The implementation of the EU milk support system is carried out by a complex web of the Community's main institutions together with national governments and their agencies, and producer-controlled and private commercial marketing organisations in each member state. Whilst in recent years there has been a tendency for the activities of farmer-controlled marketing organisations to become international, there has as yet been no tendency for their ownership or the membership to become international. Thus, for example, MD Foods, the largest Danish farmer-owned milk co-operative bought out the UK private milk business of Associated Dairies and Farm Stores, but the English milk producers supplying that business did not become part of the Danish co-operative. This is one of a number of similar instances. The Community support system remains nationally based with implementation of the farm price to producers dependent on national organisations and marketing structures, in addition, of course, to the fact that the quotas that are part of the support system are nationally based.
Implementation starts each year with the Commission's proposals for support prices for the coming "campaign" year. The Commission's proposals are normally announced by the Commissioner for Agriculture as the starting point for the consultation process with the Council, the European Parliament, the Economic and Social Committee, etc., before the Commission places its formal proposals as Regulations before the Council of Ministers for enactment. The proposals for milk are part of the whole package of proposals for all other price-supported commodities, and other support measures, e.g., grant aids, are dealt with as part of the package. Reaching a settlement is often difficult and is the result of many bilateral inter-governmental (private!) discussions and open posturing in press briefings by ministers after Council meetings, etc. The political haggling and bargaining has often been such that with proposals usually made by the Commission in January, final agreement by the Council has often not been achieved until June and sometimes even later. In such circumstances the marketing year has had to be extended by one to three months until Ministers or even heads of government, are able to agree a package in the decision-trading market.
The process of policy implementation revolves around the Commission because the Commission makes not only policy proposals to the Council but also detailed "rules Regulations" on its own account. Such Regulations are supposed to be in accordance with the opinion delivered by the Management Committee. Usually the preamble to a Commission Regulation will state whether or not the Management Committee has delivered an opinion within the time period laid down by the Commission chairman. It is, however, the Commission chairman who lays down the timetable, and negative outcomes can be avoided by the Chair. Clearly, the Commission is in a very powerful position in the implementation of policy. It can make detailed rules for the interpretation of Council Regulations and stipulate precisely how the agents in the system are to operate in delivering the policy. For example, the general rules for intervention on the market in butter and cream (Regulation (EEC) 985/68) are a Council Regulation. This Regulation defines the product that may enter intervention (e.g., minimum fat content of 82 percent, maximum water content of 16 percent, made from sweet or sour cream); the intervention price is to apply to butter delivered to cold storage depots run by the intervention agency and so forth. The Commission Regulation (EEC) 685/69 (which has been modified with amendments several times in every year of its existence) lays down detailed rules, such as size of packages, types of packaging, dating, numbering, minimum quantities to be bought in one lot, sampling procedures, payment period to suppliers, temperature of storage and many other matters. The Commission, in other words, make most of the key management decisions in the running of intervention agencies for butter and cream and, as these are complicated products, decisions are extremely numerous. The same applies to skimmed milk powder: a Council Regulation lays down general rules (Regulation (EEC) 1014/68) and a Commission Regulation ((EEC) 625/78) lays down detailed rules, and once again the changes and amendments over the years are numerous, although less so than for butter. Intervention agencies have to be inspected by the governments of member states, and reports made to the Commission which form part of the general informational flow to the Commission. There is a fine line in the making of detailed "rules Regulations" by the Commission for administration and implementation of policy, and the making of policy itself in the political process. By making detailed rules more or less tough the Commission is able to influence the effectiveness of the intervention prices laid down in Council Regulations. Thus, by tightening quality standards in times of surplus, rejection rates can be increased so that more rejected product has to come on to the market, influencing prices generally. Similarly, by lengthening the payment period, intervention is made less attractive and the effective price to the producer forced down, especially in periods of high interest rates.
A similar situation exists regarding quotas ("reference quantities" in Community language). The introduction of quotas involved first a Council Regulation changing the basic Regulation (EEC) 804/68 (i.e.. Regulation (EEC) 856/84). This was followed by a Council Regulation laying down general rules, and then a Commission Regulation laying down detailed rules for the calculation of the super-levy that the system provides for. Management of the quota system at the national level by the Commission has been extremely tight, with detailed scrutiny of the statistics on which national reference quantities are based; the introduction of tight controls on the butterfat level of quota milk to prevent the addition of cream to raise the effective milk-equivalence of quota; and rules to prevent any dilution of the super-levy applied to individual producers when national guaranteed quantities and individual quotas are exceeded. An area of quota management that the Commission has not entered in such detail, however, is the management of quotas by dairies (Formula B) or regions, in the case of individual quotas (Formula A). There are general rules for the adoption of the base period, which gave some flexibility, and for the treatment of special cases and the creation of "national reserves" to cope with them. But the system tied quota to "holdings" (i.e., loosely to land), and the rules provided for the transfer of holdings between producers by sale or purchase, inheritance or change of tenancy. This has been a difficult area within member states as it has substantial effects on property values, tenants' rights and rental payments, and comes up against the legal framework governing systems of property ownership in member states. (Article 222 of the Treaty states that it "shall in no way prejudice the rules in member states governing the system of property ownership".) It is not surprising that there are differences between member states in producers' ability to transfer quota both temporarily and long-term, and therefore big differences in quota values and the value of the land to which it relates. All national legislation for the implementation of quotas has to be reported to the Commission to ensure that it conforms to the obligations in the Communities' general rules. This problem will be returned to at later stages of this study.
The Commission's part in the implementation of the support system is fulfilled by working with national governments in both the administration of the support prices and the quota system. Customs and Excise, for collection of import levies and tariffs and payment of export refunds, are an arm of national governments. National governments appoint the intervention agency and are responsible for ensuring that it applies the rules properly. National governments have been responsible for the implementation of quotas by ensuring that basic quotas were distributed in accordance with the rules; procedures were adopted for dealing with special cases; and the super-levy is correctly calculated and applied every year. They also in the first instance collected the co-responsibility levy when it applied. National governments, moreover, are responsible financially to the Commission for all of these activities, and are subject to the Community's Court of Auditors in doing so for monies collected, claims against the Community's "own resources", and all monies due. Although the Commission is the central body and takes most of the key management decisions with all the pressure groups that are working round the process, the administrative machine itself is largely provided by national governments with a very small but powerful Commission staff involved centrally in what is effectively a management supervisory role.
In every country of the Community the great bulk of milk sold off farms (over 95 percent in most countries) is made by deliveries to dairies. It is therefore the activities of the dairies that at the end of the system finally deliver the milk price to the producers, the "targeted beneficiaries" of the system. Community policy for dairies is that they should be as competitive as possible in the single EU-wide market. Rationalisation and amalgamation has been encouraged by a policy of grants from Community Funds (principally under Regulation (EEC) 355/77 on common measures to improve the conditions under which agricultural products are processed and marketed). Amongst the criteria for support are that projects contribute to the objectives of Article 39.1 (a) of the Treaty and guarantee producers of the basic products a lasting and adequate share of the benefits. Nevertheless, the rules of competition, particularly Article 86 of the Treaty of Rome (the abuse of a dominant position), apply to agricultural organisations. The application of this article, however, has been more a possibility than a reality. There are some very large dairy organisations in the Community, but they dominate regionally and there are still very large numbers of dairies in the wider Community market. It is in the smaller countries of Denmark (MD Foods), Sweden (Aria) and Finland (Valio) where single organisations have a dominating share of the market, but in each of these countries the large organisations appear to have remained competitive and have not so far been accused of "abuse" of their position.
There can be no doubt about the importance of producer co-operatives in the marketing of milk and the delivery of the support policy to the target beneficiaries. The proportion of milk deliveries from farms to cooperative dairies in various EU member states is set out in Table 1. In most countries except Italy the proportion is very high, whilst in France it is just 50 percent.
Table 1 Market Share of Co-operatives in Milk Deliveries to Dairies
|
|
No. of Co-operatives |
% |
|
Germany |
647 |
74 |
|
France |
544 |
50 |
|
Italy |
1467 |
39 |
|
Netherlands |
15 |
82 |
|
Belgium |
30 |
85 |
|
Luxembourg |
1 |
56 |
|
United Kingdom |
23 |
na |
|
Irish Republic |
39 |
97 |
|
Denmark |
22 |
92 |
|
Greece |
100 |
na |
|
Portugal |
115 |
71 |
Note: Figures relate to the years 1991 to 1993 except for Belgium which relates to 1987.
na: Not available.
Source: EC Dairy Facts and Figures 1994.
Table 1 does not give a market share figure for the UK as it was in a special position through the Milk Marketing Boards until 1993. The figure for the UK could be either zero or 100 percent depending on the view taken of the Boards as co-operatives. Most of the 23 co-operatives in the table are in Northern Ireland and they were in any case not paying dividends to member suppliers. (The issue of the new organisations from 1994 onwards and the demise of the Boards will be discussed in the chapter dealing with implementation in the UK.) In a survey of 21 countries by the International Dairy Federation, which covered 55 percent of the world's milk production and included all 15 countries now in the EU, 86 percent of deliveries to dairies were marketed by producer-controlled organisations (Empson [1990]).
It is clear, therefore, that producer co-operatives are one of the main agents in the policy delivery system. Their existence as a competitive force is important in assisting the flow of milk into and out of intervention products as markets fluctuate. It is convenient for the support system that the target beneficiaries are the main stakeholders in a substantial part of the PDS (policy delivery system) itself. In the event that the system is dominated in some part of the Community by private companies, it will rely heavily on price competition between purchasers to retain milk supplies when markets fall close to intervention milk price equivalent (IMPE) levels to ensure that there is no leakage of benefits. A highly concentrated, privately owned industry in which farmers have no alternative competing purchasers, or one in which there is collusion, may be able to force milk prices down below IMPE levels when market prices fall. The maintenance of competition for milk supplies in the single market with free movement of dairy products is therefore crucial to the proper operation of the system.
Under the pressures of technological and structural change, continental cooperatives have become in a number of instances very large organisations, sometimes dominating regions in France and Germany and whole countries in Scandinavia. Such highly capitalised organisations, vertically integrated in the marketing chain, resemble in some respects a modern public company. Nevertheless, the nature of competition between cooperatives within the borders of those countries is different from that of private and public companies. The main purpose of a co-operative according to Parnell [1995] is to deliver a service to its primary "stakeholders". In the case of a dairy co-operative this is to market their milk although it might also include additional services. The principle purpose of a public company is to maximise profit or shareholder value. The business practice ("conduct" in the "structure-conduct-performance" paradigm) may not be all that different between the two types of enterprise in so far as both have to seek to use capital and labour resources with maximum efficiency, especially when those resources are in a highly competitive mass market. Co-operatives compete to maximise the total return to their stakeholders, that is to say their milk price and the return on their capital. The calculation of actual returns on capital for a co-operative is a difficult issue because the stakeholders own the raw material. So the aim of co-operatives, even when required to show a nominal separate return on capital, is to maximise the milk price. This matter is quite different for private firms that purchase milk at the factory gate. To them milk, the raw material, is a cost, and a large one, that they must seek to minimise in order to maximise the return on shareholders' capital in the processing and marketing business. If a privately owned dairy is in competition with a local producer co-operative for milk supplies, it will have to be careful in sharing the effects of any adverse market movements between its supplying producers and its shareholders for fear of loss of supplies, and hence its business, to the co-operative. In this situation, much can depend on the competing co-operative's rules of membership, itself a subject for scrutiny by the Commission in Brussels. Dairy cooperatives, that are well established in the marketing system are a powerful force affecting the general level of milk prices to producers, and they clearly have a strong incentive to maximise the efficiency with which they use their members' capital as well as the price they pay out to members for their milk. It would be meaningless to put a figure on any precise share of supplies that co-operatives should have to become an effective competitive force. This must depend on many locally variable circumstances of marketing and market structure. However, if the bulk of milk is handled and processed by private companies, their incentive to use the intervention system in times of surplus might be relatively weak if by not doing so they were able to reduce the price of milk to producers. In these circumstances private capital in the industry may be able to "cream off some of the benefit intended by the regime for farmers.
In the language of contractarian economics, it might be said that cooperatives in the dairy sector avoid the largest of all "transaction costs" of a private firm, that of purchasing the raw material - milk. Dairy cooperatives in this sense extend the nature of the firm as described by R H Coase [1937]. In more recent theoretical work by Oliver Williamson [1974] on transactions cost economics, it has been demonstrated that the conditions that give rise to a high level of vertical integration in an industry with recurrent transactions are those where a high level of special-purpose ("idiosyncratic" in Williamson's terms) equipment is required at each stage of the processing and marketing chain. Such special-purpose equipment has a very low alternative-use and scrap value. These circumstances apply exactly in the processing and distribution of dairy products, and so it is not surprising to find that dairy co-operatives have grown into very large, vertically integrated organisations. Their rules of membership, sometimes controversial and a very important part of their overall governance and local dominance, have often given the security of raw material supply necessary for the investment in specialist modern 'hi-tech' equipment, thereby enabling them to hold their own in a rapidly concentrating industry. Security of raw material supply other than by remaining price competitive is a difficult issue for private companies.
The point should also be made that ordinary commercial contracting for the sale of raw milk, which is effectively an intermediate product, is not an easy task. Produced daily and of high perishability, raw milk is a highly variable product and almost all of the elements of variability affect its commercial value. Milk production varies seasonally; it can be of highly variable bacterial and compositional quality, and can easily acquire unwanted residues - medicines or other. Taking account of these matters in contracts is costly, needing expensive testing facilities, and can give rise to disputes requiring settlement procedures. Research and greater understanding of the costs and control of these issues on the farm, together with modern automated laboratories is transforming the industry and has already done so in the last two to three decades; but handling these difficult matters in the form of commercial contracts has tended to favour integrated co-operative organisations rather than private firms dependent on classical contracting in a market place. The co-operative membership can decide rules of payment for themselves, and handle matters relating to variability by fiat without reference to the market; they can also adapt such rules for themselves to meet changing circumstances when necessary. For a co-operative there is no slippage so far as benefits are concerned, and the rules regarding quality can be flexibly tailored to the actual products made and the markets being served.
The countries of Europe in which co-operatives have been less successful have been Italy, parts of France and the United Kingdom. In the UK the food processing and marketing industry has been heavily oriented towards imported supplies as a result of the country's historic free trade policy, leaving trade in liquid milk as the traditional market for the home producer. This undoubtedly favoured the growth of private and public companies and stifled the development of co-operative enterprise. The UK has, nevertheless, been heavily dependent on the political process for the establishment of a framework for concluding commercial contracts for the sale of raw milk, which in turn have depended on delicate procedural rules for arbitration. In France, in very recent years, the largest dairy organisation, Besnier, which is a private, family-owned company and easily the largest dairy company in Europe, has achieved huge growth, to the point where it controls more than 20 percent of all French milk deliveries to dairies. This growth may have been assisted by the greater stability of milk supplies in a quota regime that takes out some of the key elements of variability from the contracting problem.
A final area of importance in the implementation of the European milk policy that undoubtedly affects policy delivery is the considerable extent to which some of the personnel of the industry's organisations become involved in the central processes of implementation. There are a number of inter-professional non-governmental industry discussion organisations, such as the farmers' unions through COPA, COGECA and the EDA, which have offices in Brussels and are in frequent discussions with Commission staff on the industry situation. The Commission has over the years been an open institution, and its handling of the more formal links for coordination with national governments has no doubt benefited considerably from its links with these functionally specialised bodies that represent private interests in the industry. The organisations in turn are able to act as channels for feeding back information quickly to their member marketing agencies or national unions to whom they must react, and in some cases they smooth the path of executives through the Commission's open doors. Indeed, it might be said that the very high degree of industry involvement is one factor that has enabled a system of such enormous complexity to work with tolerable smoothness.
The implementation framework for the EU milk support system is summarised in Chart 3. The chart draws attention to the fact that the system of implementation is essentially "three tier". At the first level are the Community institutions that are involved in policy making and objective setting, as well as in the implementation process. At the second level are the institutions of national governments (15 of them) each having some flexibility, albeit limited, in operating the system. At the third level are the marketing agencies who are responsible for their own strategies in a competitive market, and are affected by the normal factors in a market Structure-Conduct-Performance relation of investment, economies of scale, product differentiation, advertising and brand loyalty, research and development, and consumer demand for dairy products.
Chart 3: Implementation of the EU milk support system
