Opinion of the European Economic and Social Committee on:the Proposal for a Council Regulation amending Regulation (EC) No 1255/1999 on the common organisation of the market in milk and milk products (2003/0011 (CNS)), andthe Proposal for a Council Regulation establishing a levy in the milk and milk-products sector (2003/0012 (CNS))(COM(2003) 23 final — 2003/0011 + 0012 (CNS))
Date: 2003-09-03
Institutions: European Economic and Social Committee
Subjects: common agricultural policy, common organisation of markets, intervention price, milk, milk product, production quota

3.9.2003

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Official Journal of the European Union

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Opinion of the European Economic and Social Committee on:

— the ‘Proposal for a Council Regulation amending Regulation (EC) No 1255/1999 on the
common organisation of the market in milk and milk products’ (2003/0011 (CNS)), and

— the ‘Proposal for a Council Regulation establishing a levy in the milk and milk-products

sector’ (2003/0012 (CNS))

(COM(2003) 23 final — 2003/0011 + 0012 (CNS))

(2003/C 208/12)

On 10 February 2003 the Council decided to consult the European Economic and Social Committee,
under Article 37(2) of the Treaty establishing the European Community, on the above-mentioned
proposals.

The Section for Agriculture, Rural Development and the Environment, which was responsible for
preparing the Committee’s work on the subject, adopted its opinion on 25 April 2003. The rapporteur
was Mr Voss.

At its 399th plenary session on 14 and 15 May 2003 (meeting of 14 May), the European Economic and
Social Committee adopted the following opinion by 77 votes to 13 with 17 abstentions.

1.

Introduction

Option 1: Continuation of the Agenda 2000 measures up to
2015 (no additional reform measures);

1.1.
Regulation (EEC) No 804/68 brought in the common
organisation of the market in milk and milk products. Key
market
instruments have included common prices, state
intervention and private storage, internal consumption aids
and export refunds. In addition, in 1984, when there were
large dairy surpluses in the Community, a dairy quota system
was introduced aimed at supporting producer prices while at
the same time limiting production and expenditure.

1.2.
Although the number of dairy farms has shrunk, dairy
cattle farming in the disadvantaged regions has held steady
since the introduction of the quota system. Eurostat figures
indicate that nearly 50 % of dairy farms and around 38 % of
dairy cattle are to be found in the disadvantaged regions.

The Berlin European Council of March 1999, as part
1.3.
of the reform it approved for the Common Agricultural Policy,
stipulated the following for the dairy sector: extending the
dairy quota system until 2008, cutting back intervention prices
by 15 % and introducing direct payments as of the 2005/2006
marketing year, as well as raising the quota by around 2,4 %
as of 2005. 0,9 % of the quota was already allocated in some
Member States in 2000. Moreover, as part of the Mid-term
Review, the European Commission was instructed to compile
a report on the impact of the reform measures and to submit
proposals for the dairy sector post 2008.

On 10 July 2002,

in a report on the dairy quotas
1.4.
(SEC (2002) 789 final), the Commission put forward four
options as a basis for the Mid-term Review:

Option 2: Repetition of the Agenda 2000 approach (further
lowering of the intervention prices and an additional 3 %
increase to quotas);

Option 3: Introduction of a two-tier quota regime (reducing
the ‘A’ quota on production for the internal market and not
placing any limit on the ‘C’ quota on production for exports);

Option 4: Removing quotas in 2008 and cutting intervention
prices by a further 25 %.

Over half of

the approximately 1,7 million beef
1.5.
producers in the EU keep milk cows (1997 figures). Around
2 million people are employed in the dairy sector, including
the processing industries. In most Member States and in the
EU as a whole, dairy production constitutes the biggest area of
farming activity. The dairy sector on its own makes up around
14 % of total agricultural production in the EU. Of this,
producers account for approximately EUR 38 000 million and
the processing industries around EUR 80 000 million. 80 % of
the value added from farming in grassland areas comes from
dairy production.

1.6.
To a large extent, the diversity of the cultural landscape
in Europe has been shaped over time by cattle farming and the
use of pasture. Both regional differences in soil and climate
conditions and different ways of using and farming the land
have given rise to extensive species diversity in cultivated land.
Despite increasing use of concentrated feed, dairy cattle
farmers are still the heaviest users of grassland in central

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Europe. The key environmental importance of dairy farming
is also demonstrated by the fact that in some countries a high
proportion of dairy farms practise environmentally friendly
production methods.

2.7.
Partial compensation for the price cuts will be paid out
to milk producers in 2007 and 2008 in the form of direct
payments. The partial compensation for price cuts will climb
from 0,575 cents/kg to 2,874 cents/kg between 2004 and
2008.

Another factor is the wide variety of regional dairy
1.7.
products associated with dairy farming in Europe; furthermore,
these products are of exceptionally high quality. The European
dairy production and processing sectors operate to high
technological standards.

Additional national supplementary ceilings for milk
2.8.
can also be transferred to individual reference quantities or
paid out in another way. It has thus been extrapolated that in
2008 a total of 4,17 cents/kg of milk will be paid out in
compensatory payments, which corresponds to a partial
compensation of just under 50 %.

1.8.
In economic terms, there is a strong link between dairy
cattle farming and beef production. If interest in cattle fattening
declines (e.g. if prices fall or premium payments are decoupled)
then calf prices will come under pressure and dairy producers’
incomes fall.

2.9.
Once the reform begins in 2004, direct payments are
to be decoupled and paid out as area-based farm payments.
Their calculation is based on the historical premium payment
for individual farms.

2. Content of the reform proposals

2.10.
In contrast to other market areas, the base date for
calculating the level of premium payments based on milk
production lies not in the past but in the future (31 March
2004).

2.1.
The Commission is proposing to extend the existing
dairy quota system beyond 2008 until the 2014/2015 market-
ing year.

3. General comments

2.2.
The method adopted in 1984, which consists of
applying a levy to quantities of milk collected (115 % of the
target price) or sold for direct consumption above a certain
guarantee threshold (quota), is to be maintained. To this end,
for each Member State a specific guaranteed total quantity is
set for a reference milk-fat content.

2.3.
The Agenda 2000 reforms relating to this sector are to
be brought forward by a year to 2004/2005, since unantici-
pated budgetary resources have become available for a reform
of the dairy market.

2.4.
On the basis of Option 3 of the Milk Quota Report,
each Member State’s milk quota is also to be raised by an
additional 1 % per year in 2007 and 2008.

3.1.
Average production costs for milk in the EU stand at
30-35 cents/kg. However, variations in local conditions,
climate, farming structures and quota costs may mean that
production costs sometimes lie significantly above 45 cents/
kg. Competition is distorted as a result of farmers with arable
land having had the advantage of lower feed costs since 1992.
Because farmers cultivating 100 % plant silage fodder crops
(silage maize) are eligible for premium payments, they have so
far had an economic advantage over grassland farmers.

3.2.
In various opinions on the multifunctional nature and
the European model of farming, the EESC has highlighted the
importance of milk production (1). The demand on the part of
EU society and, in particular, consumers for high quality in
both dairy products and production conditions and the need
to protect production locations call for special support for
dairy production by introducing protective measures aimed at
products imported into the EU.

The originally scheduled uniform price cut of 15 % (a
2.5.
three-stage reduction of 5 % a year) will be replaced with
asymmetric intervention price cuts over 5 years. A 17,5 %
reduction in skimmed milk powder prices together with a
35 % cut in butter prices equates to an overall reduction of
28 % in EU target milk prices over five years, down to
22,21 cents/kg from 30,98 cents/kg today.

The EESC supports the Commission’s proposal

to
3.3.
continue to apply the dairy quota system beyond 2008, since
opting out of the quota system would lead to an increase in
production and an unquantifiable fall in prices. Despite lower
costs in some areas (e.g. for quota leasing), producers’ incomes
would fall sharply and the number of farmers leaving the
business would rise, since particularly in grassland areas there
is no economically viable alternative to dairy farming. This

The Commission is proposing a limit of 30 000 tonnes
2.6.
per annum for intervention purchases of butter. Beyond that
limit, purchases can be carried out under a tender procedure.

(1) OJ C 368, 20.12.1999, pp. 76-86.

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would have an enormous impact on the objectives of main-
taining broad-based agriculture and preserving environmen-
tally important grassland areas.

3.4.
The EESC notes that only 6 % of worldwide dairy
production is traded on the ‘world markets’. Overall demand
for milk and milk products is growing slightly. However, with
a current annual volume of trade amounting to approx.
30 million tonnes, the ‘world market’ is already very nearly
saturated. Different production costs and conditions have
created a situation where EU milk production is at a disadvan-
tage vis-à-vis some regions, such as Oceania and South
America; increasingly the world market is being supplied with
mass-produced dairy products from these regions. On the
other hand, the higher quality segments of the market still
offer growth opportunities for the EU.

The EESC does not share the Commission’s view that
3.5.
take-up of European
national and international markets’
dairy products will increase. Contrary to the Commission’s
assessment, it is more the case that the market options are
very limited because:

— the supply of dairy products has increased world-wide;

— demand is poor due to flagging growth in purchasing

power;

— growth in demand for cheese has settled down again now

that the BSE crisis has died down;

— demand has declined as a result of turmoil in the world

economy in the wake of 11 September 2001;

— EU exports are at a disadvantage due to a stronger euro;

— subsidised exports from regions with surpluses;

— major trading partners such as Russia and the USA are

restricting imports; and

— competition is being distorted by national dairy trade
organisations (New Zealand) and tax measures (USA).

4. Specific comments

The Commission believes that the 28 % reduction in
4.1.
the target price ‘justifies a(n) ...increase in the total ... reference
quantity for milk following each price reduction, with a view
to keeping production in balance with the expected trend in
consumption and avoiding any disturbance of the market in
milk products’.

The EESC notes that:

— In the past, the milk intervention price provided the basis
for the actual price paid for milk; this was about 10 %
higher than the intervention price. Consumer demand for

milk products is inelastic. It is not realistic to assume that
a significant increase — totalling 4,4 % — in the milk
quota linked to supply rights will lead to a price reduction
amounting to only half of the cut in the intervention
price.

— Since the quota increases and the intervention price cuts
are to be carried out in parallel with the annual dairy/
food trade price negotiations,
the discounters’ price
dumping strategy will be underpinned. Thus the inter-
vention price is turning into a guideline for price cuts, no
longer fulfilling its true function as a safety net.

— The price compensation payments to be paid out as of
2004/2005 can only compensate for about half of the
drop in price. Given the many jobs on dairy farms (SMEs)
and the large number of other production areas associated
with this sector,
It is
imperative that the compensatory payments for milk be
set at the same level as those paid out to date for cereals
and beef, i.e. around 90 %.

is unacceptable.

this proposal

Storing surplus dairy products in intervention stocks
4.2.
and subsidising dairy product exports to non-EU countries not
only generates costs but is also an approach being questioned
by society. At the same time, the internal market is experienc-
ing stagnating demand for butter and only slightly rising
demand for cheese and fresh dairy products. The EESC
therefore feels that the Commission’s proposal to increase
dairy quotas by 1 % a year in 2007 and 2008 is in no way
warranted. At the same time, there is no justification in market
policy terms for the Commission’s plans to bring forward the
quota increases laid down in Agenda 2000. Rather, on the
basis of the decisions taken in Berlin, the quota increases that
have already been decided should only apply when the market
can absorb the increased quantities without subsidies.

4.3. Measures to reduce butter intervention to 30 000 tonn-
es, limit it in time and allow the possibility of further private
storage will mean that intervention will no longer meet the
requirements of price support. As a result producer prices will
fall well below the intervention price. On the other hand,
unlimited intervention creates situations where, in unfavour-
able market conditions such as at present, extensive inter-
vention stocks are built up which can weigh on the market for
years. The EESC therefore calls on the Commission to introduce
a flexible quota system as a permanent component of its
dairy market policy.
intervention stocks
In the event of
accumulating, there should be an automatic adjustment; when
such stocks shrink, then quotas could be expanded. A further
indicator for dairy quote adjustment should be price thresholds
for important basic dairy products. In this way, the interests of
milk producers, consumers, taxpayers and the dairy industry
could all be reconciled.

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4.4.
The EESC notes that putting the Commission’s ideas
about quantity increases and price cuts into practice will
probably push up the budgetary cost of dairy compensatory
payments to EUR 4 895 million by 2013. The Commission
has calculated that market measures, such as export refunds,
public and private storage and internal aids, will amount to
EUR 1 328 million in 2013 compared to EUR 2 360 million
at present. With the reforms, the milk market would cost
around EUR 4 000 million more in 2013.
In addition,
European milk producers will be losing EUR 4 to 5 000 million
in income from milk production every year.

4.5.
The EESC is most concerned about the reference
periods (1999-2001) proposed in the Harbinson paper (1) for
dismantling the Blue Box, as called for by the WTO. Since the
compensatory payments for milk did not exist at that time,
and are in fact only to be paid out in the future, they are at
particular risk from the dismantling process.

4.6.
The EESC disapproves of the planned drastic price cuts
and the approximately 50 % compensation through premium
payments. It would point out that other compensatory pay-
ments have made up for around 90 % of price cuts. Equality of
treatment would seem justified, especially given the particular
multifunctional importance of dairy production. Where the
location (such as in upland areas) is the cause of extreme
disadvantages, compensation should be provided under the
second pillar.

4.7.
The Committee would underline that, because of the
Berlin agreements, EU milk quotas have already been increased
by 0.9 % in some countries. These quotas are now pushing
down the producer prices without milk producers receiving
any compensation.

The EESC fears that the Commission’s proposals for
4.8.
dairy market reform will entail major restructuring in rural
areas of the EU. It is not clear how the second pillar of the
CAP can even come near to putting right the damage to rural
areas which will be caused by this dairy market reform. It is
more the case that the financial resources for the second pillar
are becoming more meagre: throughout Europe, only an
additional EUR 1 481 million will be available in 2013 for
rural development from modulation and degression. However,
Poland alone has been allocated an additional EUR 900 million
per annum for rural development.

The Commission proposals will, to the Committee’s
4.9.
mind, create a situation where milk production in grassland
areas and low-yield disadvantaged regions will continue to
suffer from major competitive disadvantages. In its proposal

the Commission states that, because of the positive environ-
mental impact involved, steps must be taken to encourage the
preservation of permanent grassland so as to pre-empt a
wholesale changeover to arable farming. The intention of a
ban on ploughing grassland, implemented by the Commission
as of 31 December 2002, is to specify land-use as part of the
cross compliance measures. However without added value,
even a ban on ploughing is not enough to preserve grassland.
The option granted to the Member States by the Commission
to level out regional premium payments offers one solution.
The levelling out of regional premium payments could,
however, mean milk producers in regions with a higher
than average proportion of arable land gaining competitive
advantages vis-à-vis producers in regions with a low average
proportion of arable land, as is often the case in alpine regions.
The Commission is therefore urged to develop further its
proposal for taking account of the different situations in the
Member States,
thus allowing premium payments to be
distributed more fairly.

4.10.
If the EU should be obliged, for reasons associated
with world trade policy, to take the path of price cuts and
decoupled compensatory payments, then dairy compensatory
premium payments should likewise be decoupled.

The EESC attaches particular importance to the dairy
4.11.
quota system as an instrument for maintaining regional added
value. Here the Committee calls on the Commission to be
more specific about the horizontal measures set out in Annex
4.

4.12.
The thinking behind and aim of having a national
reserve does make sense. No requirements are laid down,
however, as to its minimum size. There has to be a definition
of
the ‘objective criteria’ determining the distribution of
national quotas so that structural policy aims (e.g. encouraging
young farmers) are made quite clear.

4.13.
The definitive date for setting premium payments for
milk is 31 March 2004. The EESC would point out that this
date in the future will lead to speculation on the market for
quotas. Small milk producers who, knowing that prices are
going to fall, do not see any future in milk production, will try
to sell off their supply rights at the highest price possible. This
will accentuate the structural change. Valuable jobs in small
and medium-sized enterprises will be lost.

4.13.1.
terms to rule out the subsidising of quota purchases.

It makes sense in structural and budgetary policy

( 1) WTO — Committee on Agriculture Special Session — Nego-
tiations on Agriculture. FIRST DRAFT OF MODALITIES FOR THE
FURTHER COMMITMENTS TN/AG/W/1 — 17.2.2003. Such
draft has been revised on 18.3.2003 (TN/AG/W/1/Rev.1 —
18.3.2003 (03-1585)).

4.14.
protein price support make sense.

The EESC likewise feels that the changes to fat and

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4.15.
The horizontal proposals include one option for
reconciling the interests of tenants and lessors: up to five years’
break from claims for premium payments in the event of
tenants and lessors not reaching an agreement.

5. Conclusions

5.1.
The EU must provide milk producers with stability as
regards political decisions beyond 2008, so that they are in a
position to make plans. The EESC therefore in principle
welcomes the extension of the dairy quota system up to 2015.
However it
the Commission’s other proposals
counteract the aims of a quota system (regulating production
volume, guaranteeing income in disadvantaged areas, securing
jobs in the dairy industry and reducing the burden on the
budget).

feels that

5.1.1.
The EESC calls on the Council and the Commission
to develop a new, flexible instrument for adjusting production
volumes, and thus to react to market circumstances.

5.1.2.
At the present time, against the background of the
current market conditions, the EESC does not support any
commitment to expand milk production in 2007 or 2008.

5.1.3.
Given the growing intervention stocks, the Com-
mittee also urges the Council and the Commission to revise
the decision on a 1,5 % quota increase based on the Berlin
decisions. Quotas should only be increased when market
conditions allow.

The EESC disapproves of the Commission proposals
5.2.
on intervention price cuts and the measures to restrict butter
intervention to 30 000 tonnes. Where price cuts have to be
it also calls on the Commission to make the same
made,

Brussels, 14 May 2003.

compensatory payments as provided for in the organisation
arrangements for other markets (around 90 %).

5.3.
Existing market instruments such as aid, refunds and
intervention should be used selectively and for supporting the
market. Their effects should be constantly assessed and they
should be adjusted accordingly.

5.3.1.
In order to help firms in extremely disadvantaged
locations, additional aid instruments under the second pillar
should be constantly developed and adjusted.

5.4.
The EESC attaches particular importance to milk
production in grassland areas. It therefore considers it impera-
tive to remove the competitive disadvantages suffered by these
areas, which were brought about by the 1992 agricultural
policy reform. To this end a compensatory premium payment
under the first pillar of the CAP is needed.

5.5.
The Committee would strongly advise the Com-
mission, in the WTO negotiations, to push through quality
requirements applying to imports of milk and dairy products,
so as to protect high-quality EU products and to defend the
European model of multifunctional farming.

The Committee feels that the Commission has not
5.6.
adequately investigated the impact of the legislative proposals
on the milk sector. Above all there has not been enough
analysis of the repercussions on the sectors concerned or of
the extent to which these proposals tie in with the aims of the
various EU policy areas. The options for, and costs of,
offsetting the negative impact of the reform must also be set
out. Of particular importance here are the repercussions on
the labour market, the number and structure of small and
medium-sized enterprises, upstream and downstream econ-
omic sectors and the environment. The results from the impact
studies available to date confirm the EESC’s fears in this
respect.

The President

of the European Economic and Social Committee

Roger BRIESCH