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close this bookThe political economy of the common market in milk and dairy products in the European Union. (FAO Economic and Social Development Paper - 142) (1997)
View the document(introduction...)
View the documentPreface
View the documentAcknowledgements
View the documentI. INTRODUCTION
View the documentII. THE THEORY OF ECONOMIC POLICY ANALYSIS
View the documentIII. THE DECISION-MAKING MACHINERY OF THE EU
View the documentIV. THE AIMS OF POLICY FOR AGRICULTURE AND THE MILK SECTOR
View the documentV. AN OUTLINE OF THE EU SUPPORT SYSTEM FOR MILK
View the documentVI. OTHER ASPECTS OF THE POLICY FOR THE MILK SECTOR
View the documentVII. THE IMPLEMENTATION FRAMEWORK OF THE EU MILK SUPPORT SYSTEM
Open this folder and view contentsVIII. PRACTICAL IMPLEMENTATION AND CONDUCT OF POLICY
Open this folder and view contentsIX. PRACTICAL CONDUCT IN THREE MEMBER STATES
View the documentX. ECONOMIC ANALYSIS OF POLICY
View the documentXI. WTO/GATT AND THE FUTURE OF MILK POLICY
Open this folder and view contentsREFERENCES
Open this folder and view contentsANNEX I. MANY A SLIP: STUDYING POLICY DELIVERY SYSTEMS¹
View the documentAPPENDIX to ANNEX I

IV. THE AIMS OF POLICY FOR AGRICULTURE AND THE MILK SECTOR

The aims of policy in the milk sector are very specifically linked to the fulfilment of the aims for agricultural policy as a whole set out in Article 39 of the Treaty of Rome. The aims of the policies to establish a common market in each of the main agricultural commodities for which a support price regime exists are set out in the Preamble to the Regulations and in the Articles of the Regulations themselves. In the case of milk the basic Regulation to establish a common price regime is Council Regulation (EEC) 804/68 which was enacted on 29 June 1969. Although there have since been more than 50 amendments to this Regulation that have changed most its 37 Articles, the Preamble and Article 3, which deal with its aims, remain unchanged. The Preamble contains 19 paragraphs, several of which for present purposes need to be looked at in some detail.

The specific link between Regulation (EEC) 804/68 and the aims of the Treaty of Rome (the “contract obligations” in Buchanan’s terminology) is made in the words of the Preamble where they are associated with the principal elements of the system.

- Whereas the aim of the Common Agricultural Policy is to attain the objectives set out in Article 39 of the Treaty; whereas, in the milk sector in order to stabilise markets and to ensure a fair standard of living for the agricultural community concerned, it is necessary that the intervention agencies continue to take intervention measures on the market, such measures however to be standardised so as not to impede the free movement of the goods in question within the Community.

- Whereas intervention measures must be such that the proceeds of aggregate milk sales tend to correspond to the common target price for milk delivered to dairy; whereas, to that end, in addition to intervention in respect of butter and fresh cream, other community intervention measures are required to enable the best return to be obtained from milk proteins and to support the prices of products which have special importance in determining producer prices for milk.

- Whereas the creation of a single Community market for milk and milk products involves, apart from a single price system, the introduction of a single trading system at the external frontiers of the Community; whereas a trading system including levies and export refunds, combined with intervention measures, also serves to stabilise the Community market, in particular by preventing price fluctuations on the world market from affecting prices ruling within the Community; whereas therefore provision should be made for the charging of a levy on importing from third countries and the payment of a refund on exports to such countries, both being designed to cover the difference between the prices ruling outside and inside the Community.

It will be noticed that the above paragraphs single out some of the objectives mentioned in Article 39 of the Treaty for reiteration but not others. They do not reiterate Article 39.1 (d) and (e) “to assure the availability of supplies” (the Six were more than self-sufficient in milk in 1969) and “to ensure... supplies reach consumers at reasonable prices”. They do, however, repeat 39.1 (b), the need “to ensure a fair standard of living for the agricultural community concerned” in identical words. It might be noted here that in this repetition it stops short of the last phrase of Art. 39.1 (b) which reads “in particular by increasing the individual returns of persons engaged in agriculture”. The import levy/export refund system is specifically related to Article 39.1 (c) the need “to stabilise markets” which the Preamble then spells out in detail.

The price of milk is critical to the incomes of small family farms in the northern part of the Community, and it would seem to be a fair reading of the aims of the policy for price support in the milk sector as set out that the first and main objective is income support “for the agricultural community concerned”. This is the target group of beneficiaries and this interpretation is totally consistent with the remarks quoted earlier of Mr Sicco Mansholt at the Stresa Conference in 1958. The other emphasis in the Preamble is on the free movement of goods within the Community’s borders. The Preamble in its penultimate paragraph reiterated once again the objectives set out in Article 39 of the Treaty and also Article 110.

- Whereas the common organisation of the market in milk and milk products must take appropriate account, at the same time, of the objectives set out in Article 39 and 110 of the Treaty;

The latter article emphasises that the free movement of goods within the Community will increase the competitive strength of undertakings within member states. In other words, by freeing trade between member states and creating a single European market, the marketing chain would be made more efficient through its exposure to competition. The support per se is aimed at achieving “a fair standard of living for the agricultural community concerned”.

As the policy of creating a single market is aimed at promoting competition and therefore reducing marketing margins, it might be said that it is also seeking to promote the objective of reasonable prices to consumers. Whilst this aim is easily deducible, it is not spelt out and repeated several times in the same way as the objective of support for farm incomes. Indeed, it would be easy to show how most of the documents emanating from the Commission in the last twenty years reviewing progress and dealing with reform of the CAP have given much space to the analysis of farm incomes.

It is not intended to review the immense amount of literature and discussion documents on the farm income problem and the difficulties for policy in dealing with it. A good discussion (with a long bibliography) can be found in Berkeley Hill [1989] in which the problem is discussed both for the Community and other countries, some now in and some outside the Community. That the Community objectives in policy statements for farm incomes are vague is now well understood. The Community has never defined “income” for farmers, nor the “agricultural community” to which income is related. Nevertheless, considerable effort is spent in collecting data on farm accounts from which a whole series of definitions of “farm income” can be devised. The Farm Accountancy Data Network for the Community (FADN) defines farm types on a consistent basis across the Community and the samples collect data on a consistent accounting basis for each type; but in an area as large as the Community farm type and different income definitions can have widely differing significance in different regions. The most difficult technical problem is the sampling of farms of any type or within any region which, if done non-randomly, can give useless results. That Community policy, however, does not define the “agricultural community” it is seeking to support is also fundamental. Structural change is reducing the number of farmers and farm families rapidly, and those farms that remain are getting larger. This affects the average farm income as a statistic, but pays no attention to the fact that some of those that grow through amalgamation achieve satisfactory income, while those that do not sink into poverty and eventually leave the industry. The numbers involved in milk production have shown a sharp decline in every country, whilst average herd sizes have grown.

Putting these difficulties to one side, it will be accepted for present purposes that the targeted group of beneficiaries of the policy for the milk sector are the producers of the basic commodity behind the farm gate. The other prime aim is the establishment of a free market in milk and milk products with no barriers to trade within the Community’s borders. Apart from the abolition of tariffs and all border taxes, the Articles of 804/68 in the early years sought to dismantle all special local marketing arrangements for liquid milk and related products in order that there should be no distortion of competition in the production of the intervention products, as well as products that were more widely traded than liquid milk. The prices to producers throughout the Community would then reflect closely what was intended in the support system. The creation of such a single market in milk and milk products was intended to have the favourable effect of increasing the competitive strength of organisations in the marketing chain and hence promote improved efficiency between the farm gate and the consumer. Benefits would be felt in lower prices to consumers or in reductions in the cost of support or both.

At this point we might take note once again of the political decision-making process in the EU in the enactment of policy. The Council of Ministers that enacts policy for agriculture is the Council of Agricultural Ministers who answer for their governments particularly to their agricultural populations. In many EU countries and especially in key areas the agricultural population is a politically sensitive group, which has often given Ministers of Agriculture a big role in government. The exception is the United Kingdom where the Minister of Agriculture, Fisheries and Food retains Cabinet rank now mainly because of his importance in EU Council decisions. Given this political position, it is not surprising to find the emphasis in the statement of policy aims being on farm incomes (albeit vague) with the aims of establishing the single market being more muted or just implied.

The most precise statement of the aim of the price policy regime for the milk sector is that:

“...intervention measures must be such that the proceeds of aggregate milk sales tend to correspond to the common target price for milk delivered to dairy:...”

This aim is further specified in Article 3:

1 “...a target price for milk shall be fixed for the Community in respect of the milk year....

2 The target price shall be that which it is aimed to obtain for the aggregate of producers’ milk sales on the Community market and on external markets during the milk year.

3 The target price shall be fixed for milk containing 3.7 percent fat, delivered to dairy.”

Whatever the vagaries in the income objectives of the Treaty and in measuring the improved competitive strength and efficiency of marketing organisations through the creation of a single market, the narrower aim of the milk policy to achieve a Target Price (determined at the beginning of the year) for milk of 3.7 percent fat delivered dairy is quite specific. It is only qualified in the Preamble wording by the phrase “tend to correspond to the target price...” and in Article 3 by the words “aimed to obtain for the aggregate of producers’ milk sales” (my italics).

From an analyst’s viewpoint the level of conjecture is at least narrowed down. So far as the data permit for member states and organisations, producer milk prices can be compared with the Target Price to test whether the principal stated aim of policy is being achieved. Data on “the proceeds of aggregate milk sales” for the Community as a whole do not exist, but at least a qualified judgement can be made from the use of Eurostat farm price statistics supplemented by other data. Nevertheless, the drafting of the Regulation is sufficiently flexible to allow policy makers some escape if the Target Price is not always achieved everywhere within the Community - the Target Price is the aim of policy but not guaranteed.

Article 39

1 The objectives of the common agricultural policy shall be:

(a) to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour;

(b) thus to ensure a fair standard of living for the agricultural community, in particular-by increasing the individual earnings of persons engaged in agriculture;

(c) to stabilise markets;

(d) to assure the availability of supplies;


(e) to ensure that supplies reach consumers at reasonable prices.

Article 39 of the Treaty is reproduced above partly for ease of reference, and because it is central to the study and understanding of policy. One of the themes of this study in the examination of the Preambles to the Community’s legislation in the conduct of policy is that the secondary aims of policy have shifted over time. Whilst the core aims of the Treaty remain, the aims in legislation reflect not merely the changing market circumstances but also the changing political groupings and subsidiary aims of national participants that have influenced the conduct of policy. This applies, for example, to the enlargement of the Community, particularly in 1973, when, with the accession of the UK, the Community took a different view (as will be seen later), on policy towards liquid milk pricing. A change of emphasis is also seen in the introduction of quotas, which took considerable political manoeuvring to achieve. The Commission regarded quotas as the only means left to safeguard the core aims of the Treaty. Germany and the Netherlands wanted quotas; the UK wanted to control budget spending; France and Ireland did not want quotas at all; whilst Italy hardly took the debate seriously until the very last minute. (For an account of the position taken by all parties to the debate between July 1983 and March 1984 see Petit, M. et al [1987].) The Maastricht Treaty of European Union also shifted the ground somewhat as it specifically linked agricultural policy to the achievement of closer economic integration and social cohesion through the reduction of “disparities between the levels of development of various regions and the backwardness of the least-favoured regions including rural areas” (Article 130a). The FEOGA budget is one of the Community Funds to be used to support the achievement of these objectives (Article 130b).

Perhaps, the most fundamental change that has still to be worked out in terms of the conduct of policy for milk is the EU’s Schedule of Commitments in the Agreement on Agriculture in the 1992 Uruguay GATT Round. The Community has agreed to a reduction in “the aggregate measure of support” over five years; to “tariffication” of its variable levies with a five year reduction programme; to a quantitative restriction on the payment of export refunds; and to market access for importers increasing from a minimum 3 percent to 5 percent of total milk requirements in six years starting from 1995/96. These matters, together with the Agreement on Sanitary and Phytosanitary Measures which is intended to subject barriers to trade by these means to more rigorous discipline and scientific investigation, are likely to have a considerable impact on the conduct of policy in the EU milk sector. The GATT Agreement in Agriculture is itself the result of extreme political pressures brought upon the Community from both groups within and other Contracting Parties without who seek to gain by modifying the CAP. The results have still to be worked out, but the core aims of the EU constitution in Article 39 and more recently in Article 130 will remain. These matters will be examined further in the final chapter of this study.