Economic analysis of the effects of the expiry of the EU milk quota system

The study has been prepared by the Institut d'Economie Industrielle. The objective of the study is to provide a quantitative assessment of the impact of the abolition of EU milk quotas on the EU dairy sector. The impacts of four separate policy scenarios were assessed compared to a baseline scenario (that is considered to be continuation of the current quota system in the medium term). Two policy scenarios fit in the concept of 'soft landing', where milk quotas are gradually increased over a six year period before abolition, while two 'hard landing' scenarios assess the impact of an abrupt expiry of the quota system. In addition, sensitivity analysis has been carried out on a number of important assumptions that determine the outcome of the results. Preliminary results of the study were presented at the Stakeholders' Conference on the future of the dairy sector on 11 January 2007.The impact assessments of the 'soft landing' scenarios demonstrate that a gradual increase of quotas leads to a steady price trend towards a 'without quota' situation, enabling a smooth adjustment for producers and processors. On the contrary, the abrupt quota removal in the 'hard landing' scenarios generates a relatively big price shock and a more uneven development over individual Member States. From an efficiency viewpoint the 'hard landing' scenarios benefit low cost (competitive) producers, but the costs of adjustment, such as exit costs, might be higher. Even under the soft landing scenarios, the impact of a gradual quota increase on milk production varies largely among Member States leading to a partial fulfilment of the additional quotas at the EU level.