(A) The Implementation of Price Support
(B) The Implementation of Quotas
The Community's problem in fixing the level of support price in the milk sector is to fix the Target Price at a level that will be effective in supporting farm incomes but at the same time have regard to the related issues of budget costs and effects on markets and consumers. The price and income problem is compounded by the effects of output growth exceeding market growth, hence the surplus which the Community has had to reduce by quotas. In practical implementation of support prices by individual member states the Community has had to cope with market exchange rate instability throughout the whole period since Regulation 804/68 has been operative. Common prices are fixed by the Community in common currency units - UAs (agricultural units of account) until 1979 and ECUs (European Currency Units) since then. In the translation of UAs and ECUs into national currencies to operate the system, the Community, in conjunction with member states, has had to adopt a series of devices to prevent fluctuations in market exchange rates from distorting internal Community trade flows and influencing the level of intended farm support. Nevertheless, with a large part of farm costs affected by market exchange rates and reflecting divergent inflation rates between member states, devices to stabilise output prices by insulating them from fluctuating market exchange rates must compromise the community's income objective for the sector to some extent, however vague that objective is.
The Community has always been politically sensitive to the issue of the effects on the margarine market of supporting the price of butter. High butter prices in the main household market clearly present a growth opportunity for margarine manufacturers. At the same time, subsidised disposal schemes for butter that target food processing and manufacture created difficulties for oleomargarine manufacturers. Raising the support price of butter inevitably raises the cost of such disposal schemes whilst improving the opportunities in the main household market for margarine.
One way round this dilemma would have been to tax the sales of margarine to prevent the leakage of benefits intended for dairy farmers, and to force margarine manufacturers to contribute to the cost of disposal schemes in the dairy sector. Even mild forms of this obvious proposal, such as imposing the co-responsibility levy on margarine manufacturers, which has been made from time to time, have given rise to an inevitable political storm. In some circles such ideas are branded as monstrous and an unspeakable interference with consumer choice. Increasing margarine consumption and falling butter consumption, so the argument runs, is a consumer choice made largely on health grounds and is little connected with the price of butter. Such arguments reflect the advertising campaigns of the oleomargarine manufacturers, and the extent to which they are believed throughout society reflects the huge financial resources behind them. The interest groups at work in this area have been every bit as powerful as those of farmers. In recent years dealing with the dairy industry problems in this way would have been seen as attacking the established rights of the importers of vegetable fats and oils, and unacceptable within the framework of GATT.
The other arm of support for the milk price was also through a very weak market, that of skimmed milk powder. The effects of supporting the price of skimmed milk powder in the early stages of the common dairy policy was to increase production from less than 325 000 tonnes in 1960 to around two million tonnes by 1975, where it remained until quota control of the milk support and increases in other markets (particularly cheese) began to reduce it sharply from 1986 onwards. The huge increase in skimmed milk powder production between 1960 and 1975 occurred as a result of a decline in the use of liquid skim for stock feeding. A very large part of the disposal of skimmed milk powder (nearly 80 percent in the mid-1970s through to the mid-1980s) therefore took place as animal feed either for calf-feed replacers or pig feeds. Subsidies were high because skim milk powder is a relatively expensive source of protein and has to compete with other protein sources in the animal feed market. Not surprisingly, subsidies on skimmed milk powder for animal feed have been a large cost in the Community budget for support of the dairy sector, especially after the mid-1970s when it became apparent that there was a serious disequilibrium in this sector.
Whilst there may have been some leakage of benefit here, calf rearing can be seen as partly a dairy business. In so far as it often takes place in specialist veal-producing units, such units need a supply of calves, and a strong demand for calves maintains the price of calves and dairy farms' income from that source. If the price of calves slumps, the price of milk needs to be higher to maintain farm income and vice versa.
The animal feed industry has been a strong growth industry with specialist and powerful commercial interests involved that have been fully capable of punching their political weight. Attempts by the Commission to enforce a policy of incorporating relatively expensively sourced protein in the form of skimmed milk powder into animal feed mixes was fiercely resented by the industry and in the end abandoned. Gradually, however, the degree of disequilibrium has been reduced as cuts in quota (in 1986 and 1987) and sharply increased utilisation of milk for cheese making have reduced the production of skimmed powder from its maximum of 2½ million tonnes in 1984 to just under 1 ¼ million tonnes by the mid-1990s. It remains a highly volatile market, however, subject to sharp fluctuations that can arise from the numerous sources that influence animal feed prices around the world.
What is clear from this description of the problems and development of the two markets on which support measures are concentrated is the extent to which those measures have influenced the structure of the processing industry and its markets. The enormous growth until the mid-1980s of skimmed milk powder production, and the development of the animal feed business around it, could not have taken place without the Community's support policy. The use of liquid skim on farms for animal feed has been reduced to very small proportions, with wide repercussions. The policy thus necessitated investment in the building of modem butter and skimmed powder manufacturing plants, which affected both co-operative and private businesses throughout the industry and hence the structure of the policy delivery system. Through the removal of skim from farms, it has influenced the structure of farming, enabling dairy farms to become more specialised, with, for example, the establishment of specialist business units raising calves for veal production, which has influenced the trade in calves.
The IMPE price is supposed to represent 90 percent of the Target Price for 3.7 percent fat milk fixed by the Council. To establish it as a figure, two essential practical pieces of information are needed for which the Commission has, at times during the period of the policy, been reliant on the industry. These factors are the costs of manufacture of a tonne of butter and a tonne of skimmed milk powder (or a "processing margin"), and the product yield factors, i.e., the number of tonnes of milk (at 3.7 percent fat) to a tonne of butter (at 82 percent fat) and the number of tonnes of skim milk to produce a tonne of powder.
Whilst the costs have been carefully established on agreed accounting conventions, they have not been kept up-to-date in recent years, and are subject to a large amount of assumption and conjecture. Such areas in the implementation of policy can and do become battle grounds, and in recent years it is an area of dispute in which the industry has tended to retire from the field. The erstwhile ASSILEC (now EDA), which was responsible through its Costings Committee for supplying information, no longer undertakes the task. The model of the working of the system for 1994/95 is set out in Table 2 below.
The processing margins in Table 2 are "model" calculations with some historic grounding in fact. It has to be emphasised, however, that even if they were completely up-to-date there is no guarantee of the availability of the IMPE to all producers throughout the Community; costs vary from factory to factory, as do standards of rejection by intervention agencies, and variations in payment period can affect the effectiveness of the intervention prices themselves. The system is one of general market support and relies on the competitive marketing agencies to deliver a price to farmers at or close to the Target Price.
Table 2 Intervention Milk Price Equivalent (TMPE:) 1994/95
|
|
EC Commission Data |
||
|
Butter |
ECU/100kg |
SMP* |
|
|
Intervention Price |
271.80 |
|
170.20 |
|
Tender Price |
244.62 |
|
|
|
Less Processing Margin |
25.57 |
|
24.00 |
|
Raw Material Value of Product |
219.05 |
|
146.20 |
|
Divided by yield factor |
22.649 |
|
11.00 |
|
Raw material value for milk of 3.7 percent fat |
9.67 |
+ |
13.29 |
|
IMPE at 3.7 percent fat |
|
22.96 |
|
|
Fat: non-fat solids ratio |
42.10 |
|
57.9 |
|
EC Target price |
|
25.66 |
|
|
IMPE: Target price ratio |
|
89.50 |
|
* Skimmed milk powder.
Source: EC Dairy Facts & Figures 1994 Ed.
Attention has already been drawn to the fact that the ratio of fat to solids-not-fat elements in the support system detailed in Table 2 has changed over the years, with a higher proportion of the support progressively coming from skimmed milk powder. This has been determined by budget cost as much as by the market. While some of the loss of the butter market could have been avoided by reducing the price of butter and raising that of skim powder, the budget cost of this at a time when the milk sector took up more than one-third of the FEOGA budget made it prohibitive. Steps could be taken to change the ratio only when the world market prices for support products were favourable or when the Target Price was reduced by reducing the price of butter rather than of skim powder. Budget ceilings and world market conditions have had an impact on the practical implementation of the support policy, although the Community is such a big player on the very small world market that its surplus disposal cannot but affect the world market however much the Commission seeks in its conduct to act passively. The small size of the world market results from the conduct of policy by most of the world's major milk producing and consuming nations who isolate their producers and consumers from the volatile nature of world dairy product markets. (New Zealand, with its grass-based dairy economy, is the only leading milk-producing nation not to do this, and is heavily dependent on exporting although in global terms it represents a small part of world milk production.)
Institutional prices in the EC fixed in ECUs have to be translated into national currencies in the member states in order to operate the system, and it is at this stage that some of the biggest differences in practical implementation have arisen. This is another feature that has made the dairy policy "national" to a high degree, notwithstanding the involvement of the Commission in the details of running the support mechanisms. From the mid-1980s, alterations in "green rates of exchange", particularly devaluations of green rates, were decided each year as part of the Price Review package, and became one of the bargaining chips. As an illustration of the large differences that have arisen in producer prices, the end point of the system, Table 3 shows the prices in Germany and the UK in two years, 1992 and 1993. In those two years there was a difference of over 15 percent in producer prices between the two countries. Part of this difference (as will be shown later) arises through the market system, but it is compounded by some 5-6 percentage points as a result of differences in green and market rates of exchange in these two years.
The operation of the agri-monetary system has been changed over time, although its effects have not been removed. Until the completion of the Single Market programme, monetary compensatory amounts (MCAs) were calculated every week and imposed as levies or subsidies at borders to represent the difference between green rates of exchange (decided by the Council) and the market rate. The Single Market rendered MCAs an inappropriate device, and the "switchover coefficient" was invented to replace it. The switchover coefficient was used to realign the ECU green rates in order to prevent revaluations of currencies from lowering prices in national currencies and devaluations from raising them. Institutional prices thus remained stable in national currencies by changing green rates to make them so. This system was changed again after difficult negotiations in February 1995 by revaluing all green rates by 20.75 percent and raising institutional prices to match. It was intended to leave institutional prices in national currencies unchanged and so remove the threat to farm prices, particularly German, of the need to revalue the green rate for the DM and benefit producers in countries with weak currencies immediately in the event of devaluations in their market rates of exchange.
Table 3 Producer Prices Ex Farm 3.7 percent fat
|
|
Price per 100 kg |
|||
|
1992 |
1993 |
1992 |
1993 |
|
|
National Currency |
DM |
|||
|
Germany DM |
60.53 |
58.81 |
60.53 |
58.81 |
|
UK £ |
19.07 |
20.48 |
52.58a |
50.79b |
|
Percentage difference (Germany over UK) |
- |
- |
+ 15.1 |
+ 15.8 |
a£1= 2.7575 DM
b£1=2.481 DM
Sources: EC Dairy Facts and Figures 1994 Ed. and Bank of England Quarterly Bulletin.
The conduct of policy by national governments on green currency negotiations has demonstrated greater differences in attitude towards farm support than almost any other issue. With the exception of the UK, countries with weak currencies (which includes the UK, Ireland, Italy, Greece, Portugal and Spain) have been prepared to devalue green rates to raise farm prices. The UK has always argued that to do so adds to inflation, and has been prepared in some periods to accept very large differences between green and market rates. Countries with strong currencies (the Deutschmark bloc - Germany, Belgium, Luxembourg, Netherlands) have often fought hard against revaluations that would reduce prices to their farmers.
The total FEOGA budget expenditure on the milk sector in 1995 was 4.3 billion ECU and may be a little lower in 1996 at 4.2 billion ECU. A breakdown of appropriations for 1994 between the various market support activities is set out in Table 4, which shows that the largest expenditure is on export refunds.
Table 4 Budget Appropriations for the Milk Sector in 1994 (million ECUs)
|
Export refunds |
|
1992 | |
|
Storage of skim milk powder |
|
-5 | |
|
Aid for skim milk and powder milk for animal feed |
|
493 | |
|
Aid for skim processed into casein |
|
318 | |
|
Storage of butter and cream |
|
187 | |
|
Aid for butter |
|
575 | |
|
Intervention for other milk products |
|
108 | |
|
Other measures |
|
576 | |
|
|
of which: school milk |
111 |
|
|
|
promotion and publicity |
21 |
|
|
|
milk quality |
5 |
|
|
|
milk cessation premium |
395 |
4244 |
Source: EC Dairy Facts and Figures 1994 Ed.
The system of subsidies for the disposal of intervention products is implemented by a series of Commission Regulations issued each year on an on-going basis. For example, the subsidy rates for the sale of butter to "non-profit-making institutions" is fixed by a Commission Regulation, as are subsidies on butter and butteroil for the bakery sector, ice-cream manufacture and concentrated butter, and claims are approved and settled through national intervention agencies. Subsidies on the sale of skim powder for animal-feed use, and re-constituting and liquid skim, are fixed similarly by Commission Regulation. Intervention sales for animal feed are also tendered for and the terms are again fixed by Commission Regulations.
Analysis of FEOGA Budget expenditure can be made by country according to the various subsidy schemes, which enables a reasonably precise picture to be built up of where exactly expenditure goes. An analysis of this is set out in Table 5 for expenditure in 1993. This analysis emphasises the importance in the budget of export refunds, and shows that those countries exporting milk products outside the Community, particularly the Netherlands and Denmark, are responsible for a high proportion of expenditure, especially when compared to their proportion of deliveries of milk to dairies in the Community. However, some caution is necessary. Because the Netherlands is an exporting country, all of the export refunds administered through the Dutch Produktschap do not apply 100 percent to Dutch produce (see Ch IX), but partly to products from other parts of the Community moving through Dutch agencies and ports. Similar reasoning can apply to some other areas of support. For skimmed milk powder, for example, (not butter) intervention agencies can take the produce of countries other than their own; this could also affect the conclusions to be drawn from an analysis of Table 5. Nevertheless, the general point can be sustained that a relatively high proportion of budget expenditure goes to countries with high exports out of the Community.
The European Union instituted its quota regime with legislation at the eleventh hour on 31st March 1984. There was indeed much political opposition within the agricultural industry and in the Council of Ministers (Petit et al. [1987]). In the two Regulations themselves. Regulation (EEC) 856/84 which made the necessary changes to 804/68 and Regulation (EEC) 857/84, the word "quota" does not appear. Regulation (EEC) 856/84 cows' milk...." when "guaranteed total quantities" of milk in each member introduces "... an additional levy payable by producers or purchasers of state are exceeded. Regulation (EEC) 857/84 then enacted "... general rules for the application of the levy". The system was to apply immediately (as has already been noted in Section V) for five years starting on 2nd April 1984 - "as a matter of overwhelming public interest". (Preamble.)
Table 5 FEOGA Guarantee Section Expenditure on Milk and Milk Products by Country
|
|
1994 Million ECUs |
Percent of EU |
1994 Deliveries to Dairies (%) |
|
Netherlands |
995.1 |
23.4 |
10.1 |
|
France |
942.7 |
22.2 |
22.4 |
|
Germany |
677.5 |
15.9 |
25.3 |
|
Denmark |
381.5 |
9.0 |
4.3 |
|
Ireland |
320.2 |
7.5 |
5.1 |
|
Belgium |
311.2 |
7.3 |
2.8 |
|
UK |
290.7 |
6.8 |
13.8 |
|
Italy |
187.7 |
4.4 |
9.2 |
|
Spain |
74.12 |
1.7 |
4.8 |
|
Portugal |
57.9 |
1.4 |
1.4 |
|
Greece |
7.6 |
0.2 |
0.6 |
|
Luxembourg |
2.6 |
0.1 |
0.2 |
|
Total |
4 248.8 |
100.0 |
100.0 |
The introduction of this legislation, and its tone and manner, marks a drastic change of emphasis in Community thinking about the conduct of the CAP. Respect is still paid, as indeed it has to be, to the aims of the Treaty Establishing the European Community in Article 39. "The.... structural surpluses as a result of an imbalance between supply and demand... are imposing financial burdens and market difficulties which are jeopardising the very future of the common agricultural policy." (Preamble 856/84). The Preamble then goes on to state:
"... a careful examination of the different possible ways of re-establishing balance in the milk sector shows that, despite the administrative difficulties which its implementation may involve, the most effective method and the one having the least drastic effect on the incomes of milk producers is the introduction... of an additional levy on quantities of milk delivered beyond a guaranteed threshold."
The statements in the Preamble to this legislation are the most clear-cut up to that date that the aims of agricultural policy could not impose unacceptable financial burdens. At that stage the milk sector was taking more than one-third of the FEOGA Guidance sector of the budget; butter and skim powder intervention stocks had reached record levels and threatened to go higher; and world markets reflected the Community's difficulties. The Community, either through the Commission or the Council, did not then and has not since attempted to define what "reestablishing balance in the milk sector" means. It has not meant in practice that supply should be brought into line with internal demand, which, given the different imbalance in butterfat and solids-not-fat on the market, would be very difficult. Nor has it been defined in terms of an upper limit on acceptable expenditure on subsidies and disposal measures, influenced as they are by world markets. Nor yet is policy linked to any degree of self-sufficiency. All of these are uneasy grey areas with different interests and member states having their own agenda forming a difficult basis for achieving commonality.
One objective the policy was intended to achieve was that:
"the measures taken to cope with the increase in milk deliveries should not prevent structural changes which are required;"
To achieve this there has been considerable flexibility in the conduct of the system that gives rise to diversity.
To keep the immense detail of the conduct of quota policy within reasonable bounds each of the following main elements will be discussed in turn: (i) the base period; (ii) the use of Formula A and B; (iii) the distribution of quota to individual farmers; (iv) deliveries and direct-sales quotas; (v) the short-term transfer of quotas and leasing; and (vi) the land link and long-term transfer of quotas. It is in the quota policy in general and those elements in particular that, more than for any other policy, detailed conduct is in the hands of national governments, requiring national legislation to operate it, and so leading to different treatment between member states.
(i) The base period for total guaranteed quantities The total quantity to be guaranteed in the first year (1984/85) was the total deliveries to dairies in the calendar year 1981 plus 1 percent, i.e., 98.2 million tonnes. The additional 1 percent was "to allow for transition to the new system" and was removed in year two reducing the total guaranteed quantity to 97.2 million tonnes. In the tough negotiations in the Council that took place, Ireland (invoking the Luxembourg Convention) declared milk to be a vital national interest, arguing that "the dairy industry contributed directly or indirectly to about 9 percent of the gross national product, a proportion materially higher than the Community average;" (Preamble 856/84). Italy also argued that "in 1981 the collection of milk production was the lowest of the last ten years... the apparent increase in deliveries between 1981 and 1983 corresponds in large part to a structural change consisting of a reduction in direct (sales and) ... an increase in deliveries to dairies"; (Preamble 856/84). On the basis of these arguments, exceptions were made for Ireland and Italy and their reference quantities were fixed on the basis of deliveries to dairies in 1983, which was the first important difference in implementation between countries.
Because of the treatment of the Republic of Ireland it was argued (see Thatcher [1993] p.337) that the province of Northern Ireland should be treated similarly, and so the United Kingdom was given an additional 65 000 tonnes from the Community reserve (created to deal with Ireland, Luxembourg and the UK) for the benefit of Northern Ireland.
(ii) Formula A and B The general "rules Regulation" gave member states the option of two administrative formulae for operating the levy and managing the reference quantities distributed to individual producers. Under Formula A, the national reference quantity would be distributed to individual producers and the individual producer would be responsible for paying a levy of 75 percent of the Target Price on sales above the quota. Under Formula B, a levy of 100 percent was imposed on a dairy when the total reference quantities of its supplying producers was exceeded by their deliveries. The dairy in this case was responsible for paying the levy and collecting it from its supplying producers. Formula B had the advantage that if some producers did not fulfil their quota, those who over-supplied did not pay a levy until the quota of those who under-supplied had been used up.
The use of the two formulae did give rise to differences of treatment, and the rules were changed over the years to bring the two systems gradually into line in terms of their effect on individual farmers. Regional off-setting of "over and unders" was allowed under Formula A, and the levy rate changed to 100 percent (in 1987). Off-setting between regions (Formula A) and then between dairies (Formula B) was allowed, and the levy rate was then increased to 115 percent of the Target Price (1990). The effect of these moves was to make the management of reference quantities gradually a national matter.
(iii) The distribution of quota to individual farmers In order to allow flexibility, individual quotas, distributed directly or through dairies, could be based on sales in 1981, 1982 or 1983, but could not exceed the total national guaranteed quantity of 1981 plus 1 percent (857/84 Art. 2). Member states could create a reserve for handling special cases, and could retain part of such a reserve for handling contingencies. In handling claims from special cases, Germany and the Netherlands over-allocated and as a consequence had to adjust. In the UK all producers in the first year (1984/85) were given an initial quota of 1983 sales minus 9 percent (because of the increase in sales between 1981 and 1983). Nearly half of all producers appealed, and were invited to do so against a number of criteria according to whether they had development plans (with or without government grant) or whether special circumstances had affected their deliveries in 1983. Cases were heard by regional committees appointed for the purpose by the Ministry of Agriculture with powers granted by Parliament. Many farmers with development programmes on which money had been borrowed for capital investment did not get all the quota they needed and were hard hit throughout most member states, and there was undoubtedly some rough justice through the application of equal rules to everyone.
(iv) Deliveries to Dairies and Direct Sales Quotas The levy on sales above the quota for deliveries to dairies was also to apply to milk sold directly by farmers to consumers, or the milk equivalent when the direct sales were of dairy products. The quota fixed for direct sales was sales in 1981 plus 1 percent for producers selling by this method. Producers who sell milk both by deliveries to dairies and directly to the public have two quotas, one for each type of sale. It has to be said that this is probably the most difficult of all areas to handle administratively, and opens up the possibility of almost uncloseable loopholes, which has led to unequal treatment both within and between countries. In Belgium and Italy comparatively high levels of milk are sold in this way, and as a consequence those countries have had direct sales quotas (DSQs) that have been as much as 12 ½ percent of their deliveries quota. For producers with two quotas it is impossible to prevent transference from one type of quota to another. (This is recognised in Article 6 of 857/84 and the revisions to it.) While transference cannot sensibly be prevented at the individual farm business level, it has not proved possible to prevent it at the national level either; legal provision has had to be made accordingly (Commission Regulation (EEC) 2033/85 with numerous revisions).
(v) Short-term transfer of quota and leasing Formula B (the dairies quota) provided from the start a mechanism for short-term transfer of quota within each year. Modification to Formula A (individual farm quota) provided similar benefits regionally under this method of applying the additional levy. Further modification to both Formula A and B enabled regions and dairies to offset over-fulfilment and under-fulfilment in calculating levy liability that made the additional levy a national calculation.
Therefore a producer producing over quota in any year in a member state is in a risky situation. He will not know until the end of the year whether or not he will be subject to levy (at a rate since 1st April 1990 of 115 percent of the Target Price, which is well above the farm-gate price received by the vast majority of producers throughout the Community). Given the problems of calculating off-sets between dairies and regions, and the necessity to leave open national deliveries quota until producers with both DSQ and deliveries quota have made their decisions and their effect has worked through, it can be some time after the end of a year before a producer who is over quota will know whether he has a levy liability or not.
The management of quota is down to member states, and there can be no doubt that the degree of risk to which farmers are subject in managing their own quotas has varied a great deal between member states. Producers are dependent on the quality of information systems to inform them, especially in the closing months of the year, whether their dairy, region or country is likely to be over quota or not.
Some member states have introduced a leasing scheme for the temporary transference of individual quotas (the Netherlands, Belgium, Ireland and the UK are examples) which has effectively meant the setting up of a market for temporary quota transfer. The Commission legalised these arrangements (Commission Regulation (EEC) 1546/84 Article 8) albeit after their development had already started in some member states. The Commission has tried to standardise to some degree the way such a short-term transfer market should work by specifying how long the leasing market should remain open within the year. This has been a controversial matter as clearly the price of a leased quota is going to be affected by the assessed risk of being in a levy-paying situation as the year progresses. In some years the requirement has been for the market to be closed by the end of July, in some by the end of September, and in others by the end of December. The leasing market has tended to grow in the countries that have had such schemes. Quota leasing rose in the Netherlands from 1.1 percent of deliveries quota in 1989/90, its first year, to 4.3 percent in 1993/94. In the UK it was 1.2 percent of quota in 1986/87, the year of introduction, and 6.2 percent in 1993/94 (Bulletin No. 309 of the International Dairy Federation (IDF) 1996).
(vi) Long-term transfer and the land link The Council's initial legislation seemed to tie quotas to land. Article 7 of Regulation (EEC) 857 read as follows:
"Where a holding is sold, leased or transferred by inheritance, all or part of the corresponding reference quantity shall be transferred to the purchaser, tenant or heir according to procedures to be determined".
Gradually varying degrees of flexibility have become established through the interpretation of "a holding" of land on the one hand, and the words "all or part of the corresponding reference quantity" on the other. There have nonetheless been wide differences between member states in interpretation and degrees of flexibility allowed in the national systems of permanent transfer of quotas. Member states are authorised to place a "quota tax" on transfers if they wish to provide a national reserve for restructuring programmes or assistance to young farmers in getting established. (Germany, for example, has such a scheme, while the UK does not maintain a national reserve). The UK has had considerable difficulty with regard to transfers in cases of tenancy. Landlords claimed ownership of the quota; tenants argued that they had expanded milk output on the farm as a result of capital input and herd improvement. The matter had to be resolved by formula, giving landlords a basic 70 percent and varying the proportion according to tenant improvement (or otherwise) of the business, but allowing tenants 100 percent rights in purchased quota.
In some countries a maximum amount of quota transfer has been stipulated per hectare of land transferred. In the Netherlands, permanent transfer of 20 000 kg of quota requires the transfer of a minimum of 1 hectare of land; the land cannot be transferred back within the year of quota transfer or in the year following. In Germany, the rules have been much stricter. To begin with, land and quota could only be transferred proportionately to the original quota allocation to the holding when a part transfer was made up to a maximum of 5 000 kg per hectare. This was raised to 12 000 kg per hectare in 1990/91 - still much more restrictive than the Dutch level. In the UK fixed links between quota and land have not been adopted with the result that land has been transferred with quota in one year and re-transferred without quota in the following year.
The most developed quota transfer markets have become established, not surprisingly perhaps, in the Netherlands and the UK. Quota prices in the Netherlands are believed to be the highest anywhere in the Community, reaching levels of four times the milk price compared with two to two and a half times the milk price in the UK. The efficiency of Dutch milk production is well known and doubtless important in raising the quota price in relation to the milk price. However, a very important fiscal difference exists between the two countries: Dutch farmers are allowed to write off the cost of quota purchase against tax liability over five years; in the UK, quota purchase is treated for taxation purposes as expenditure on non-depreciating capital. In the Netherlands, there is therefore on UK principles a "government contribution" towards purchasing quota that obviously affects the level of prices and may well be the principal reason for the big difference between the two countries.
Denmark has gone out of its way to prevent the establishment of high capital values for quota. On 1st April 1984 Denmark established a new Danish Milk Board which was to perform two major functions: to buy all milk from all producers to re-sell to dairies; and to administer quotas as a single dairy for the whole of Denmark. It re-sells milk to the dairies to which producers are already affiliated without interfering with the local terms. The Board is a legal sole purchaser and is responsible for the super-levy. It has to keep producers informed throughout the year, allocate unused quota, and collect any levy due from those responsible if the national quota is exceeded. A producer is allowed a maximum of 10 percent over his quota in the distribution of unused quota in any year, after which super-levy will be collected when national quota is exceeded. The money is collected from milk payments in May and June.
Denmark has a national re-allocation scheme for long-term quotas, as far as possible operated through the Milk Board. Quota is bought up from producers wishing to leave milk production and re-sold to continuing producers at a price fixed politically - D.Kr 1.25 per kg. Demand exceeds supply, and the maximum quantity that a producer may purchase is 9 percent of his existing quota in any one year. Quotas can also be transferred with land in Denmark. A maximum of 10 000 kg of quota may be sold or leased with one hectare of land, and no land may be sold at all at a later date if this figure is exceeded. Politically there is a consensus in Denmark that capitalisation of quotas should be avoided as far as possible. Most parties would like to see the quota system abolished in the long run, a move that will be more difficult the more heavily capitalised are quotas. (H.H. Sørensen in Bulletin No. 309 of the IDF. 1996.)
It is clear from this general survey of the conduct of the milk quota policy in the EU that there is a great deal of variation between member states, some of which at least arises in response to local problems. Member states are required to report every step in the process of implementation to the Commission, and when approved these reports frequently result in amendments to the Council Regulation (EEC) 857/84 and in the Commission's detailed rules Regulation (EEC) 1546/88. Both these Regulations have been amended frequently at a rate of two, three and sometimes four times a year. The Commission has, nevertheless, been taken to task by the Court of Auditors (Official Journal, C12.Vol.37,1.5.1.94) for failure to respond quickly enough to national legislation and for failure to enforce sufficient uniformity to enable a reasonable move of the present system away from its national base to a full communautaire system.
The Court of Auditors have also argued that although quotas have brought about an improvement in the imbalance of supply and demand in the EU, which was their purpose, an imbalance still exists which could be further corrected if the Commission applied the rules for temporary transfer much more toughly. The Court suggested that temporary transfer, which gives a free allowance everywhere to exceed quota, should not be allowed; temporary transfer should, according to the Court, take place only when there is a leasing scheme in operation (pp.cit. para 4.50). The Court argues that this would reduce deliveries to dairies; improve producers' planning of production; and make the implementation across member states more uniform. The Commission have so far rejected this approach, arguing that it would inhibit structural development and preferring to improve the overall imbalance by small and gradual reductions in national reference quantities.
