Production limits are not the way forward for under pressure dairy sector
Commissioner Phil Hogan announced at the July Agricultural Council that the Commission would propose legislation to introduce an EU-wide voluntary milk supply reduction scheme in the autumn.
This will be funded by €150m out of the additional €500m of new EU money made available for this latest farm aid package from the CAP budget without requiring recourse to the crisis reserve.
What sort of impact might this scheme have on the EU milk market and the EU milk price when it is introduced? This depends primarily on how responsive buyers of milk and dairy products are to an increase in the milk price along the supply chain.
If buyers are very sensitive to an increase in the price, then limiting supply will have little impact.
Despite the growing importance of exports of dairy products to a highly competitive world market, the demand for EU milk and dairy products is probably still relatively unresponsive to price. I estimate that, for every 1pc that EU milk supplies are reduced, the EU milk price will increase by just under 2.5pc.
However, the mechanics of a voluntary milk reduction scheme make the situation more complicated. DG AGRI officials estimate that paying farmers an incentive of 14c for each kilo of milk that they reduce their supply by in the last quarter of this year compared to the same quarter in 2015 could remove 1.1m tonnes from the market.
Against this it should be remembered that the amount of foregone milk that farmers are paid to remove will not be the same as the net impact on the market.
Part of the reason is that the higher milk price that results because some farmers reduce production will encourage other farmers (including farmers in New Zealand and in the US) who might have reduced production not to do so. Conversely, it may encourage dairy farmers who might otherwise have slowed down their expansion plans not to do so. This rebound effect is one reason why the net reduction in milk supplies will be less than what the budget has financed.