Special Report No 8/2000 on the Community measures for the disposal of butterfat accompanied by the Commission's replies
Date: 2000-02-24
Institutions: European Court of Auditors
Subjects: butter, common organisation of markets, discount sale, milk fat, sales aid

12.5.2000

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 8/2000

on the Community measures for the disposal of butterfat accompanied by the Commission(cid:146)s
replies

(pursuant to Article 248(4), second subparagraph, EC)

(2000/C 132/01)

CONTENTS

Paragraph

Page

MAIN AUDIT FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The butter disposal measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Court(cid:146)s audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE MILK CMO AND THE BUTTER SURPLUSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The milk CMO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The EU butter surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The external butter market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The relative importance of the different disposal measures . . . . . . . . . . . . . . . . . . . . . . . . . .

OBSERVATIONS RELATING TO THE DISPOSAL SCHEMES . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fixing the level of aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Quality requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payment of the aid for imported butter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Particular health aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Value added tax (VAT) on EU subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Particular weaknesses affecting Commission Regulation (EC) No 2571/97 ((cid:145)butter for
pastry(cid:146)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Complex rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Monitoring deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Particular weaknesses affecting Commission Regulation (EEC) No 2191/81 ((cid:145)butter for
non-profit organisations(cid:146)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ADMINISTRATIVE WEAKNESSES ENCOUNTERED IN MEMBER STATES . . . . . . . . . . . . . . . . .

Control weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-5

1-4

5

6-22

6-9

10-12

13-16

17-22

23-50

23-27

28-30

31-34

35-38

39-41

42-47

42-45

46-47

48-50

51-53

51

Inadequate application of regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52-53

3

4

4

7

7

7

7

9

9

13

13

13

13

14

14

15

15

15

15

16

16

16

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Paragraph

Page

THE EFFICIENCY AND COST-EFFECTIVENESS OF THE DISPOSAL MEASURES . . . . . . . . . . . .

Determination of efficiency and cost-effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Factors determining demand on the internal market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Characteristics of the market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Competitive position of butter in relation to other fats . . . . . . . . . . . . . . . . . . . . . . . . . .

Impact of the aid on prices of final products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The relation between demand, aid rates and market prices . . . . . . . . . . . . . . . . . . . . . . .

Structural factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comparison between disposal measures and other forms of market intervention . . . . . .

Structural surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54-78

54-56

57-75

57-60

61-63

64-67

68-71

72-73

74-75

76-78

79-84

The Commission(cid:146)s replies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

16

17

17

17

18

19

20

20

22

22

26

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MAIN AUDIT FINDINGS

EU butter production (1 840 000 tonnes in 1998) accounts for about 45 % of worldwide production. Includ-
ing imports and stocks, some 2 000 000 tonnes of butter is available on the market each year, but only
1 290 000 tonnes is sold at market prices. The remainder is subsidised, either by disposal measures, export
refunds or public and private storage (see paragraphs 1 to 3).

Per capita consumption of butter dropped by 15 % during the second half of the 1980s. While consumption
remained relatively stable in the 1990s a further decrease in consumption is anticipated. The increase of milk
quotas will allow higher production in future years (cid:151) which may exacerbate the surplus situation (see para-
graphs 10 to 12).

Butter disposal measures aim at increasing consumption by providing aid for the use of butter. There are three
measures ((cid:145)butter for pastry(cid:146), (cid:145)butterfat for direct consumption(cid:146) and (cid:145)butter for non-profit organisations(cid:146)).
Annual expenditure amounts to ECU 600 million, covering around 500 000 tonnes of butter each year (para-
graphs 17 to 22).

The lowest possible aid level is not attained by the existing tender system. The aid level (about 30 % of the
market price of butter) could be further reduced, if market forces were allowed to play their role fully (see
paragraphs 23 to 27 and 68 to 71).

Lower quality and imported butter are eligible for EU support, thereby reducing the impact of the measures
(see paragraphs 28 to 34).

The relevant Commission regulations foresee the adding of tracers to products for control reasons. According
to an expert(cid:146)s opinion some of the substances involved give rise to a health risk. The Commission should take
initiatives to assure prior testing and approval of tracers and the declaration of their presence on product
packaging (see paragraphs 35 to 38).

VAT is imposed on EU subsidies in some Member States. This breaches the principle of equal treatment and
moreover it undermines the general purpose of the subsidies. The Commission should reflect on the implica-
tions of EU subsidies not reaching their intended beneficiaries in full (paragraphs 39 to 41).

Improvements are necessary at Member State level concerning the approval and inspection of establishments
entitled to incorporate aided butterfats, the control of the adding of tracers and the controls on the European
origin of butter for direct consumption (paragraph 51).

The justification for the disposal measures rests on the creation of additional demand, but the Commission
has no comprehensive information, analysis or studies on their impact. For some traditional or premium prod-
ucts the use of butter is necessary to obtain the expected final product characteristics. For other products,
competing fats such as vegetable oils and margarine which are much cheaper (by at least 50 %) can be used.
For croissants or ice cream, which are among the most important products in which aided butter is incorpor-
ated, the EU aid has a limited effect on retail prices and therefore on overall demand by final consumers
(paragraphs 54 to 71).

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While disposal measures are less expensive than intervention and export refunds, this comparison is only valid
if additional demand is created. However, there are reasonable indications that a substantial proportion of but-
ter disposed of with EU aid would have been consumed anyway (paragraph 75).

Introduced in 1969 on a temporary basis, the butter disposal measures became permanent schemes to deal
with structural surpluses. As well as aiming to reduce the cost of disposal measures, the Commission should
also consider structural measures to improve demand for non-subsidised butter or limiting its supply (para-
graphs 76 to 78).

The Commission should undertake a comprehensive assessment of the disposal measures. Meanwhile, the cur-
rent tendering procedures should be revised, aid should be progressively reduced and concentrated only on
quality non-imported butterfats for products where it is likely that additional demand is in fact created (para-
graph 84).

INTRODUCTION

The butter disposal measures

1. One third of the milk produced in the European Union (EU)
is either consumed fresh as drinking milk or converted into fresh
products, such as yoghurt. The remaining two thirds are con-
verted into the three broad product categories, butter, cheese and
skimmed milk. The EU butter production, of 1 843 000 tonnes in
1998 (1), accounts for about 45 % of the worldwide produc-
tion (2). Including imports and stocks, 1 984 000 tonnes of but-
ter (3) is available on the market, but only 1 290 000 tonnes (4) is
sold at market prices.

2. The remainder (694 000 tonnes in 1998) is subsidised, either
for consumption through the various disposal measures or
exported with the assistance of export refunds or taken into pub-
lic or subsidised private storage (5). For the overall market balance
see Table 1.

3. Butter is normally produced from cream, which is the first
product obtained in the course of separating milk fat from milk.
It has a minimum fat content of 82 % (80 % if salted). Concen-
trated butter or butteroil (99,8 % fat content), which can be stored
over a longer period without refrigeration, is used in the food-
processing industry and for household cooking, particularly in
certain regions of Germany.

4.
Introduced in 1969, the EU disposal measures aim to limit
surpluses by providing subsidies for the use of butter, particularly
where there is competition from other fats such as vegetable
oils (6). There are three EU disposal measures: a measure princip-
ally for the use of cream, butter and concentrated butter in pastry
and ice cream ((cid:145)butter for pastry(cid:146)), a measure for concentrated but-
ter intended for direct consumption including private households
((cid:145)butter for direct consumption(cid:146)) and a measure for the use of but-
ter by institutions and non-profit organisations such as hospitals
or social canteens ((cid:145)butter for non-profit organisations(cid:146)). Some
ECU 600 million (7) is spent annually on these measures, which
was 20 % of the total EU expenditure of ECU 2 956 million on
the common market organisation (CMO) for the milk sector in
1998 (see Table 2).

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Opening stocks:
1. Private stocks (with EU aid)
2. Public stocks
3. Total opening stocks

4. Production

5. Imports

6. Available for use

Consumption:
7. At market prices
8. Aided consumption
9. Total consumption
Consumption per capita (kg) in the EU:

Exports:
10. Commercial
11. Food aid
12. Special price
13. Total exports

Closing stocks:
14. Private stocks (with EU aid)
15. Public stocks
16. Total closing stocks (6 - 9 (cid:150) 13)

Table 1

Overall market balance

EU-10
1984

EU-12
1994

EU-15
1995

EU-15
1996

EU-15
1997

(1 000 t)

EU-15
1998

161
692
853

47
161
208

59
59
118

50
20
70

54
40
94

40
11
51

2 115

1 675

1 892

1 893

1 863

1 843

89

65

73

95

90

90

3 057

1 948

2 083

2 058

2 047

1 984

1 342
358
1 700

1 161
506
1 667

1 298
486
1 784

1 291
470
1 761

1 291
478
1 769

1 290
464
1 754

5,30

4,70

4,74

4,70

4,70

4,68

235
59
114
408

108
841
949

152
0
11
163

59
59
118

219
1
9
229

50
20
70

202
1
0
203

54
40
94

226
1
0
227

40
11
51

170
0
0
170

57
3
60

Explanatory notes:
The quantities for (cid:145)Aided consumption(cid:146) at row 8 are different from those for (cid:145)total butter equivalent disposed of(cid:146) in note 1, Table 5, because the latter includes dairy fat disposed
of in the form of cream under Regulation (EC) No 2571/97. The two sets of figures are reconciled as follows:

Aided consumption
add dairy fat disposed of in the form of cream
Total butter equivalent disposed of, as per Table 5

Consumption per capita in 1984 is for EU-12.

Sources: For 1984: Agricultural situation yearbook, 1987.

1994 to1998: Commission DG VI, Spreadsheet entitled (cid:145)Balance sheet (cid:151) butter stocks(cid:146).

1994

1995

1996

1997

1998

506
17
523

486
23
509

470
24
494

478
29
507

464
32
496

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Notes

Budget reference

Category of expenditure

1994

1995

1996

1997

1998

1999

(million ECU/EUR)

Table 2

Expenditure on milk 1994 to 1999

B1-2 0 0 0
B1-3 0 1 3

Butter and butteroil
Export Refunds
Export Refunds (cid:151) non-Annex II

B1-2 0 3 1...2 0 3 4
B1-2 0 3 0

Storage operations:
Public storage
Private storage

1

B1-2 0 4
B1-2 0
B1-3 0

B1-2 0 0 1
B1-3 0 1 2

Disposal measures: (analysed in Table 5)
Chapter B1-2 0 subtotal
Chapter B1-3 0 subtotal
Expenditure on butter and butteroil:

Skimmed milk and skimmed-milk powder
(SMP)
Export Refunds
Export Refunds (cid:151) non-Annex II

B1-2 0 1 1...2 0 1 4
B1-2 0 1 0

B1-2 0 2 0...2 0 2 3
B1-2 0 2 4

Storage operations
Public storage
Private storage

Disposal measures:
Aid for animal feed
Aid for casein

B1-2 0
B1-3 0

B1-2 0 0 2

N/A
B1-2 0 5 0

B1-2 0 0 3

Chapter B1-2 0 subtotal
Chapter B1-3 0 subtotal
Expenditure on skimmed milk and SMP:

Cheese
Export Refunds
Storage operations:
Public storage
Private storage

Chapter B1-2 0 expenditure on cheese:

251
47
299

18
49
68
656
975
47
1 023

73
137
210

69
0
69

500
279
779
922
137
1 059

592

0
89
89
681

477
65
542

(cid:150) 74
34
(cid:150) 40
618
1 055
65
1 119

199
144
343

(cid:150) 89
0
(cid:150) 89

448
343
791
901
144
1 045

584

0
89
89
673

Other milk products
Export Refunds
Chapter B1-2 0 Expenditure on other milk products:

1 010
1 010

1 008
1 008

2
2
3

3

4

B1-2 0 6 1
B1-3 1 2
B1-2 0 6 2, 3, 4
B1-2 0 6 5, 6, 8

B1-2 0 7
B1-2 0 6 7
B1-2 0 6 9/B1-2 0 9

Other measures relating to milk:
School milk scheme
School milk scheme
Development of marketing and quality
Compensation for reducing or abandoning milk
production
Additional milk levy
Compensation for non-allocation of milk quotas
Other measures

Chapter B1-2 0 subtotal
Chapter B1-3 1 subtotal
Expenditure on other measures relating to milk:

Chapter B1-2 0 subtotal
Chapter B1-3 0 subtotal
Chapter B1-3 1 subtotal
Total expenditure on milk:

155
(cid:151)
34

412
(cid:150) 2
15
33

647
0
647

112
(cid:151)
16

316
(cid:150) 80
(cid:150) 1
29

392
0
392

4 236
184
0
4 420

4 028
208
0
4 236

237
64
300

26
28
54
625
916
64
980

138
132
270

155
0
155

525
85
610

(cid:150) 9
30
21
598
1 145
85
1 230

171
160
331

30
0
30

337
82
420

(cid:150) 45
22
(cid:150) 23
584
899
82
981

133
172
305

90
0
90

439
311
750
1 042
132
1 174

386
288
675
875
160
1 035

367
287
654
877
172
1 049

469

0
84
84
553

761
761

124
(cid:151)
5

348
(cid:150) 194
0
16

299
0
299

3 572
196
0
3 767

272

0
99
99
371

785
785

108
(cid:151)
0

353
(cid:150) 547
0
3

(cid:150) 83
0
(cid:150) 83

3 093
245
0
3 337

181

0
74
74
255

775
775

(cid:151)
105
(cid:151)

6
(cid:150) 214
2
(cid:150) 2

(cid:150) 209
105
(cid:150) 104

2 597
254
105
2 956

(Estimate)

250
76
326

(cid:150) 4
32
28
491
769
76
845

122
155
277

45
0
45

364
289
653
820
155
975

181

0
93
93
274

706
706

(cid:151)
96
(cid:151)

6
0
0
6

12
96
108

2 581
231
96
2 908

Differences in totals due to roundings.
1. In 1998, disposal of social assistance butter (ECU 4 million) was transferred from B1-2 0 4 to B1-3 1 3.

The table excludes expenditure on social assistance butter (B1-2 0 4 0) for all years.

2. In 1998, school milk (ECU 105 million) was transferred from B1-2 0 6 1 to B1-3 1 2. The table includes expenditure on school milk for all years for consistency.
3. In 1997, these lines were included under B1-2 0 6 9.
4. Reconciliation to budget Chapter B1-2 0:

B1-2 0
B1-2 0 4 0

Milk and milk products
deduct social assistance butter

1994
4 249
13
4 236

1995
4 039
11
4 028

1996
3 582
11
3 571

1997
3 101
9
3 093

1998
2 597
0
2 597

1999
2 581
0
2 581

Note: The table excludes expenditure for butter distributed to deprived persons in the Community (B1-3 1 0 0/B1-3 5 0), expenditure for social assistance butter (B1-2 0 4

0/B1-3 1 3), and expenditure on export refunds for butter used for food aid (B1-3 3 5).
Sources: Evolution of EAGGF expenditure, DG VI, for 1994 to 1998, and EU budget for 1999.

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The Court(cid:146)s audit

5. The Court(cid:146)s audit was carried out in 1998 and the first half of
1999 at the Commission and in six Member States (Germany, Bel-
gium, Spain, France, the Netherlands and the United Kingdom). It
centred on the management of the measures and it included an
appreciation of the cost-effectiveness and related aspects of the
efficiency of the measures. The observations of the Court are
based on an examination of the systems involved and the testing
of the key controls as well as on the examination of a number of
selected transactions. Particular attention was paid to the butter
for pastry measure which accounted for 87 % of the expenditure
on disposal measures in 1998. The disposal measures for butterfat
were previously audited by the Court in 1989 (8). The Court com-
mented at that time on the complexity of the measures and on the
need to increase the frequency of on-the-spot checks and to
improve their central monitoring.

THE MILK CMO AND THE BUTTER SURPLUSES

The milk CMO

6. The CMO for milk was set up under Council Regulation (EEC)
No 804/68 (9). Intervention measures to deal with production
surpluses centre on butter and cream (for the fat content of the
milk) and on skimmed-milk powder and casein (for the protein
content of the milk) (10). There is also aid for the private storage
of certain cheeses under certain conditions and in certain regions.

7. The milk price support system led to substantial overproduc-
tion and increasing expenditure in the past. Milk quotas were
implemented from 1984 in order to control milk production and,
indirectly, limit the production of butter and skimmed milk pow-
der, the two products into which all milk surpluses are eventually
transformed. However, as quotas were established on the basis of
historical production, the surplus situation has never been solved.

8. The Court has underlined, notably in its Opinion No 10/98
on the Commission(cid:146)s Agenda 2000 CAP reform proposals (11),
that the current levels of guaranteed prices and milk quotas inevit-
ably lead to a surplus of milk and milk products and consequent
recourse to intervention (12). Furthermore, the Court has recently
highlighted that only 35 % of skimmed milk powder (SMP) is sold
without EU subsidies and aid is also paid for a further 395 000
tonnes of SMP-equivalent transformed into casein, resulting in
annual EU expenditure of around ECU 1 050 million (13).

Initially adopted for a period of five years from 1984, the milk
9.
quota system was extended to the year 2000 (14). A further pro-
longation to the year 2008, accompanied by an increase of the
quotas of up to 2,4 % together with a 15 % reduction of the inter-
vention price, has been decided in the context of the Agenda
2000 CAP reform. Assuming that the current product mix does
not change, the additional quotas will lead to increased annual
butter production of 44 000 tonnes (15).

The EU butter surplus

10. According to the Commission(cid:146)s services, there is a slight
increase in demand for milk products each year, mainly due to the
growth of the population, but the EU still produces more milk
and milk products than it consumes. In terms of milk-equivalent,
milk delivery as a whole exceeds consumption by 11 %, or by
20 % if one excludes subsidised consumption (16).

11. The market situation for butter has been relatively stable in
recent years. This has been mainly due to the introduction of milk
quotas and less attractive rules and prices for public storage. Pub-
lic intervention stocks decreased from a high of 1 300 000 tonnes
at the end of 1986, to 3 000 tonnes at the end of 1998. The cur-
rent market situation is characterised by:

(a) stabilised butter production since 1995, at a level of between

1,8 and 1,9 million tonnes per annum (17);

(b) a relatively stable level of aided private storage of butter, total-

ling some 180 000 tonnes contracted in 1998 (18);

(c) stable consumption of between 1,7 and 1,8 million tonnes per

annum since 1995 (19);

(d) a continuing surplus of exports over imports.

12. Despite the relative stabilisation of the market, the propor-
tion of consumption which is subsidised by disposal measures has
not been reduced and remains at approximately 500 000 tonnes,
or 25 % of the total available on the EU market. Per capita con-
sumption of butter (4,7 kg), though relatively stable in the 1990s,
has never recovered from the 15 % decrease (20) during the second
half of the 1980s which mainly affected countries where per capita
butter consumption was high, such as Belgium, Denmark, Ireland
and Finland, see Table 3. A further decrease in per capita con-
sumption of 1 % annually is forecast, to 4,5 kg by 2001 and 4,3
kg by 2003 (21). This decrease cannot be compensated by the
expected increase in EU population so that total consumption of
butter in the EU is expected to decrease annually by 0,8 %.

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Table 3

Butter consumption per capita in the EU

1984

8,58
11,85
7,24
0,71
0,46
9,55
11,18
2,28
13,67
3,89
0,83
5,14
5,30

4,84
10,37
7,18
5,40

1991

7,91
8,14
6,90
0,98
0,43
8,26
3,86
2,43
5,98
3,33
1,54
3,87
4,68

4,42
6,06
5,03
4,70

1994

6,63
5,95
6,88
1,06
0,43
8,64
3,77
2,21
5,49
3,32
1,54
4,20
4,70

4,18
5,24
5,90
4,72

1995

6,12
5,00
7,15
0,96
0,55
8,65
3,73
2,24
5,41
3,50
1,51
4,09
4,74

4,48
5,14
4,95
4,74

1996

6,11
4,74
7,26
0,96
0,64
8,05
3,71
2,27
5,33
3,42
1,51
4,31
4,71

4,59
4,69
4,35
4,70

1997

6,10
4,44
7,21
0,86
0,56
8,19
3,70
2,30
5,26
3,34
1,51
4,32
4,71

4,57
4,53
4,52
4,70

(kg)

1998

6,08
4,06
7,20
0,86
0,53
8,07
3,68
2,34
5,23
3,33
1,51
4,39
4,70

4,56
4,27
4,51
4,68

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Portugal
United Kingdom
EU-12 average

Austria
Finland
Sweden
EU-15 average

Source: Commission DG VI.

Table 4

Butter and butteroil import/export summary

Notes

1995

1996

1997

1998

GATT commitments

GATT expenditure commitment
Actual expenditure

1 392
542

1 303
300

1 214
610

GATT quantity commitment

487 800

470 100

452 400

1
2

1

3
3

Actual exports
Main countries of export:
Russia
Saudi Arabia
Baltic Republics
Lebanon
Syria
Singapore
Egypt
Mexico
Morocco
United Arab Emirates
Other countries

Actual imports
Main countries of import:
New Zealand
CEEC countries
Estonia
Latvia
Lithuania
Czech Republic
Hungary
Poland
Slovakia
Other countries

(million ECU)

1 126
420
(tonnes)
434 700

(tonnes)
162 489

29 145
16 333
3 992
5 155
3 397
6 457
15 336
4 528
7 849
3 094
67 203

(tonnes)
71 213

215 428

184 021

216 316

75 899
17 388
3 572
5 631
5 059
5 127
9 938
6 126
4 636
4 767
77 285

30 900
17 530
5 302
5 462
5 638
5 799
24 107
6 332
7 295
4 282
71 374

81 555
15 505
14 482
5 063
5 330
5 875
4 740
7 116
4 238
3 143
69 269

66 941

83 143

76 694

59 402

70 258

62 819

60 211

371
100
688
1 109
337
1 277
190
3 467

783
983
1 287
1 600
58
1 514
498
6 162

2 244
1 558
1 527
1 496
19
1 547
669
4 815

944
1 230
1 560
1 974
274
809
639
3 572

Notes
1. GATT Uruguay Round export commitments, for year ending 30 June.
2. Evolution of EAGGF expenditure, DG VI.
3. Imports from CEEC and New Zealand qualify for preferential rates of duty.
NB: This table shows the actual import/export figures of the calendar year. They differ from the Commision(cid:146)s estimate for the overall market balance shown in Table 1.
Source: Actual imports and exports: Regime 1 normal trade statistics, Commission DG VI.

Evolution of EAGGF expenditure, GATT commitments.

12.5.2000

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The external butter market

13. Annual EU exports of butter exceed imports on average by
120 000 tonnes per year (see Table 4). The external market con-
tributes therefore to the stabilisation of the EU butter market
although world market prices for butter are below the European
price level: at the end of 1998, world market prices for butter
were around ECU 1 480 per tonne fob, while prices in the EU
Member States varied between ECU 3 060 and ECU 3 460 (22) per
tonne. Almost all exports of butter and butteroil from the EU are
dependent on EU export refunds (23). The level of export refunds
for butter declined from ECU 1 932 per tonne on 1 January 1995
to ECU 1 700 (24) in November 1997, in line with an increase in
world market prices.

14. Subsidised exports are running at less than half of the maxi-
mum volume permitted under the EU(cid:146)s GATT/WTO commit-
ments (25). The resulting expenditure on export refunds (ECU 420
million in 1998) is also less than half of the maximum amount
permitted. The WTO commitments would give scope to increase
subsidised exports if market opportunities could be found. How-
ever, it is questionable whether real outlets exist for increased
exports of EU butter, given the current competitive situation and
oversupply on the world market (26).

Imports of butter and butteroil to the EU are subject to pay-
15.
ment of duty. The full rate of import duty declined from ECU
2 780 per tonne on 1 January 1995, to ECU 2 250 in July 1998.
However, in practice, over 80 % of such imports take place within

the framework of the preferential agreement with New Zealand (27).
A further 10 % is covered by preferential agreements with Poland,
the Czech Republic, Slovakia, Estonia, Latvia and Lithuania.

16. On 31 December 1998, the preferential duty on New Zealand
butter was ECU 868,80 per tonne (since 1 July 1995) and ECU
450,20 for butter from the central and east European countries.
Aid rates for the disposal measures, for which imported butter is
eligible, exceed preferential import duties.

The relative importance of the different disposal measures

17. The EU uses the following measures and exchange mecha-
nism to deal with butterfat surpluses:

(a) public storage, if market prices for butter fall below a guaran-

teed price level;

(b) aid for private storage of butter taken into store between 1

April and 15 August (for 1998) (28);

(c) an exchange mechanism with third countries, with import
duties, export refunds and control of trade by licences;

(d) (cid:145)disposal measures(cid:146), financed by the EU when surpluses of
milk products build up, or are likely to occur. The cost of
these measures is outlined in the following table:

Regulation/measure

Expenditure 1998
(million ECU)

Average cost per tonne disposed of in
1998
(ECU per tonne)

Regulation (EC) No 2571/97 (cid:151) (cid:145)butter for pastry(cid:146)
Regulation (EEC) No 429/90 (cid:151) (cid:145)concentrated butter for direct
consumption(cid:146)
Regulation (EEC) No 2191/81 (cid:151) (cid:145)non-profit organisations(cid:146)

511
26

47

1 151
1 422

1 577

18. Council Regulation (EEC) No 1723/81 (29) indicates the types
of disposal measures for which specific Commission Regulations
apply (30). Table 5 shows the quantities disposed of under each
measure in the last five years. The disposal measures are particu-

larly significant for France, Germany, Belgium, the United King-
dom and the Netherlands, which account for over 92 % of the
expenditure (see Table 6).

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Table 5

Importance of the disposal measures

Quantities of butter involved under the disposal measures

Regulation

Description

1994

1995

1996

1997

1998

(1 000 t)

570/88 & 2571/97

Sales to the food industry

2191/81
429/90

Pastry
Ice cream

Sub total
Non-profit organisations
Concentrated butter
Total (see notes 1 and 2)

Cost of butter disposed of

352
99
451
37
22
510

341
89
430
37
23
490

339
73
412
39
20
471

344
90
434
33
24
491

360
84
444
30
18
492

(million ECU)

Budget line

Regulation

Description

1994

1995

1996

1997

1998

570/88 & 2571/97

Sales to the food industry

B1-2 0 4 9-0 0 1+ 0 0 7
B1-2 0 4 9-0 0 2

B1-2 0 4 9-0 0 3
B1-2 0 4 9-0 0 4

2191/81
429/90

Cost per tonne of butter disposed of

Pastry
Ice cream

Sub total
Non-profit organisations
Concentrated butter
Total

435
118
553
64
40
656

395
131
526
54
38
618

428
115
543
52
30
625

420
101
521
47
31
598

413
98
511
47
26
584

(ECU)

Budget line

Regulation

Description

1994

1995

1996

1997

1998

570/88 & 2571/97

Sales to the food industry

B1-2 0 4 9-0 0 1+ 0 0 7
B1-2 0 4 9-0 0 2

B1-2 0 4 9-0 0 3
B1-2 0 4 9-0 0 4

2191/81
429/90

Differences in totals due to roundings.

Notes:

Pastry
Ice cream

Average
Non-profit organisations
Concentrated butter
Total

1 236
1 191
1 226
1 719
1 818
1 287

1 159
1 469
1 223
1 465
1 635
1 260

1 262
1 573
1 317
1 331
1 520
1 327

1 221
1 117
1 199
1 412
1 288
1 218

1 147
1 169
1 151
1 577
1 422
1 187

1.

(cid:145)Quantities disposed of(cid:146) in this context do not include butter disposed of under the social assistance and deprived persons schemes, which are not considered as market disposal
measures. The quantities involved for these schemes are:

Social assistance butter (Regulation (EEC) No 2990/82)
Deprived persons (Regulation (EEC) No 3149/92)

Total butter equivalent disposals are the sum of these social schemes, and the above market disposal measures:

Social schemes
Market disposal measures
Total butter equivalent disposed of

(1 000 t)

1994

1995

1996

1997

1998

8
5
13

8
11
19

7
16
23

5
11
16

4
0
4

1994

1995

1996

1997

1998

13
510
523

19
490
509

23
471
494

16
491
507

4
492
496

2. The quantities for (cid:145)Total butter equivalent disposed of(cid:146) are different from those in the overall market balance sheet (row 8 at Table 1), because the latter excludes dairy fats

disposed of in the form of cream under Regulation (EC) No 2571/97. The two sets of figures are reconciled as follows:

Total butter equivalent disposed of
less dairy fat disposed of in the form of cream
Aided consumption, per overall market balance sheet

1994

1995

1996

1997

1998

523
17
506

509
23
486

494
24
470

507
29
478

496
32
464

Source: Commission DG VI, spreadsheet entitled (cid:145)Butter disposal measures(cid:146) bal.xls, Evolution of EAGGF expenditure, Commission DG VI.

12.5.2000

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Expenditure on disposal measures in 1998 by category and Member State

Table 6

B1-2 0 4 0.0 0 1

B1-2 0 4 0.0 0 2

B1-2 0 4 0.0 0 7

Subtotal

B1-2 0 4 0.0 0 4

B1-2 0 4 0.0 0 3

Total B1-2 0 4 0

(million ECU)

Budget heading

Regulation (EC)
No 2571/97 and
Regulation (EEC)
No 570/88
Butterfats for
pastry

Regulation (EC)
No 2571/97 and
Regulation (EEC)
No 570/88
Butterfats for ice
cream

Regulation (EC)
No 2571/97 and
Regulation (EEC)
No 570/88
Butterfats for
food preparat.

Regulation (EC)
No 2571/97 and
Regulation (EEC)
No 570/88
Subtotal

Regulation (EEC)
No 429/90
Concentrated
butter for direct
consumption

Regulation (EEC)
No 2191/81
Butter for non-
profit
organisations

1

2

3

4=1+2+3

5

6

7=4+5+6

(%)

Member State

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom

Total

76,8
0,1
37,3
0,3
4,7
171,5
3,2
6,9
0,1
47,4
0,8
0,0
3,6
1,6
58,1

412,4

Source: Commission, DG VI.

12,0
1,8
23,9
1,3
2,1
21,3
1,3
3,6
0,1
14,8
0,0
0,9
4,0
2,9
8,2

98,2

0
0,2
0
0,3
0
0
0
0
0
0
0
0
0
0
0

0,5

88,8
2,1
61,2
1,9
6,8
192,8
4,5
10,5
0,2
62,2
0,8
0,9
7,6
4,5
66,3

511,1

3,1
0,0
13,5
0,6
0,0
0,9
0,0
2,6
0,0
1,0
0,8
0,0
0,0
0,0
3,1

25,6

0,8
0,7
23,6
0,0
0,0
15,9
0,4
0,4
0,1
0,5
1,0
0,0
0,0
0,0
3,9

47,3

92,7
2,8
98,3
2,5
6,8
209,6
4,9
13,5
0,3
63,7
2,6
0,9
7,6
4,5
73,3

15,9
0,5
16,8
0,4
1,2
35,9
0,8
2,3
0,1
10,9
0,4
0,2
1,3
0,8
12,6

584,0

100,0

19.
(cid:145)Butter for pastry(cid:146) is the most important disposal measure
and accounted for the disposal of 444 000 tonnes in 1998, for
which EU aid of ECU 511,1 million was paid. Its objective is to
encourage the use of butterfat instead of other fats by the food-
processing sector. Subventions are paid for the use of cream, but-
ter and concentrated butter in the manufacture of pastry prod-
ucts, ice creams and other foodstuffs. There are particular formulae
set out in Commission Regulation (EC) No 2571/97 to take into
account the different types of products for which butterfat is
used (31).

21. The measure (cid:145)butter for non-profit organisations(cid:146) provides
for subsidies for the use of butter at reduced prices by institutions
and non-profit organisations and accounted for the disposal of
30 000 tonnes in 1998 for which EU aid of ECU 47,3 million was
paid, mainly in Germany and France.

20. The measure (cid:145)butter for direct consumption(cid:146) provides aid for
concentrated butter intended for direct consumption. It accounted
for the disposal of 18 000 tonnes in 1998 for which EU aid of
ECU 25,6 million was paid, more than half of it in Germany. The
products covered are mainly used by final consumers for the
preparation of food (32).

22. Different management and control systems apply for the
three measures and different aid rates apply for butter, concen-
trated butter and cream. Aid rates for traced products (33) are
higher than for untraced products. The overall aid level has been
reduced during recent years, due to more favourable market con-
ditions, but it still corresponds to some 30 % of the market price
of butter. Figure 1 shows the recent evolution of aid rates.

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12.5.2000

Figure 1

DEVELOPMENT OF ACCEPTED AID RATES, 1995 TO 1999

2 500

2 000

e
n
n
o
t

1 500 

r
e
p
R
U
E
/
U
C
E

1 000

500

0

1.1.95

1.3.95

1.5.95

1.7.95

1.9.95

1.11.95

1.1.96

1.3.96

1.5.96

1.7.96

1.9.96

1.11.96

1.1.97

1.3.97

1.5.97

1.7.97

1.9.97

1.11.97

1.1.98

1.3.98

1.5.98

1.7.98

1.9.98

1.11.98

1.1.99

1.3.99

R. 2571/97 : Traced butter with 82 % fat content

R. 2571/97 : Untraced butter with 82 % fat content

R. 2571/97 : Traced concentrated butter

R. 2571/97 : Traced cream

R. 429/90 : Concentrated butter

R. 2191/81 : Non profit organisation butter

Aid rates per tonne

Regulation

2571/97

2571/97

2571/97

2571/97

429/90

2191/81

Type of aid

Traced butter with
82 % fat content

Untraced butter
with 82 % fat
content

Traced
concentrated
butter

Traced cream

Concentrated
butter

Non-profit
organisation
butter

1.1.1995
1.4.1995 (*)
1.7.1995
1.10.1995
1.1.1996
1.4.1996
1.7.1996
1.10.1996
1.1.1997
1.4.1997
1.7.1997
1.10.1997
1.1.1998
1.4.1998
1.7.1998
1.10.1998
1.1.1999
1.4.1999

1 210
1 400
1 260
1 250
1 250
1 250
1 250
1 250
1 250
1 250
1 250
1 250
1 170
1 170
1 090
1 090
1 090
950

1 180
1 360
1 220
1 210
1 210
1 210
1 210
1 210
1 210
1 210
1 210
1 210
1 130
1 130
1 050
1 050
1 050
910

1 530
1 760
1 560
1 540
1 540
1 540
1 540
1 540
1 540
1 540
1 540
1 540
1 440
1 440
1 340
1 340
1 340
1 170

520
600
540
540
540
540
540
540
540
540
540
540
500
500
460
460
460
400

1 750
2 030
1 990
1 790
1 790
1 790
1 790
1 790
1 790
1 790
1 790
1 790
1 690
1 690
1 340
1 340
1 340
1 170

1 300
1 390
1 390
1 390
1 390
1 390
1 390
1 390
1 390
1 390
1 390
1 390
1 390
1 390
1 050
1 050
1 050
1 050

Source: Court of Auditors analysis of documents provided by Commission DG VI.
(*) The increase shown in the aid rate for the first quarter of 1995 is not an effective increase but is due to the adjustment of the green rate mechanism.

 
 
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OBSERVATIONS RELATING TO THE DISPOSAL SCHEMES

Fixing the level of aid

23. While the aid rates for the measure (cid:145)butter for non-profit
organisations(cid:146) are fixed by Commission Regulation (34), the amount
of Community aid for the other disposal measures ((cid:145)butter for
pastry(cid:146) and (cid:145)direct consumption(cid:146)) is determined by public tender.
In the context of these tenders, which are organised twice monthly
by the intervention agencies in the Member States (35), tenderers
have to state for each product included in their bid the aid rate
required (36), the quantity they propose to process, and which of
the product formulae permitted by the Regulation will be fol-
lowed.

24. Bids have to be submitted together with the written under-
taking stipulated by the Regulations and a tendering security of
ECU 350 per tonne for (cid:145)butter for pastry(cid:146) or ECU 181 per tonne
for (cid:145)butter for direct consumption(cid:146). The Commission fixes a maxi-
mum aid rate for each tendering procedure up to which bids are
accepted. The corresponding decision is published in the Official
Journal of the European Communities after each tendering date.

25. The audit has shown that the tendering system operates in a
particular way. In practice, tenderers are specialised companies,
very few in number (little more than 10 in most Member States
visited, 35 in Germany and 50 in France). The stability of the aid
level means that the tenderers can readily estimate the likely aid
level that the Commission will accept and make their quantita-
tive bids accordingly. As a result, almost all bids are at the maxi-
mum aid level and thus there is no competition on aid, which
adversely affects the efficiency of the tendering procedure. The
Commission therefore manages the scheme not by determining
each time the least possible aid level but by monitoring the quan-
tities for which tenders were submitted. If there is a particular
increase in quantities tendered exceeding the overall demand pat-
tern per period (this happens notably when the industry fears that
the Commission is likely to reduce the aid rates), the Commission
may determine a lower aid level.

26. The Commission balances the accepted bids for quantities
up to the annual target quantity of 500 000 tonnes for the three
disposal measures. Although the Commission was successful in
reducing the aid rates several times (most recently in January
1999) there is no established formal approach or set of calcula-
tions justifying the fixing of a particular aid level. The Commis-
sion tries to avoid abrupt modifications of aid rates because it
fears that this could make the use of butterfat less attractive for
the industry. However, if market forces were fully allowed to play
their role, the aid level could be further reduced.

27. However, there are additional tools the Commission uses to
obtain compliance between tendered quantities and the monthly
demand pattern for the target quantities. The Commission can
increase the amount of the required tendering security (which
increased for (cid:145)butter for pastry(cid:146) from ECU 180 per tonne to ECU
350 per tonne in 1998). Furthermore, the Commission can
shorten the deadline for the processing and incorporation of sub-
sidised butterfats into final products following the closing date for
the submission of tenders. This deadline, initially set at six months,
has been modified several times, and is currently set at four
months. A reduction of the deadline has the impact that benefi-
ciaries can only bid for a relatively short period and therefore they
reduce the quantities for which aid is requested. In addition, cer-
tain industries, such as ice cream manufacturers, who plan their
production and retail prices for the whole summer season (37),
cannot count on a given aid level for the whole period of the cam-
paign.

Quality requirements

28. Quality requirements for butter and for the products eligible
for the granting of the aid are not harmonised with those for stor-
age (38). Furthermore, Article 1(2) of Commission Regulation (EC)
No 2571/97 ((cid:145)butter for pastry(cid:146)) stipulates detailed quality require-
ments for butter and cream only if taken from the market ((cid:145)beurre
du marchØ(cid:146)) (39). However, there are no quality requirements at all
for butter and cream used for the production of concentrated but-
ter. As a consequence, all sorts of butter can benefit from the aid,
if converted into concentrated butter. Likewise, Commission Regu-
lation (EEC) No 429/90 ((cid:145)direct consumption(cid:146)) does not stipulate
quality requirements for the cream or butter used for the produc-
tion of concentrated butter.

29. The audit revealed that low quality butter, such as whey but-
ter, crude butter and various spreadable milk fats with different fat
contents are used for the production of concentrated butter (40).
Whey is a by-product of cheese production and as such, it is not
eligible for EU subsidy. However, from whey, butter (41) can be
produced which is used for the production of concentrated but-
ter and, in this manner, whey can qualify for EU subsidies. Besides,
since 1993 an amendment to Commission Regulation (EEC) No
570/88 as well as the new Commission Regulation (EC) No
2571/97 allow the use of concentrated butter for the production
of (cid:145)recombined butter(cid:146) (42) without losing the aid.

30. To the extent that low grade ingredients are being used by
claimants as substitutes for quality butter and cream the contribu-
tion of the EU subsidy to the overall balance of the butter market
is weakened.

Payment of the aid for imported butter

31. Whereas under the (cid:145)direct consumption(cid:146) measure the cream
or butter used for the manufacture of concentrated butter must be

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Official Journal of the European Communities

12.5.2000

of European origin, the (cid:145)butter for pastry(cid:146) measure does not
impose a similar condition.

36. Tracers were introduced some 20 years ago but the Com-
mission could not provide evidence that the substances were sub-
jected to prior testing and approval in respect of their possible
toxicological risk.

32. Butter imported under preferential regimes, notably from
New Zealand, can be and is used to produce concentrated but-
ter (43) which is fully entitled to EU aid under the (cid:145)butter for pastry(cid:146)
disposal measure. This is an attractive option which avoids pack-
aging and distribution arrangements and costs associated with
retail sales. Furthermore, the concentrated butter is also eligible
for export refunds under the regime for non-Annex II prod-
ucts (44). The use of imported butter is therefore profitable because
the product can be bought at world market prices and the aid
receivable is higher than the import duties to be paid. In effect,
the EU is providing a net subsidy for the use of butter imported
at preferential rates which displaces demand for EU-produced
butter.

33. The (cid:145)butter for pastry(cid:146) measure creates an attractive market
for imported butter, and is therefore counterproductive to the
objective of balancing the European milk market. The Court has
already commented on this situation in its Special Report No
4/98 (45) and calculated that the annual net cost to the EU budget
for the disposal of New Zealand butter amounts to ECU 7,7 mil-
lion. In its reply the Commission stated that (cid:145)New Zealand butter
forms part of the supply and, from a management point of view,
it is not relevant which butter is used for industrial purposes. The
Commission has always estimated the cost of the butter conces-
sion to New Zealand as the sum required to export an equivalent
quantity of butter to third countries less the reduced levy/duty
paid on import(cid:146). However, the Management Committee for Milk
and Milk Products has twice rejected Commission proposals to
exclude this butter from the scheme (46).

34. The Council, in its discharge decision on the budget year
1997 (47), has recommended inserting a clause requiring products
to have European origin in the context of Commission Regula-
tion (EEC) No 570/88 (since replaced by Commission Regulation
(EC) No 2571/97). The Court also suggests a corresponding clause
in Council Regulation (EEC) No 1723/81, authorising the disposal
measures. In addition, the aid for (cid:145)butter for non-profit organisa-
tions(cid:146) should also be limited to quality butter of European origin.

Particular health aspects

37. The Commission argues that these tracers have been consid-
ered to be harmless for human consumption, since no Member
States have forbidden their use and since it was not informed
about any problems with the existing tracers. Furthermore, the
declaration of the presence of tracers in the final food is generally
not required if the content of butter, butter concentrate or cream
in the final product does not exceed 25 % (49).

38. According to an expert(cid:146)s opinion (Bundesinstitut f(cid:252)r gesund-
heitlichen Verbraucherschutz of the German Federal Ministry of
Health) some of the substances foreseen as tracers by Commis-
sion Regulation (EC) No 2571/97 give rise to a health risk. The
Commission should review this file and take appropriate initia-
tives to assure that prior testing and approval procedures are
adopted. The introduction of provisions requiring the declaration
of the presence of tracers should be required in accordance with
the principle of consumer information and protection.

Value added tax (VAT) on EU subsidies

39. Apart from the general provisions laid down in the sixth
VAT Directive (50), so far there has not been any specific EU leg-
islation concerning VAT on subsidies paid in the context of the
disposal measures.

40.
In most Member States visited by the Court the VAT rate on
subsidies for butterfat is effectively zero. Either the subsidies are
exempt from VAT taxation (Spain), the VAT on butter and conse-
quently on the aid is zero rated (United Kingdom) or the VAT is
compensated by a national subsidy (France). On the other hand,
in Belgium and Germany, VAT must be paid on the subsidy for
(cid:145)butter for non-profit organisations(cid:146). In Germany, VAT on EAGGF
subsidies for (cid:145)butter for pastry(cid:146) was also paid by a beneficiary vis-
ited in Bavaria but not by beneficiaries in the Land of Lower Sax-
ony.

35. Both the (cid:145)direct consumption(cid:146) and (cid:145)butter for pastry(cid:146) disposal
measures stipulate the adding of tracers to the products (48) for
control reasons. Tracers include substances which provide a spe-
cific aroma such as those obtained from vanilla or from synthetic
vanillin, substances to add colour, such as those obtained from
carotene, and a number of other substances that are obligatory for
the chemical tracing of the products.

41. The different treatment of EU subsidies for butterfat breaches
the principle of equal treatment and undermines the general pur-
pose of the subsidies. Moreover, the Commission should seriously
reflect on the implications of EAGGF subsidies not reaching the
beneficiaries in full.

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Particular weaknesses affecting Commission Regulation (EC)
No 2571/97 ((cid:145)butter for pastry(cid:146))

Complex rules

third Member State for incorporation into the final product. The
complex trade patterns do not allow verification of the quantities
processed and finally incorporated in the Member States. Further-
more, no information is available about the use of the subsidised
butterfat by category of final products, other than the two global
formulae A (all products other than ice cream) and B (ice cream).

42. Commission Regulation (EC) No 2571/97, applicable from
January 1998, replaced Commission Regulation (EEC) No 570/88
which was modified several times and needed updating (see para-
graph 5). However, the new Regulation is still complicated, because
it combines rules for several products, taken either from the mar-
ket or from public storage, and establishes complex procedures in
order to avoid, as much as possible, incorrect use of the aid.

43. The payment of the aid to the tenderers (cid:151) who are, in most
cases, butter suppliers (cid:151) is governed by detailed rules concern-
ing the approval of establishments, production controls and the
movement of products from the initial processing stages to the
various end-users of subsidised butterfat.

44. Each successful tender must be inspected at least once. In
order to minimise the financial risk in case of irregularity, tender-
ers split up their bids into smaller quantities, which implies a mul-
tiplication of controls and inspections by the Member States. The
Commission should consider increasing the minimum tendering
quantity of 5 tonnes set by Article 16(4)(b) of the Regulation.

45. There are various authorised uses for butterfats in different
products, involving various production processes and specific
rules for the control of the incorporation of butterfats into the
final product, ranging from large industrial groups to small cor-
ner bakeries. Descriptions of formulae and final products are
complicated and sometimes not even logical (for example, for ice
cream, chocolate coatings are eligible for the use of subsidised
butterfat but not the chocolate coating of a praline though some
pralines(cid:146) contents may, nevertheless, be eligible). Rules should be
simplified by concentrating on key product groups and should at
least correspond to the codes of the Combined Nomenclature to
which the Regulation refers (for ice cream and preparations a
minimum fat content of 4,5 % is required by the Regulation but
the code to which it refers allows a minimum fat content of 3 %).

Monitoring deficiencies

47.
In 1998, Commission Regulation (EC) No 2571/97 intro-
duced a reporting system under which Member States are required
to report, periodically, a set of statistical data and information (51).
Some Member States were slow in providing information (notably
Greece, France and Italy). As a result, the reporting system has
only properly functioned since autumn 1998. For its part the
Commission was slow in evaluating the results. By April 1999 the
Commission(cid:146)s services had not yet evaluated the information
received. Such information could have been used to make better
informed decisions on, for example, targeting the aid for appro-
priate end uses or reducing aid levels.

Particular weaknesses affecting Commission Regulation
(EEC) No 2191/81 ((cid:145)butter for non-profit organisations(cid:146))

48. The disposal measure (cid:145)butter for non-profit organisations(cid:146)
provides aid for up to 2 kg of butter per month per eligible con-
sumer (i.e. persons to whom meals are served) but most non-
profit organisations buy less. Although the non-profit organisa-
tions are considered as beneficiaries, the aid is paid to the suppliers,
who have to present, with their aid request, the original docu-
ments proving delivery. This leads to a clerical burden for the pay-
ing agency, which has to check the compliance of each delivery
document with the quantities claimed.

49. This procedure should be simplified by dropping the require-
ment to send in the documents proving delivery. In this case the
Regulation would have to include precise rules requiring checks
based on risk analysis and adequate representative sampling of
transactions to be inspected. Such rules do not exist at the moment.
Many suppliers offer the possibility of the sale of price-reduced
butter to beneficiaries only in the hope of selling other products
as well, and it is against this background that they take on the
heavy administrative burden involved.

46. Expenditure on (cid:145)butter for pastry(cid:146) is concentrated in Bel-
gium, France, Germany, the Netherlands and the United King-
dom. However, this does not necessarily reflect where butter is
processed and incorporated, because the butter accepted by ten-
der in one Member State (where the aid is paid) may be sent to
another Member State for concentration and might be sent to a

50. By its nature the measure is a social rather than a disposal
one. The Commission should consider its transfer to budget head-
ing B1-3 1 (Food aid) which applies already for the aid for school
milk. A direct payment of the aid to the non-profit organisations
could be envisaged, linked to the fixing of minimum quantities to
exclude (cid:145)mini-cases(cid:146).

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12.5.2000

ADMINISTRATIVE WEAKNESSES ENCOUNTERED IN MEMBER
STATES

Control weaknesses

51. The disposal measures for butterfat have been operating for
30 years. Despite their complexity, authorities of Member States
are generally well aware of the regulatory requirements and have
made enough staff available for the administration of the mea-
sures. Nevertheless, the audit identified a certain number of weak-
nesses, such as:

(a) control inadequacies relating to the requirement that key pro-
cesses concerning the (cid:145)butter for pastry(cid:146) measure shall be car-
ried out in approved establishments (52). In France and Spain,
the approval files need to be completed. Furthermore, the
periodic review of the respect of the approval conditions by
the establishments, as required by the Regulation, was not
adequately documented in the control reports (France, Spain,
the Netherlands and the United Kingdom);

(b) approved establishments are obliged to keep registers in order
to record transactions and to facilitate controls on compliance
with the conditions stipulated by the Regulation. These reg-
isters were often not kept in the format prescribed in the
Regulation nor were they maintained according to generally
accepted standards (53). Particular weaknesses were identified
in France, Germany and Spain. National inspection services
should pay more attention to these aspects because in the
absence of correct registers proper control is very difficult or
even impossible;

(c) other aspects of control systems were found to be unsatisfac-

tory:

(i) absence of rotation of inspectors (Belgium);

(ii) lack of documentary evidence of inspections and scrutiny

(Belgium);

(iii) the absence of product samples before tracing in Belgium,
the Netherlands and Spain, and a case of inadequate
sample-taking in France (54);

submit a declaration confirming the fulfilment of their obliga-
tions (56) for the use of subsidised butterfat. In the view of the
Court, there should be controls to ensure that the upper limit
is respected, because there is a risk that it could be exceeded
if small users were to issue declarations to several different
suppliers. At present, in France and Germany (57) there are no
databases recording the declarations issued by small users so
that an efficient check (58) of compliance with this condition
cannot be carried out;

(e) the European origin of the butter used for the production of
butterfat was not checked in France despite the requirements
stipulated by Commission Regulation (EEC) No 429/90 (but-
terfat for (cid:145)direct consumption(cid:146)). Besides, for a beneficiary vis-
ited in the context of the audit, the European origin of most
of the butter/cream used for the production of concentrated
butter could not be proved by supporting documents, such as
certificates of origin or contracts or invoices indicating the
origin of the butter;

(f)

for deliveries to other Member States there are fixed deadlines
by which the end-use of the aided butterfats must be certified
on the T 5 control copy (59) to the paying agency of the
(cid:145)exporting(cid:146) Member State. The audit revealed that the issue of
the T 5 copies with the certificate of use was sometimes
delayed, particularly in France, due to complex trading struc-
tures.

Inadequate application of regulations

52. Commission Regulation (EC) No 2571/97 ((cid:145)butter for pastry(cid:146))
made possible the payment of subsidies for untraced cream, in
response to the requirements of the ice cream industry. However,
in France this option was not used in 1998 because of the need
to introduce new specific control procedures and to conclude
contracts with the establishments concerned.

53. Commission Regulation (EEC) No 2191/81 ((cid:145)butter for non-
profit organisations(cid:146)) is operated in the Netherlands in a way that
does not conform with the Regulation. The paying agency is itself
the butter supplier, and its declaration of expenditure, sent monthly
to the Commission, is based on quantities delivered multiplied by
the aid rates but not, as it should be, on real payments.

(iv) incompleteness of certain checks (55) (Spain);

THE EFFICIENCY AND COST-EFFECTIVENESS OF THE
DISPOSAL MEASURES

(v) weaknesses concerning inspections of non-profit organ-
isations in respect of the corresponding disposal measure
(Belgium and Germany);

Determination of efficiency and cost-effectiveness

(d) Commission Regulation (EC) No 2571/97 ((cid:145)butter for pastry(cid:146))
does not stipulate particular inspections for small end-users
(in most cases local pastry makers) using less than 9 tonnes
of butter equivalent or 14 tonnes of cream per year if they

54. The current disposal measures can be considered efficient
and cost-effective if they encourage maximum demand at mini-
mum levels of aid and, in this context, the costs relating to other
forms of market intervention can also be relevant.

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55. The Commission assesses the success of the disposal schemes
in the context of the overall dairy-fat market. As the market is
stable, with low levels of intervention stocks, the management of
the dairy-fat market is considered to be successful. The Commis-
sion explains the stable level of demand for butter under the
scheme, despite constant aid reductions, as being due to a con-
stant increase in the overall demand for butter. The increase in
demand is limited by lower aid rates. The schemes(cid:146) success is mea-
sured by the Commission against a previously determined (cid:145)target
quantity(cid:146) of some 500 000 tonnes per year for all three disposal
measures. In fact, the justification for the disposal measures rests
on the creation of additional demand for butterfats which would
not otherwise be met at market prices.

56. The audit has shown that the Commission has no compre-
hensive information, analyses or studies on the impact of the dis-
posal measures and on the creation of additional demand. Para-
graphs 57 to 71 report on data collected suggesting that EU aid
generated only limited additional demand for butter.

Factors determining demand on the internal market

58. While many products can be made with either butter or veg-
etable fats (or a mix of fats) some require, by their nature, by tradi-
tion or for marketing reasons, the use of butter. For example, (cid:145)Gal-
ettes(cid:146) from Brittany, (cid:145)Stollen(cid:146) from Germany, or (cid:145)butter shortbread(cid:146)
from Scotland require butter, if produced in the traditional way.
In such cases, there is no risk of substitute products being used.

59. The choice of whether to use butter or not is also marketing-
driven. Expensive premium products sometimes contain more
butterfat, while mass market products (cid:151) where price is the deter-
mining factor (cid:151) might contain more vegetable fats. In addition
there are recognised brands where the use of dairy or non-dairy
fats is irrelevant to their successful marketing. Finally, the use of
vegetable-based fats for some products could be determined by
health considerations.

60. Where producers currently use butterfats, they are to an
extent committed to using butter in the short to medium term,
since switching to vegetable fats would require investment and
changes in production and marketing strategies. However, once
they make the switch to non-butterfats, it is unlikely that they will
return quickly to butter-based products, unless required by the
market.

Characteristics of the market

57. The market for fats is diverse, with wide variations within
and between Member States and food industry segments. Differ-
ent types and qualities of butterfats are used for different pur-
poses. The use of dairy fats is traditionally rather limited in some
Member States. For example, Greece, Spain and Portugal have tra-
ditionally used vegetable fats, while Belgium, Denmark, Germany
and France use considerably more dairy fats per capita.

Competitive position of butter in relation to other fats

61. Although margarine may also be produced on the basis of
animal fats, vegetable fats are the main substitutes for butter in the
food industry. Palm oil (60) and coconut oil (61) are particularly of
interest for the ice cream industry, while vegetable margarine is
the main butter substitute for the pastry industry (62). While the
price for 82 % fat content butter is EUR 3 053 per tonne, compet-
ing fats are still much cheaper than butter and concentrated but-
ter, even after including aid (see Figure 2).

C 132/18

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Official Journal of the European Communities

12.5.2000

Figure 2

BUTTER PRICE COMPARED WITH VEGETABLE FAT PRICES

e
n
n
o
t

r
e
p
R
U
E
/
U
C
E

4 000

3 500

3 000

2 500

2 000

1 500

1 000

500

0

Butter - average price in the EU

Peanut oil - cif Rotterdam

Coconut oil - cif Rotterdam

Palm oil - cif Rotterdam

Sunflower oil - ex tank, Rotterdam

Soya oil - Dutch ex-mill

Rape oil - Dutch ex-mill

1995

1996

1997

1998

1999 (cid:13)
(to March)

Average price per year

Note:
Most imports of palm oil and coconut oil qualify for reduced rates of duty, as low as around 3 %.
The sunflower oil price quoted is the EU market price.
Soya oil is made in the EU from imported soya beans, on which there is no duty.
Rape seed is of EU origin, so no duty is applicable.

Source: Court of Auditors analysis of documents from Commission DG VI, US Department of Agriculture.

62. The price of vegetable oils, such as refined palm oil, can be
estimated at about EUR 700 per tonne (63) while the price range
for vegetable margarine is about EUR 1 000 to EUR 1 050 per
tonne.

fat, the EU subsidy amounts to FRF 0,15 (slightly more than EUR
0,02).

63. Butter is expensive when compared to alternative fats. There-
fore, the existing level of aid does not provide significant incen-
tive for using butter, if price is the main consideration. Producers
using butterfat consider that the higher price of butter is compen-
sated for by consumer preference, allowing for selling prices
and/or quantities which compensate for higher production costs.
In the light of the enormous difference in prices between butter-
fats and substitute vegetable fats, the risk that producers would
switch to substitute vegetable fats if aid levels were reduced (or
indeed abolished) seems low.

Impact of the aid on prices of final products

65. Therefore, for products such as croissants or ice cream,
which are among the most important products in terms of expen-
diture under the disposal measures, the existence of the aid has
little effect on prices and on demand. However, there are some
premium products (see paragraph 58), with a high butter content,
more than 30 % in some cases, for which the retail price could be
significantly affected by changes in aid rates in so far as the cost
of ingredients is a determining element in the pricing of the prod-
uct.

66.
In practice the impact of the aid on the retail prices of prod-
ucts may be lower than calculated. In fact, part of the aid may be
absorbed by processing costs, including packaging, the trade mar-
gin of the company, and by extra costs required for qualifying for
the aid, such as the cost of adding tracers, participating in the ten-
dering procedures and financing the related tendering and pro-
cessing securities.

64. For most products the impact value of the subsidy paid is
not significant in terms of the product(cid:146)s final selling price. In the
case of a butter croissant, for instance, the EU subsidy would
reduce its price by only FRF 0,08 (slightly more than EUR 0,01).
For a premium ice cream, with a relatively high content of butter-

67. The above elements suggest that the impact of the aid on the
prices of final products is limited and that the overall demand by
final customers is not greatly influenced by the level of the aid.

 
 
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The relation between demand, aid rates and market prices

68. The aid rates for the disposal measures, other than the sub-
sidy of butter for non-profit organisations, are determined by
adjudication in the framework of tendering procedures. While
highly variable from one tender to the next, the average tendered

quantities have remained stable since 1994, even though maxi-
mum aid rates have been progressively reduced by some 35 % (64).
Analysis of tendered quantities in the two most important Mem-
ber States for this measure (France and Belgium) also shows that
demand for subsidised butterfat did not increase when market
prices dropped (see Figure 3).

TENDER QUANTITIES IN RELATION TO MARKET PRICES AND AID RATES

Figure 3

1995 to 1998: Successful tender quantities in France v market price for butter

3 200

3 300

3 400

3 500

3 600

3 700

butter price per tonne

1995 to 1998: Successful tender quantities in Belgium v market price for butter

3 200

3 300

3 400

3 500

3 600 

3 700

butter price per tonne

tender (cid:13)
quantities

Linear (cid:13)
regression (cid:13)
line

tender (cid:13)
quantities

Linear (cid:13)
regression (cid:13)
line

)
s
e
n
n
o
t
(

s
e
i
t
i
t
n
a
u
q
r
e
d
n
e
t

l

u
f
s
s
e
c
c
u
s

)
s
e
n
n
o
t
(

s
e
i
t
i
t
n
a
u
q
r
e
d
n
e
t

l

u
f
s
s
e
c
c
u
s

25 000

20 000

15 000

10 000 

5 000

0
3 100

10 000
9 000
8 000 

7 000
6 000
5 000 
4 000
3 000 

2 000
1 000
0
3 100

In France and Belgium, there is no significant relationship between market prices for butter and demand under Regulation (EEC) No 570/88 and Regulation (EC) No 2571/97.
The coefficient of correlation is 0,107 for France and 0,087 for Belgium, where 0 indicates no corrrelation, and 1 indicates perfect correlation.

1994 to 1998: Average successful tender quantities in the EU v maximum aid rates

 (cid:13)
r
e
d
n
e
t

l

u
f
s
s
e
c
c
u
s
e
g
a
r
e
v
a

)
s
e
n
n
o
t
(
y
t
i
t
n
a
u
q

30 000

28 000

26 000

24 000

22 000

20 000

18 000

16 000

14 000

12 000

10 000

average (cid:13)
tender (cid:13)
quantity

Linear (cid:13)
regression (cid:13)
line

1 050

1 100

1 150

1 200

1 250

1 300

1 350

1 400

1 450

1 500

maximum aid rate ECU/tonne

Tender quantities have not been lower when maximum aid rates were reduced. In fact the opposite occurred (cid:151) there has been negative correlation between aid rates and
successful tender quantities, of (cid:150) 0,416, where 0 indicates no correlation, and (cid:150) 1 indicates perfect negative correlation.

Note: the aid rate used is for 82 % traced butter; quantities are in tonnes of butter equivalent.

Source: Court of Auditors analysis of Commission DG VI documents.

 
 
 
 
 
 
 
 
 
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12.5.2000

69. By contrast, for (cid:145)butter for direct consumption(cid:146) demand
decreased when the aid was reduced (65). Likewise, the non-profit
organisations (cid:151) often operating on low budgets (cid:151) reacted quickly
to the reduction in aid rates by reducing their use of butter. How-
ever, both these measures have only a minor effect on the market,
together accounting for some 10 % of the disposed quantities.

(such as fractionated butterfats (68) for pastry). Meanwhile, the
structure of the food industry as a whole has changed, with a
growing production of prepared foods for which subsidised butter-
fat is often used (69). The activity of the butter-processing industry
in convincing the food industry of the use of butterfats must cer-
tainly be taken into consideration when evaluating the impact of
the disposal measures on creating additional demand.

70. On the basis of the 444 000 tonnes subsidised in 1998 for
(cid:145)butter for pastry(cid:146), each ECU 1 reduction in the aid rate would
have saved ECU 4,4 million for the EU budget (66). However, the
Commission does not know to what extent it could reduce the aid
while still maintaining demand.

Comparison between disposal measures and other forms
of market intervention

71. The demand for subsidised (cid:145)butter for pastry(cid:146) has not been
significantly affected by previous reductions in aid levels even
when combined with other Commission measures to reduce
short-term demand under the scheme by increasing the tender-
ing security and reducing the time limit for incorporation of the
subsidised butterfat into final products. The aid may therefore still
be set at too high a level.

74. With export refunds for butter of currently EUR 1 700 per
tonne, and aid for untraced (cid:145)butter for pastry(cid:146) of EUR 910 (70),
each tonne of butter disposed of under this scheme costs EUR
790 less than butter exported with the help of export refunds.
Furthermore, at the current level of refunds it is probably not pos-
sible to increase exports significantly. See Figure 4 for a compari-
son of export refund rates, aid levels, average market prices, and
intervention prices.

Structural factors

72. The butterfat processing industry has developed, specialised
and adapted to new market conditions since the introduction of
the disposal measures in 1969. Industries have also obtained the
necessary know-how to comply with the complex requirements
of the regulations.

73. New distribution channels
also
emerged (67). Specialised products, based on butterfat, were devel-
oped to meet the requirements of particular production processes

and markets have

75. According to the Commission, the disposal measures are sig-
nificantly cheaper than public intervention and export refunds,
the other main market-management tools to deal with the butter
structural surplus. In fact, 83 % of intervention stocks between
1992 and 1998 benefited from aid under the butterfat disposal
measure when finally sold. As regards the comparison with export
refunds, the Commission(cid:146)s assertion is valid to the extent that the
disposal measures create additional demand. There are reasonable
indications, however, that a substantial part of the butter disposed
of with EU aid would have been consumed anyway (see para-
graphs 63 to 67).

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C 132/21

4

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C 132/22

EN

Official Journal of the European Communities

12.5.2000

Structural surplus

76. The first disposal measure, introduced in 1969 (71), was seen
as a temporary measure, limited to sales of butter from interven-
tion stocks to the processing industry. However, disposal mea-
sures have continued ever since. They were expanded to also
include butter from private storage and cream and butter taken
from the market, as well as concentrated butter, and evolved into
permanent aid schemes to increase demand, notably in the food
industry.

77. Considering the forecast decrease in demand during the next
five years (see paragraph 12) and the level of the quotas decided
in the context of the Agenda 2000 reform (see paragraph 9), no
reduction in the surplus that has characterised the butter market
in the last decade can be expected.

78. As well as aiming to reduce the cost of disposal measures for
surplus butter to a minimum, the Commission should also con-
sider structural measures to improve demand for non-subsidised
butter and/or limiting its supply. As regards the latter, the Court
has previously suggested the review of the mechanism prevent-
ing excessive fat content of milk (72) and notes that the reduction
in the guaranteed price levels has been postponed until 2005 by
the European Council of Berlin (73).

CONCLUSION

butter are eligible for EU support, aid is not fixed at its lowest pos-
sible level, and VAT is charged on EU subsidies in some Member
States (see paragraphs 28 to 34).

81. Member State authorities are generally well aware of the
complex requirements of the regulations and have made enough
resources available for the administration of the disposal mea-
sures. However, the audit showed that improvements are neces-
sary, notably concerning the approval and the inspection of
establishments entitled to incorporate aided butter, the control of
the adding of tracers and of the European origin of butter for
direct consumption (see paragraphs 31 to 34 and 51 and 52).

82. The Commission has made no comprehensive evaluation of
the impact of these measures on demand. However, the data col-
lected suggests that EU aid created only limited additional demand
for butter, given the considerable price advantage of competing
fats and the marginal value of the aid in relation to consumer
prices of most of the products into which subsidised butter is cur-
rently integrated (see paragraphs 61 to 67).

83. The persisting EU milk-production surplus is the combined
result of the limited impact of the quota regime on production
and the substantial reduction in per capita consumption which
took place in the late 1980s. The current butter disposal measures
alone are not an appropriate way to deal with structural sur-
pluses. A reduction in the guaranteed price level combined with
production control measures has to be considered (see paragraphs
7, 8 and 78).

79.
Introduced in 1969 on a temporary basis, the butter disposal
measures developed and became permanent schemes to deal with
the structural surplus of butter resulting from the overproduction
which characterises the milk sector, despite the introduction of
the milk quotas in 1984 (see paragraph 76).

80. Certain weaknesses relating to the regulatory provisions
governing the disposal measures and to their implementation also
affected the efficiency of the EU aids. Lower quality and imported

84. The Commission should make a comprehensive assessment
of the disposal measures. Meanwhile, the current tendering pro-
cedures should be revised, aid should be progressively reduced
and concentrated only on quality non-imported butterfats used
for products where it is likely that additional demand will in fact
be created. Furthermore, alternative measures, aiming at improv-
ing demand for non-subsidised butterfats and measures to pena-
lise the increase in the fat content of fresh milk, should be con-
sidered (see paragraphs 12, 77 and 78).

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 23 and 24 February 2000.

For the Court of Auditors

Jan O. KARLSSON

President

12.5.2000

EN

Official Journal of the European Communities

C 132/23

NOTES

Including some 15 000 tonnes of farm butter.

(1)
(2) Source: ZMP Bonn. Worldwide butter production is 4 065 000 tonnes.
Data for 1997 compiled from various sources, including Eurostat,
FAO and USDA but covering only producing countries for which
detailed data are available. A substantial proportion of cow(cid:146)s-milk is
produced in developing countries for which no details are available.
The European share of total cow(cid:146)s-milk production, including devel-
oping countries, is about 25 %.

(3) The total quantity available on the market consists of public and pri-
vate stocks (51 000 tonnes) plus imports (90 000 tonnes) plus EU
production (1 843 000 tonnes).

(4) Total consumption less subsidised consumption (see also Table 1).
(5) Public storage (3 000 tonnes) and private storage (57 000 tonnes) at
the end of 1998; some 9 000 tonnes higher than in the previous year
(differences to the total due to roundings). For disposal measures the
quantities (464 000 tonnes) indicated for 1998 in the butter balance
sheet do not include cream that has also been subsidised by the dis-
posal measures.

(6) Situation and outlook dairy sector, April 1997 (Commission DG VI

(cid:151) Working document CAP 2000).

(7) Financial amounts are expressed in ecu when referring to periods

before 1.1.1999 and in euro for subsequent periods.

(8) Annual Report concerning the financial year 1989, paragraphs 4.1.1

to 4.1.26 (OJ C 313, 12.12.1990).

(9) OJ L 148, 28.6.1968, p. 13.
(10) The measures for skimmed-milk powder were examined by the Court

in 1998. See Special Report No 1/99 (OJ C 147, 27.5.1999).

(11) OJ C 401, 22.12.1998.
(12) The intervention price of butter is ECU 3 282,00 per tonne and for
skimmed milk ECU 2 055,20 per tonne (this price has been appli-
cable since 1995). However, public storage only takes place if market
prices are less than 92 % of the intervention price. The buying-in
price fixed by the Commission shall not be less than 90 % of the inter-
vention price.

(13) See chapter 4 of the Court(cid:146)s Annual Report concerning the financial
year 1993, paragraphs 4.1 to 4.54 on aid for casein and caseinates
from skimmed milk (OJ C 327, 24.11.1994) and Special Report No
1/99 on aid for the use of skimmed milk and skimmed-milk powder
as animal feed, notably Table 2 (OJ C 147, 27.5.1999). Including SMP-
equivalent of casein the EU production totals 1,6 million tonnes. The
expenditure of ECU 1 050 million in 1998 includes ECU 367 million
for disposal measures on SMP and a further ECU 287 million aid for
casein.

(14) Milk quotas were implemented by Council Regulation (EEC) No
856/84 of 31 March 1984 (OJ L 90, 1.4.1984, p. 10). The current sys-
tem is ruled by Council Regulation (EEC) No 3950/92 of 28 Decem-
ber 1992 (OJ L 405, 31.12.1992, p. 1).

(15) This will increase the milk quotas from 117 492,6 million tonnes to
120 324,1 million tonnes. Assuming that the production pattern does
not change, the increase in quotas will result in a proportional increase
in butter production of 44 232 tonnes which has to be sold on the
market, with or without subsidies.

(16) Overall milk balance 1997 in terms of milk equivalent: deliveries
113,28 million tonnes, equivalent to 111 % of total consumption and
120 % of total consumption at market prices. For milk fats the situ-
ation is more favourable: deliveries and total consumption are bal-
anced, but if only consumption at market prices is taken into account,
the oversupply is 9 % (Source: ZMP Bonn, cow(cid:146)s milk balance of the
European Union).

(17) Even though this includes approximately 140 000 tonnes annual pro-
duction of the three new Member States, current EU production is
significantly lower than production levels between 1980 and 1987,
when production ranged between 1,9 and 2,3 million tonnes per
annum.

(18) The contracted quantity is higher than the quantity indicated in the
milk balance (Table 1) for private stocks because of their rotation dur-
ing the year. Contracted quantities 1996: 205 000 tonnes, 1997:
144 000 tonnes, 1998: 181 000 tonnes, forecast 1999: 200 000
tonnes.

(19) This represents a slightly higher level of consumption than in previ-
ous years, even after taking into account the extra 100 000 tonnes
consumed annually in the three new Member States.

(20) The reduction of per capita consumption is commonly explained by
changes in consumer preferences, notably because of health consid-
erations and the increased availability of alternative products.
(21) CAP reports: Prospects for agricultural market 1998 to 2005, Com-

mission, DG VI, October 1998.

(22) Source: European Commission, DG VI. D1 (cid:145)Butter prices communi-
cated by Member States (in percentage of intervention prices) (Com-
mission Regulation (EEC) No 1547/87)(cid:146).

(23) (cid:145)Situation and outlook: dairy sector(cid:146) (April 1997) (cid:151) the table on page
28 indicates that all butter and butteroil exports are subsidised.
(24) Setting the level of export refunds is complicated because prices of
dairy products vary across Member States and are significantly higher
than world-market prices, which are quoted in USD. For example,
since 1995, prices in Germany for 82 % fat content butter have been
on average 4 % higher than in the United Kingdom.

(25) Under the GATT Uruguay Round Export commitments, the EU com-
mitted itself to limiting its export refunds for butter and butteroil. The
annual outlay on export refunds was limited to ECU 1 392,1 million
in 1995/1996, reducing progressively to ECU 947,8 million in 2000/
2001. The annual quantity on which export refunds could be paid
was limited to 487 800 tonnes in 1995/1996, reducing progressively
to 399 300 tonnes in 2000/2001. Actual exports of the EU in 1995
were 220 000 tonnes and in 1998, 170 000 tonnes.

(26) Source: The agricultural situation in the European Union, 1997 Report.

COM (1998) 611 final, 8.12.1998.

(27) See paragraph 1.3 of the Court(cid:146)s Special Report No 4/98, which
describes the background to the New Zealand quota and reduced levy
rates.

(28) Private storage aid is available on the basis of storage contracts
between beneficiaries and paying agencies for a period of at least 90
days. The aid is paid for a maximum of 210 days. The aid is ECU 24
per tonne for fixed costs and ECU 0,7591 per tonne and day in 1998
(EUR 0,6773 in 1999). Total aid for 1 tonne over the maximum period
of 210 days would be ECU 183,41 in 1998 (EUR 166,23 in 1999).

(29) OJ L 172, 30.6.1981, p. 14.
(30) A fourth disposal measure, butter for the army (Commission Regula-
tion (EEC) No 2192/81 of 31 July 1981), was suspended in 1989 and
finally repealed by Commission Regulation (EC) No 479/1999 of 4
March 1999 (OJ L 57, 5.3.1999, p. 5).

(31) Under Commission Regulation (EEC) No 570/88 (OJ L 55, 1.3.1988,
p. 32) formula A concerns the use of butter for pastries and under its
terms different products, which are considered similar, are included.
Formula B is for the use for ice cream. Formula C concerns food
preparations of flour, starch or malt extract. Formula D concerns
conserves/preparations of meat, fish, sauces and soups. From 1998
the Regulation is replaced by Commission Regulation (EC) No 2571/97
(OJ L 350, 20.12.1997, p. 3). The new Regulation stipulates only two
formulae: A (this corresponds to the old formulae A, C, D) and B (this
corresponds to the old formula B). However, there are no major dif-
ferences between the old and the new Regulations. Because of the
delay between tendering and the payment of the aid, linked to the
presentation of the evidence of end use, there are still payments made
under the old Commission Regulation (EEC) No 570/88. Observa-
tions of the Court cover both the new and the old Regulation, if not
otherwise stated.

(32) The high acceptance in Germany is explained by the traditional use
of cooking butter in the south of Germany. The formula (cid:145)butter ghee(cid:146)
is mainly used for Indian and Pakistani cuisine. Because of the limited
impact of the Regulation, the Commission suspended it in January
1998, but this was repealed in May 1998, notably because of the Ger-
man market.

(33) Tracers have to be added in order to indicate that the products were
subsidised. Untraced products are only eligible for aid under certain
conditions and subject to more control.

C 132/24

EN

Official Journal of the European Communities

12.5.2000

(34) The most recent revision of aid rates in January 1999 did not, how-
ever, include any reduction in the aid rate for non-profit organisa-
tions.

(35) Tendering procedures are carried out twice monthly, except, however,
in the months of August and December when there is only one ten-
dering procedure.

(36) The procedure described concerns cream, butter or butterfat pro-
duced from quantities taken from the market for which the aid rate is
paid. For butter from public intervention storage the tenderers have
to quote a price for the intervention butter they want to buy.
(37) For ice cream the programme and price level is calculated and fixed
in January/February for the whole summer season and it is difficult
for producers to make price corrections during the season.

(38) While the most severe quality requirements are for butter for public
storage, the requirements for butter for private storage are less strict,
for example the butter can be salted and need not be produced directly
and exclusively from pasteurised cream.

(39) This butter must be produced directly and exclusively from pas-
teurised cream and meet the requirements of Article 6(2) of Council
Regulation (EEC) No 804/68 and the requirements of national qual-
ity classes. Cream must comply with Article 6(5) of the same Regula-
tion and, in addition, have a fat content of not less than 35 %.
(40) Concentrated butter needs only to comply with the conditions of
Annex 1 to Commission Regulation (EC) No 2571/97; 99,8 % mini-
mum fat content; moisture content and non-milk fat constituents
0,2 %, free fatty acids 0,35 %; peroxides maximum 0,5 %; fresh fla-
vour, absence of extraneous odours, absence of neutralising agents
and absence of non-milk fat.

(41) Whey butter has a particularly strong taste and is not marketed for

direct human consumption.

(42) Recombined butter is produced on the basis of butteroil by adding
water and/or cream in order to obtain a type of milk fat with a fat
content corresponding to that of fresh butter.

(43) The total amount of imported butter used for the production of sub-
sidised concentrated butter cannot be quantified because no statisti-
cal data are available.

(44) The preferential import duty for New Zealand butter with 80 % fat
content is EUR 868,88 per tonne, which corresponds to a rate of EUR
1083,38 per tonne if calculated on 99,8 % fat content. The product is
eligible for the subsidy for butteroil of EUR 1 130 if untraced and EUR
1 170 per tonne if traced. The rate already exceeds the import duty.
The final product, if exported as a non-Annex II product, can benefit
from export refunds of EUR 2 160 per tonne from which the aid
received has to be deducted. The import of New Zealand butter for
the production of butteroil is therefore more profitable compared
with using EU butter because the butter can be imported at world-
market prices which are far below the European price level.

(45) Special report on importation of New Zealand milk products and
Swiss cheese (OJ C 127, 24.4.1998, paragraphs 3.32 and 3.33).
(46) According to the Commission(cid:146)s services an attempt was made to
include in Regulation (EC) No 2571/97 a condition in favour of Euro-
pean products, similar to Regulation (EEC) No 429/90, but the Man-
agement Committee did not agree.

(47) Document 5911/99 of the Council of 19 February 1999, Annex III to
the Annex: Conclusions concerning the Court(cid:146)s Special Report No
4/98.

(48) Commission Regulation (EC) No 2571/97 also allows the payment of
a subsidy for untraced products but at lower aid rates and under cer-
tain particular conditions only.

(49) Council Directive 79/112/EEC of 18 December 1979. For the 25 %
rule Article 6(7) applies. However, even in cases where the butter con-
tent of the final products exceeds 25 % it is unlikely that the tracers
will be declared by the final producer since there is no obligation to
declare the substance on the part of the wholesaler of the butterfats.
(50) Council Directive 77/388/EEC of 17 May 1977 on the harmonisation
of the laws of the Member States relating to turnover taxes (cid:151) Com-
mon system of VAT: uniform basis of assessment (OJ L 145, 13.6.1977,
p. 1).

(51) A monthly table shows tenders received and quantities accepted.
Quarterly tables show quantities entering and leaving the Member
State by T 5 control copies and data about their incorporation into
final products. Furthermore, Article 25 requires the communication
of prices paid by final users and cases where it was found that the
terms of Article 1(2) of Commission Regulation (EC) No 2571/97

have not been complied with (this paragraph concerns the quality of
butter, concentrated butter and cream).

(52) This concerns, according to Commission Regulation (EC) No 2571/
97, the adding of tracers, the repacking of concentrated butter, the
incorporation into intermediate products and, where applicable, the
incorporation of butter, concentrated butter, intermediate products
and cream into final products. Commission Regulation (EEC) No
429/90 also stipulates the approval of establishments for the produc-
tion of concentrated butter and for its packaging.

(53) For example, entries were made in pencil and/or on various slips of
paper. Others contained no reference to the transaction number, or
only recorded global figures which could not be reconciled with the
transaction concerned.

(54) Several cases were reported in this respect: the quality of the butterfat
must be checked by laboratory analysis both before and after the add-
ing of the tracer. The test before adding the tracer was not docu-
mented in the Netherlands and not carried out by one beneficiary in
Belgium who was entitled to autocontrol. In Spain the taking of
samples before adding the tracers was abolished. At one major pro-
ducer in France samples were taken from a central tank but the move-
ments were not documented so that there is no evidence that the
samples were taken from the appropriate production batches to be
inspected.

(55) The Spanish authorities certified final use of products imported under
T 5 control copies despite incorrect or incomplete description of the
product on the T 5 copy.

(56) They have to confirm their undertaking to incorporate the butterfat
into final products and state that they are aware of the penalties they
may incur if any check which the public authorities may perform
reveals that they have not fulfilled the obligations they have entered
into.

(57) In the case of Germany, such a database is expected to be established

during the coming months.

(58) Controls are made at regional level (1 % of declarations) in Germany:

no controls are carried out in France.

(59) For deliveries to other Member States T 5 control copies have to be
issued indicating the product, the formula and relevant deadlines. The
(cid:145)importing(cid:146) Member State is responsible for checking on the end-use.
(60) Palm oil is the main product of palm and the main substitute for but-
teroil in the manufacture of ice cream. The first stage in the process is
extracting the crude palm oil from the ectocarp of oil palms. This
product is further processed into cooking oil. The main exporter is
Malaysia.

(61) Coconut oil is derived from coconut palms. It currently is facing a
loss of competitiveness vis-(cid:224)-vis other vegetable oils due to lack of
research into new applications and also because of ageing plantations.
Main producers are South East Asia, Africa and the Pacific.

(62) Margarine is not only made from vegetable fats but can also be made
from animal fats. The price competition is, however, determined by
vegetable fats and therefore the examples are based on these fats.
(63) In the absence of reliable statistical data on the commercial values the
price is estimated on the basis of data submitted by the Commission:
cif price Rotterdam for palm oil in 1998: ECU 600 plus 3 % import
duty plus estimated costs of refining of ECU 40 = ECU 658 per tonne.
Commercial trade margins have to be added.

(64) For traced butter, for example, from ECU 1 460 per tonne in 1995 to

EUR 950 per tonne in 1999.

(65) There are already replacement products being developed which con-

tain mainly vegetable fats and some unsubsidised butter.

(66) The aid rate is fixed per 100 kg. Reducing the aid rate per 100 kg by
ECU 1 corresponds to an overall saving of ECU 10 per tonne.
(67) In Germany, for instance, the development of the brand (cid:145)Butaris(cid:146), sup-
ported by advertising, for the use of butterfat as cooking butter in
restaurants and private households. Other examples are brands
designed for butter ghee for the ethnic market, notably in the United
Kingdom, and a number of brands developed by several different pro-
cessors for concentrated butter for pastry producers.

(68) For pastry production it is important that fats used deliver good results
at a given baking temperature and duration. By varying the treatment
and mixture of the different fats included in butter (sterol, cholesterol
and oleicole) fractionated butter is able to provide consistent results
throughout the year.

(69) For instance, use of prefabricated products by local pastry makers.

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(70) Since January 1999, this is the aid rate for untraced 82 % butter taken
from the market. For concentrated butter higher aid rates apply.
(71) Commission Regulation (EEC) No 198/69 of 31 January 1969 (OJ

L 26, 1.2.1969, p. 31).

(72) In its Special Report No 4/93 (OJ C 12, 15.1.1994) on the quota sys-
tem the Court observed that (cid:145)the penalty imposed in the event of the
reference fat content being exceeded lacks dissuasive effect(cid:146). The fat
content of cow(cid:146)s milk delivered increased from 3,87 % in 1984 (EEC-
10) to 4,09 % in 1997 (EU-15). The increase in fat content has a direct

impact on butter production. For the calculation of the milk produc-
tion, the quantity of milk is increased by 0,18 % per 0,1 g of addi-
tional fat per kg of milk. For example, an increase in the fat content
of 22,2 % (from 3,6 % to 4,4 %) would result in an increase in the
milk production figure of 1,44 %.

(73) A gradual reduction in the target prices and intervention prices for
butter and skimmed-milk powder will start from 1 July 2005. See
Council Regulation (EC) No 1255/1999 of 17 May 1999 (OJ L 160,
26.6.1999, p. 48).

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THE COMMISSION(cid:146)S REPLIES

MAIN AUDIT FINDINGS

The milk sector is in structural surplus with production of butter exceeding demand at normal market prices.
The Council has therefore, in the framework of the common agricultural policy, required that support mea-
sures are applied in the form of an intervention system for butter and skimmed milk powder (SMP), as well as
internal and external disposal measures, with the purpose of improving market balance and ensuring stability
for both consumers and milk producers.

The internal disposal measures are indispensable in a situation where consumption of butter continues to
decrease, and they have in the past proved to be an efficient means of maintaining stability and avoiding more
expensive buying into public intervention. For almost 30 years, the pastry and ice-cream scheme in particular
has been an important instrument to improve the market balance for butter. Over time, improvements have
been made to the regulations, and the Council in the Agenda 2000 agreement also confirmed the need to
ensure continuation of the disposal measures.

Aid levels and quantities for the pastry and ice-cream scheme and the concentrated-cooking-butter scheme are
fixed through a tender system, and the Commission is confident that the application of the system in the past
has ensured that the aid levels and quantities have been established at an appropriate level, ensuring stability
and the most economic disposal of the butter surplus in the short, medium and long term. Reductions in the
aid of around 35 % have been realised since 1995 and, despite the fact that expensive intervention buying has
temporarily been necessary, the Commission has succeeded in slowing down the increased use of subsidised
butter and achieved a reasonable market balance.

Reductions in the aid since 1995 have resulted in annual savings of around EUR 250 million for a quantity of
approximately 500 000 tonnes, but there are risks in reducing the aid further, especially during a period with
low prices and buying into intervention. Aid levels and contracted quantities are followed closely by the Com-
mission and Member States in the framework of the Management Committee for Milk and Milk Products.

Second-quality butter and imported butter both form part of the butter supply and the internal disposal mea-
sures ensure disposal of surplus milk fat in the form of butter, cream and butter concentrate (BC). Lower qual-
ity butter and imported butter is not eligible as such but can be used for the production of high-quality BC
without the impact of the scheme being reduced. Furthermore, international concessions and agreements must
be respected for imported butter.

The expert study referred to by the Court especially queried two tracers and their influence on health. However,
according to information subsequently received from Member States these tracers are in fact not used under
the pastry and ice-cream scheme. The Commission will therefore delete them from the Regulation. Moreover,
as flavourings they will be evaluated by the Scientific Committee for Food as required by Regulation (EC) No
2232/96 of the Council and the European Parliament. At present it is not envisaged to change the Council
Directive on labelling requirements, which already covers flavourings and aspects of consumer information
and protection.

The Commission has taken note of the Court(cid:146)s remarks concerning VAT and will consider them in the frame-
work of future action aimed at modernising and simplifying the VAT system.

The Member States will be notified about the remarks made by the Court concerning their administration of
the disposal measures and, if relevant, financial corrections will be made in the framework of the clearance of
accounts procedure.

The purpose of the pastry and ice-cream scheme is primarily to ensure that milk fat is used as raw material
instead of competing vegetable fats. The eligible products have been carefully selected with this in mind in the
Milk Management Committee. Information concerning the use of subsidised milk fat in various final product
groups will shortly become available and, in addition, an evaluation of the entire market organisation for milk
(including the quota scheme) for milk is foreseen in 2001, so that results will be available when the quota
system is reviewed in 2003.

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Following the Council(cid:146)s decisions in the framework of Agenda 2000, the structural surplus will remain, and
except for limited Community support for general promotion activities, it is considered to be the task of the
industry and the various organisations defending the interests of the milk sector to promote milk and milk
products and increase demand.

Because of the policy practised in the milk sector in the last decade, in particular in relation to the operation
of the milk quota system, buying into intervention between 1995 and 1998 was small and the stocks limited
to around 3 000 tonnes at the end of 1998 compared with 1,3 million tonnes at the end of 1986. Unfortu-
nately stocks started to build up again in 1999. In addition, the milk sector(cid:146)s share of the budget has dropped
from its peak of around ECU 6 billion or 30 % of total expenditure in 1985 to less than EUR 3 billion or 7 %
of total expenditure in 1999.

THE MILK CMO AND THE BUTTER SURPLUSES

6-22. The introduction of the milk quota system in 1984 resulted
in immediate reductions in milk deliveries, and subsequent reduc-
tions in quotas together with continued internal and external dis-
posal measures have improved the market situation for butter
considerably.

The level of milk quotas is a highly political question which has
been subject of intense negotiations in the Council. However, the
reductions in quotas made in the past have only decreased and
not eliminated the structural surplus.

The butter stocks in public intervention dropped from 841 000
tonnes at the end of 1984 to 3 000 tonnes at the end of 1998
(after reaching a peak of 1,3 million tonnes at the end of 1986)
and buying into intervention has been limited to around 43 000
tonnes for the period 1995 to 1998. However, in 1999, when
public intervention was opened due to low market prices in 11
Member States, buying-in increased to almost 55 000 tonnes.

The Council has decided in the framework of Agenda 2000 that
an increase in quotas will be accompanied by reductions in sup-
port prices of 15 % for butter and skimmed-milk powder (SMP)
and, given the downward trend in butter consumption at normal
market prices, a structural surplus will remain. Consequently,
internal disposal measures for butter and SMP will be indispens-
able in the coming years.

The Commission recalls its reply to the Court(cid:146)s report No 1/99
concerning the aid for use of skimmed milk and SMP as animal
feed, that surplus milk which cannot be processed into other
value-added dairy products is used for the manufacture of butter
and SMP, the two intervention products which form the basis of
the market support mechanism in the dairy sector.

Considering the current stable production, reduced exports,
increased imports, relatively stable uptake of butter under the
internal disposal measures and reduced normal consumption, the
Commission is of the opinion that the internal disposal measures
have a substantial effect on market balance, especially when pub-
lic stocks have declined and there has been limited buying into
intervention.

The structural surplus in milk-equivalent of 20 % (excluding sub-
sidised consumption) referred to by the Court requires both inter-
nal subsidised sales of around 500 000 tonnes in butter-equivalent
and exports with refunds. Otherwise, butter will end up in public
intervention in a market characterised by low prices. As the Court
points out in paragraph 14, it is questionable whether real outlets
exist for increased exports of EU butter, and reduced uptake under
the internal disposal measures will therefore to a large extent
result in expensive public intervention buying.

The average cost per tonne indicated by the Court in paragraph
17(d) may not fully reflect the situation due to the time lag
between the tender quantities and the final payment of the aid.
The aid rate from January 1999 for pastry and ice-cream butter
(82 % untraced) amounts to EUR 910/t, refunds to EUR 1 700/t
and the intervention purchase price to EUR 2 954/t.

OBSERVATIONS RELATING TO THE DISPOSAL SCHEMES

Fixing the level of aid

23-27. The Commission sets a limit on aid for each tender, tak-
ing account of the quantities requested. The nature of the opera-
tions involved means that the operator has to be able to plan
regular supplies. He presents his offer accordingly and the maxi-
mum level of aid set for the tender in question will allow or dis-
allow the quantity presented by the operator. If the aid is set at a
level which results in his offers being repeatedly refused he will
turn to alternative sources of raw material and cease to participate
in the scheme. Consequently, the scheme would not be as efficient
as it is today in disposing of butterfat. Efficient application of the
tender system ensuring an optimum aid level does not prevent aid
levels and selling prices for intervention butter from remaining
unchanged in certain periods, if the quantities and aid levels
requested by operators in a given market situation are in line with
the aims of the Commission. Furthermore, the Commission can
decide not to accept any of the offers received.

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In the present situation there is no indication that demand for aid
is higher than the target quantity and the Commission is confi-
dent, on the basis of current discussions in the Milk Management
Committee, that aid levels are appropriate and that the tender sys-
tem is working correctly.

Under the present tendering system it has been possible to reduce
aid levels considerably over time. Since the beginning of 1995 the
aid for 82 % traced butter under the pastry and ice-cream scheme
has been reduced by 35 % from ECU 146/100 kg (or 45 % of the
intervention price (IP)) to EUR 95/100 kg (or 29 % of the IP). The
aid share of the market price has dropped during the same period
from around 45 % to around 30 %.

The aid for concentrated-cooking-butter was reduced during the
same period from ECU 209/100 kg to EUR 117/100 kg or 40 %
and the aid to non-profit making organisations from ECU 156/
100 kg to EUR 105/100 kg or 32 %.

The tender system is considered by Member States and the Com-
mission to be clear for both operators and administrations and
the best method to manage quantities. It was introduced in order
to ensure equal access for all purchasers, to fix the aid at the level
strictly necessary and to supervise the quantities concerned effec-
tively. Stability is essential for the users and for smooth function-
ing of the schemes.

Quality requirements

28-30. The Commission wishes to stress that the aids awarded
under the internal disposal measures are introduced to ensure dis-
posal of surplus milk fat in the form of butter, cream or butter
concentrate (BC). The intervention price for butter is established
on the basis of specific product criteria and related production
costs, and if the aid level for BC depended on the same criteria
and costs the aid for BC would need to be higher. The quality
requirements for subsidised butter therefore do not need to be
identical to those applied for public or private storage butter.
Moreover, the aid is granted to butter concentrate, where high
quality norms are required by the Regulation, and not to the raw
materials used to produce it. The butter concentrate can be used
for a traced 82 % fat intermediary product ((cid:145)recombined butter(cid:146))
and the aid is equal to the aid for traced 82 % butter.

The Commission is of the opinion that if lower quality products
are not allowed to be used for production of butter concentrate,
they will remain on the market where they may push higher qual-
ity and more expensive butter into public intervention.

Payment of the aid for imported butter

to exclude imported butter from the pastry and ice-cream scheme.
For market and control reasons this has been refused by Member
States, who also underlined that the real problem was that the
butter was allowed to be imported under preferential conditions
by the Council and international agreements; but once imported
it should be treated in the same way as EU butter. Furthermore,
the Commission is bound by international concessions and agree-
ments and as such cannot stop refunds being paid on non-Annex
I products although they contain processed imported products
classified under other CN codes.

According to the Court, it is attractive to use butter imported
under preferential regimes for BC under the pastry and ice-cream
scheme because the packaging and distribution costs associated
with retail sales are avoided. However, the Commission considers
that although the elimination of retail distribution costs may be
an advantage, this is offset to some degree by the fact that the
price obtained for bulk butter is lower than that for small-pack
retail butter. Furthermore, it is more expensive to produce BC
from butter than cream, which is normally used as a raw mater-
ial, and on which the aid is based. In addition, operators make use
of this option only occasionally, depending on market conditions.

34. Although the Council, in its opinion (1) on the discharge for
the 1997 budget year recommended a Community-origin condi-
tion for BC for the pastry and ice-cream scheme, in its new Basic
Regulation (EC) No 1255/1999 (which incorporates Council Regu-
lation (EEC) No 1723/81 authorising disposal measures), it has
not excluded imported butter from use in the production of but-
ter concentrate. However, imported butter as such is already
excluded from the scheme.

Particular health aspects

35-38. At the request of Member States, tracers were introduced
more than 20 years ago for control reasons. Traced products are
subject to less strict controls compared with untraced products.
At that time no Community legislation was yet in place concern-
ing food additives, flavourings, etc. It was therefore not incum-
bent on the Commission to require prior testing or approval of
the use of tracers in the form and very limited quantity required.
It was the responsibility of Member States, having accepted trac-
ers in the Community legislation, to ensure that they were accept-
able for human consumption in the form and very limited quan-
tity required in accordance with national legislation.

The recent Community legislation on additives and novel foods
has not changed this basic position as tracers in general are not
considered food additives in accordance with Directive 89/107/
EEC and they serve another purpose.

31-33. Following an earlier recommendation from the Court,
the Commission has already tried in the Management Committee

(1) Recommendation of the Council of 15 March 1999 (Document

5911/99 of the Council).

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The expert study referred to by the Court questions two tracers
in particular: thymol and capsaicin. However, not all tracers
allowed under the pastry and ice-cream scheme are in fact used,
and according to information subsequently received from Mem-
ber States, these two flavouring substances are not used. On the
other hand they are included in the Community Register of around
3 000 flavourings which is to be evaluated by the Scientific Com-
mittee for Food in the coming five years as required by Regula-
tion (EC) No 2232/96 (1) of the Council and European Parliament.
The Commission will propose to the Milk Management Commit-
tee that it delete the above two tracers from the pastry and ice-
cream schemes.

Furthermore, under the pastry and ice-cream scheme the tracers
are added to butter, BC or cream intended for further processing
and for making composite foods which are covered by the normal
labelling requirements in Council Directive 79/112/EEC (2). The
Directive already covers aspects of consumer information and
protection and no particular labelling requirements for tracers are
therefore at present envisaged.

Value added tax (VAT) on EU subsidies

39-41. The Court(cid:146)s finding that there is a lack of harmonisation
in the VAT treatment of subsidies is in part a direct result of the
VAT Directive itself.

The Commission has tried by various means to achieve a more
uniform treatment of VAT on subsidies, without success, since the
Member States have been unable to reach unanimous agreement
among themselves. As part of its efforts to modernise and sim-
plify the VAT system, the Commission currently plans to propose
an in-depth reworking of the VAT treatment of subsidies in the
Union. In the process, it will be taking the Court(cid:146)s remarks into
account.

Particular weaknesses affecting Commission Regulation (EC)
No 2571/97 ((cid:145)butter for pastry(cid:146))

Complex rules

42-45. Regulation (EC) No 2571/97 replaced Regulation (EEC)
No 570/88 as from 1 January 1998 and is the result of more than
two years(cid:146) preparatory work in working groups under the Man-
agement Committee for Milk and Milk Products. National experts
(required to cover all aspects in relation to the management of the
scheme) as well as Commission experts from the market division,
supported by legal, customs, EAGGF and financial control depart-
ments, participated in the preparation of the Regulation. The
Regulation also incorporates recommendations from the Court

(1) OJ L 299, 23.11.1996, p. 1.
(2) OJ L 33, 8.2.1979, p. 1.

and an external expert simplification group established, follow-
ing the Court(cid:146)s recommendations in the framework of Regulation
(EEC) No 570/88, which combined two Regulations.

The structure and rules of the Regulation reflect the requirements
for improved management and control of the Community market
and funds as well as the complexity of the industry and of care-
fully selected products, where reference to the Combined Nomen-
clature is a key element, which can benefit from the scheme.

The Commission notes the position of the Court regarding the
use of the aid and agrees with the requirement for constant man-
agement and control appraisal. However, experience obtained
during the first two years of operation of the new Regulation has
shown that the scheme has worked satisfactorily.

The Court(cid:146)s suggestion in paragraph 44 to increase the minimum
tender quantity would reduce the number of controls referred to
in Article 23(2) of the pastry and ice-cream scheme. The Com-
mission will examine this suggestion.

Monitoring deficiencies

46-47. The Combined Nomenclature codes and eligible product
groups have in the past been carefully selected in order to ensure
the highest possible efficiency. With the introduction of Regula-
tion (EC) No 2571/97 (especially Article 25 and Annexes VIII to
XIII), more statistical information concerning the use of different
kinds of eligible products, intermediary products and specified
final-product groups will become available as recommended by
the Court. Sufficient comparable information has not yet been
received by the Commission from two important Member States
enabling it to make a reliable evaluation. However, this has not
prevented the Commission from pursuing prudent market man-
agement and, through the tender system, reducing aid levels.
Member States have on several occasions been asked to forward
missing information and to comply with time limits given in the
Regulation.

Particular weaknesses affecting Commission Regulation
(EEC) No 2191/81 ((cid:145)butter for non-profit organisations(cid:146))

48-49. The Regulation stipulates that the Member States are to
institute all the necessary controls to ensure compliance with the
provisions of the Regulation, and the clerical burden in the pay-
ing agency referred to by the Court may well be caused by the
competent authority itself.

50. This disposal measure was introduced in order to contribute
to the disposal of the surplus of milk fat which is the objective of
all the disposal measures on the internal market. The legal basis
set out by the Council is also the same. The Commission cannot
therefore endorse the Court(cid:146)s proposal to transfer the scheme to
the budget line for food aid.

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ADMINISTRATIVE WEAKNESSES ENCOUNTERED IN MEMBER
STATES

51-53.
In noting the Court(cid:146)s comments regarding controls the
Commission would like to point out that around 500 000 tonnes
of butter equivalent has been subsidised each year since 1995 and
that, while a number of irregularities have been reported over this
period by the Member States, the Commission is satisfied that in
relative terms the system has worked very well.

The Court(cid:146)s observations will be followed up in the clearance of
accounts procedure and duly notified to the Member States con-
cerned. If confirmed, they might lead to financial corrections. For
the case mentioned by the Court concerning the Netherlands
(paragraph 53) the Commission has initiated the procedure for
the necessary follow-up checks.

THE EFFICIENCY AND COST-EFFECTIVENESS OF THE
DISPOSAL MEASURES

Determination of efficiency and cost-effectiveness

54-56. Council Regulations (EEC) No 804/68 and (EEC) No
1723/81 (replaced by (EC) No 1255/1999) oblige the Commission
in the present surplus situation to support the butter market.
Various disposal measures supporting the total consumption of
milkfat in the form of butter, butter concentrate and cream have
therefore been introduced.

The butter balances and information concerning realised subsi-
dised sales justify the disposal measures and, together with the
intervention system, they ensure that the market price for milk
moves closer to the target price fixed by the Council. The mea-
sures have clearly limited buying into intervention in the past.

The Commission stresses that, although no specific evaluation
study has been carried out until now, it has closely followed the
market management measures for butter in association with Mem-
ber States in the framework of the Milk Management Committee.

However, a system is being established which will enable the
Commission to evaluate the three market organisations subject to
the reforms of Agenda 2000 (arable crops, beef and milk) in the
medium term (between 2002 and 2006).

In this context, it is planned to evaluate the entire market organ-
isation for milk (including the quota regulation) in 2001, in order
to obtain results in time to be available for the review of the quota
system in 2003.

fat and changes in the aid level will certainly influence the choice
between different fats and have an impact on the quantities con-
tracted; but also the context in which the changes are made as
well as many other factors will have an impact on operators(cid:146) deci-
sions and on the quantities tendered in both the short and long
run. Changes in and expectations of aid levels, availability of raw
material as well as prices for competing vegetable products, reci-
pes, brand names, image, quality, taste, strategy, production pro-
cess, introduction of new products, etc. will influence the imme-
diate and future demand of operators.

An analysis of each one of these factors and its influence on
uptake can only be made with limited certainty considering the
complexity of the economic interrelations.

Competitive position of butter in relation to other fats

61-63. The difficult point is in practice to ensure that operators
use butter/milkfat as raw material instead of other fats and that
through the tender system the aid is fixed at the lowest possible
level.

The quality and taste of butter is superior to that of vegetable fats
but owing to the relatively higher price for butter, the industry is
in constant search of ways of replacing butter with cheaper raw
materials. Continuous reductions in the aid level will therefore
push operators away from butter (especially for new final prod-
ucts) and decrease the efficiency of the scheme, resulting in far
more expensive intervention buying.

It is extremely expensive to create a recognised brand name and
therefore difficult/costly to withdraw special recipes. When an
operator decides to turn away from butter and replace it with veg-
etable fats, it is unlikely that he will return to butter.

Given the above factors and that operators have three to six
months to incorporate butter into final products, cuts in the aid
may have a short-term reverse effect to the one expected and
result in increased demand, especially if operators expect a further
reduction in aid. It is normal consumer behaviour in the short
term to optimise purchases if the aid is expected to decrease and
to minimise purchases if the aid is expected to increase.

Impact of the aid on prices of final products

Factors determining demand on the internal market

Characteristics of the market

57-60. Many factors influence operators(cid:146) choice between vari-
ous kinds of fats to be used as raw material. The aid level for milk

64-67.
It is not the primary objective of the pastry and ice-cream
scheme to reduce the consumer price for final products but rather
to ensure the use of milk fat as raw material instead of other fats.
Furthermore, it is very difficult to identify precisely the impact on
consumer prices and sales of a price change of one single raw
material (which can originate in changes in aid for butter or in
butter market prices), especially when the share of the raw mate-
rial in the value of the final product is small.

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The aid is not passed on in full to the retail price but the reduc-
tion in the effect of the aid should be limited to the actual addi-
tional costs linked to the participation in the scheme. Processing
costs, packaging costs, distribution costs, etc. are more or less
identical for subsidised and non-subsidised products and should
therefore not be counted as a reduction in the effect of the aid but
rather as necessary costs required to obtain a desired product.

Considering the above points, the Commission finds that there is
a constant risk that operators, especially following reductions in
aid and/or increased raw material prices, will switch to cheaper
vegetable fats. The risk will increase when the price difference
between butterfat and suitable substitute vegetable fats and uncer-
tainty concerning butterfat prices become greater.

The relation between demand, aid rates and market prices

is at present not considered to be too high, especially when inter-
vention buying continues to take place.

Comparison between disposal measures and other forms
of market intervention

74-75. The aid for pastry and ice-cream butter (EUR 910/t for
untraced 82 % butter) is considerably lower than export refunds
(EUR 1 700/t) but the actual disposal costs will depend on the
efficiency coefficient under the two measures. The Commission
finds that the efficiency coefficient is lower for internal disposal
measures than for exports but under all circumstances it is cheaper
to support butter directly from the market instead of buying it
into intervention and later selling it at reduced prices.

It is obvious that abolishing the aid schemes would not push the
total supported quantity into intervention (cid:151) but a substantial
part of it would be. It is not realistic to expect 100 % efficiency
for any disposal measure in a surplus market.

In the Commission(cid:146)s view, an increased purchase price
68-71.
will, other things being equal, reduce the absolute uptake or halt
the general tendency of increased use of milk fat in food products.
The Commission would like to illustrate its view with the follow-
ing description of the actual development of the market.

Structural surplus

In 1994 the uptake for pastry and ice-cream amounted to 450 000
tonnes, as a result of the progressively reduced aid levels in the
first half of 1995, there was a reduction in the uptake of 50 000
tonnes to around 400 000 tonnes in 1996. During the same
period purchases of butter into public intervention amounted to
40 000 tonnes. However, the uptake in 1997 increased by 22 000
tonnes despite increases in market prices for butter and a constant
aid level until December, since operators wanted to secure sup-
plies at the prevailing aid level.

The reduction in aid rates in December 1997 and April 1998 were
counterbalanced by lower market prices. However, following
declines in the deadline for incorporation from six to three months
in May 1998 and from five to four months in January 1999, the
contracted demand decreased by 25 000 tonnes during the first
five months of 1999.

During the first six months of 1999, 25 000 tonnes was pur-
chased into intervention and the increase in quantities contracted
for pastry and ice cream for the period June to August 1999 was
not sufficient to prevent purchases of a further 30 000 tonnes
into public storage during the rest of 1999.

70. Application of the tender system has in the past ensured the
necessary and appropriate disposal of surplus milk fat. As noted
above, reductions in aid levels since 1995 amount to around 35 %,
corresponding to yearly savings in the order of EUR 250 million
for a total quantity of around 500 000 tonnes. The aid has been
reduced over time under the tender system to its lower limit and

76-78. The structural surplus has continued to exist within the
milk sector and the internal and external support measures have
been adjusted in order to meet the requirements for improved
market balance. Despite previous reductions in the milk quotas
and following the Council(cid:146)s decision in the framework of Agenda
2000, support measures will continue to be needed in future.

The Commission has, over time, supported promotion of the
consumption of milk and milk products in general in order to
maintain or increase total consumption, while a specific promo-
tion campaign for butter is considered to be the task of the indus-
try or dairy organisations.

As far as the quotas and adjustment in the deliveries following an
increase in the milk-fat content is concerned, the Commission has
already pointed out in its reply to the Court(cid:146)s special report No
4/93 that, (cid:145)it is not the objective of the scheme introducing refer-
ence quantities for milk production to prevent an increase of the
fat content of milk as long as milk production is adjusted accord-
ingly(cid:146).

In its 1994 reply quoted above, the Commission compared the
overrun penalty with the price of butter and showed that the
additional penalty where the fat content was above the quota was
already 55 %, well beyond the 15 % set by the Council for milk in
excess of the quota. The coefficient corresponding simply to the
(cid:145)commercial(cid:146) neutralisation of the fat produced in excess (assumed
to be valued at the price of butter), without penalty, is around
0,012.

The Commission stressed in its reply that too severe a penalty
would run counter to the desired goal. It could in fact lead to a
black market in the excess fat.

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To sum up, the Commission considers that the present coefficient
attains its goal, which is to keep the total volume of milk deliver-
ies within the quantity set.

CONCLUSION

79. The structural surplus and consequent continued need for
permanent disposal measures for milk fat are the result of politi-
cal decisions by the Council.

80. Both second-quality butter and imported butter form part of
the butter supply, and the internal disposal measures have been
introduced to ensure disposal of surplus milk fat in the form of
butter, cream and butter concentrate.

The aid levels and quantities for the pastry and ice-cream scheme
and the concentrated-cooking-butter scheme are fixed through a
tender system and the Commission is confident that the applica-
tion of the system in the past has ensured that aid has been estab-
lished at an appropriate level ensuring stability and disposal of the
butter surplus in the short, medium and long term.

The Commission has taken note of the remarks made by the
Court concerning VAT and will consider them in the framework
of future actions aiming at modernising and simplifying the VAT
system.

81. Member States will be notified of the Court(cid:146)s remarks con-
cerning their administration of the disposal measures and, if rel-
evant, financial corrections will be made in the framework of the
clearance of accounts procedure.

However, the Commission would like to point out that around
500 000 tonnes of butter equivalent have been subsidised per
year since 1995 and that, while a number of irregularities have
been reported over the period by the Member States, the Com-
mission is satisfied that in relative terms the system has worked
very well.

82. Experience over the last few years demonstrates a delicate
interrelationship between aid levels, the subsequent uptake under
the aid schemes and the level of intervention buying. The bigger
the price difference between subsidised milk fat and vegetable fats
becomes, the greater is the risk of a switch away from milk fat and
of increased intervention buying. Given the structural surplus of
milk fat, the disposal measures are indispensable.

83. Following the Council(cid:146)s decisions already taken in the frame-
work of Agenda 2000, the structural surplus will remain, and
except for limited Community-supported general promotion
activities it is considered to be the task of the industry and vari-
ous organisations defending the interests of the milk sector to
promote milk and milk products and increase demand. The Com-
mission will continue its efforts through efficient application of
disposal measures to ensure balance between supply and demand.
It is planned to start an evaluation of the entire market organisa-
tion of milk in 2001, including the effectiveness and efficiency of
internal disposal measures for butter and for skimmed-milk pow-
der.

The Commission considers the tender system to be efficient in its
present form. Since the beginning of 1995 the aid for butter under
the pastry and ice-cream scheme has been reduced by 35 %.
Second-quality butter and imported butter form part of the gen-
eral butterfat surplus which must be disposed of. The Commis-
sion does not intend to limit aid only to quality non-imported
butter and finds no reasons for increasing the penalty in cases of
increased fat content of raw milk delivered under the milk quota
system.

Finally, the Commission would like to stress that, because of the
policy practised in the milk sector in the last decade, in particular
in relation to the operation of the milk quota system, buying into
intervention was small between 1995 and 1998 and stocks lim-
ited to around 3 000 tonnes at the end of 1998 compared with
1,3 million tonnes at the end of 1986. Unfortunately stocks started
to build up again in 1999, reaching around 56 000 tonnes at the
end of the year. In addition, the milk sector(cid:146)s share of the budget
has dropped from its peak of around ECU 6 billion or 30 % of
total expenditure in 1985 to less than EUR 3 billion or 7 % of the
expenditure in 1999.