As regards exports of preserved milks, under existing legislation refunds are only granted for products containing at least 34% protein in the non-fat dry matter. This requirement is in line with the Codex standards that set the norm for international trade.

6. Regulatory framework - Fat content of drinking milk

6.1. In Council Regulations (EC) No 2597/97 and (EEC) No 1898/87 marketing standards and protected designations for milk are established. As part of the accession negotiations, Finland and Sweden were authorised to derogate from the provisions on the fat content of drinking milk foreseen in Council Regulation (EC) No 2597/97. This derogation was originally foreseen for a period of three years, expiring on 31 December 1997. Council Regulation (EC) No 2596/97 originally granted an extension of two years, but Regulation (EC) No 2703/1999 added a further period of four years bringing the expiry date of the derogation to 31 December 2003. In December 2001, Finland and Sweden submitted reports on this derogation thus complying with a requirement in Regulation (EC) No 2703/1999.

Derogation on the fat content of drinking milk for Finland and Sweden

6.2. Under current derogation Finland has an authorisation for 1% milk to be marketed in the country of production or exported to a third country. In its report, Finland stresses the complexity of the issue, underlining in particular that:

- the industry's decision on the product range is consumer driven, noting that milk with 1% fat accounts for a market share of 10 to 12%;

- milk is natural part of Finnish diets with 69 to 84% of the population consuming it daily, depending on the age;

- because of the exceptionally large intake of fresh milk, concern should be given to the fat content of milk and a variety of low fat products should be offered accordingly;

- Finnish death rate figures for cardio-vascular disorders are amongst the highest in the world. Consequently, a reduction in fat intake is recommended;

- according to a market survey, if the "1% milk" would be banned from the market, some 10% of the consumers would stop drinking milk.

Finland therefore advocates a cautious approach concerning the discontinuation of the current derogation and requests a broad discussion on the future EU policy in relation to drinking milk.

6.3 The derogation for Sweden is granted for a product with a fat content of 3%, which can be marketed in Sweden or exported to third countries. The Swedish report firstly refers to two national market analysis that were carried out in order to asses the market opportunities for milk with 3.5% fat as a substitute for the current "whole" milk with 3.0% fat.

The results of a market analysis show the importance of milk in the diet especially for families with young children and teenagers as well as a clear trend among consumer to choose milk with a lower fat content. During the first six months of 2001, consumption of milk with 3% fat dropped by 0.8% compared to the previous year, while the consumption of milk with 1.5% fat increased by 1%. Furthermore, the market analysis shows that in case of a change from 3.0 to 3.5%, some 33% of the consumers would opt for a less fatty alternative. This equals a reduction in the milk fat uptake of 600 000 kg per year.

The results of a study by the National Food Agency show that from a public health perspective the consumption of fat, especially of saturated fat as in milk, should be reduced. There is indeed a clear connection between the high level of saturated fat in the Nordic diet and vascular disorders, overweight and gallstone.

Based on these studies, the Swedish authorities make the following comments:

- since the time of accession there has been no support among consumers for increasing the fat level in drinking milk and the political position has been to reduce the consumption of fat and especially saturated fat;

- although Sweden understands the wish to harmonise the rules for drinking milk and to limit derogations in time, it also believes that consumer preferences should be respected and that it is preferable that Member States would decide the fat content of drinking milk based on their own situation;

- the priority must be to maximise the consumption of drinking milk, not to reduce the fat surplus in the market through excessive fat content requirements;

- Sweden believes that the standards for drinking milk should be considered in isolation from the milk CMO and that legislation should focus on the correct labelling of drinking milk. It wishes that a broad discussion on these subjects should be launched in the near future.

6.4 Recent trends in drinking milk consumption in EU-15 are summarised in the following table. The data show a small decline in total drinking milk production and a shift from whole to semi-skimmed milk. Skimmed milk production has a fairly constant market share, which seems to suggest that consumers are looking for a compromise between reduced fat intake and taste, the latter being assimilated to the presence of some milk fat.

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Following the successful conclusion of the negotiations with ten Candidate Countries on 13 December 2002 in Copenhagen six new Member States have been granted a derogation for the fat content of drinking milk for a period of five years. The derogations are indicated in a table below. Data for the Swedish and Finnish derogations are included for the sake of comparison.

>TABLE POSITION>

As in the case of Finland and Sweden, the new transitional arrangements were granted under condition that drinking milk covered by the derogation may only be marketed in the country of production. These new derogations were accepted until 30 April 2009. Since the requirements relating to the fat content of milk for human consumption continue to cause difficulties for Finland and Sweden it seems appropriate to extend also their present derogations to the same date.

7. Conclusions

Based on the above analysis the Commission suggests the following approach:

(a) as regards drinking milk, protein standardisation should not be legalised taking account of the need to preserve the natural image of milk thereby avoiding negative impact on consumption and also with a view to avoiding additional milk protein surpluses on the Community market;

(b) as regards preserved milks, protein standardisation in line with the Codex Alimentarius standards can be justified on the basis of international harmonisation. However, standardisation will have an impact to an internal market balance. It could create an additional milk protein surplus equivalent to 140 000 tonnes of skimmed milk powder for which the disposal cost is estimated at more than 130 Mio EUR. Such a standardisation, if agreed, should be accompanied by additional restrictive measures for the milk sector so as to neutralise the effects on the Community budget;

(c) since the requirements relating to the fat content of milk for human consumption continue to cause difficulties for Finland and Sweden it is proposed to extend their present derogations until 30 April 2009. In 2007 the Commission will make a report on the market for drinking milk, possibly accompanied by proposals to harmonise the rules.