They
U.S. dairy surpluses are no
match for those across the
Atlantic, where the 10-nation
European Community is trying to
tarn back a tidal wave of milk. In
the following article, economists
Reed Friend and Ron Trostle of
USDA’s Economic Research
Service examine recent dairy
policy decisions in the European
Community (EC) and the im
plications of those decisions for the
EC and the United States:
In late March, after nearly a
year of debate, agricultural
ministers of the European Com
munity agreed on a variety of farm
policy and price reforms. Dairy
received special attention, with
two related decisions that mark a
significant departure from the
past.
The ministers voted to reduce
production by imposing milk
delivery quotas and to freeze the
official target price for milk at last
year’s level.
Up until this time, EC dairy
farmers could produce unlimited
quantities at guaranteed prices.
The guaranteed support prices
were routinely boosted every year,
providing a strong incentive to
expand output.
If the resulting EC dairy
problem found a sympathetic ear
in the United States, American
farmers can hardly be pleased
with the remedy. U.S. agriculture
has little to gain and somewhat
more to lose from the recent EC
actions.
These actions are expected to
reduce EC milk production by
about 5 percent, not nearly enough
to eliminate the surpluses or
curtail subsidized EC dairy ex
ports. EC production exceeds
usage by an estimated 23 percent.
The quotas, however, will en
courage the slaughter of less
productive cows, putting more
beef on world markets in the
months ahead. Fewer cows and
lower feeding rates also suggest
some reduction in EC demand for
feedstuffs, including com gluten
feed and citrus pulp imported from
the United States.
Dairying, EC style
The EC has more than twice as
many milk cows as the United
States and produces roughly 75
percent more milk. That’s far too
much for a population of around
285 million, 25 percent larger than
the U.S. population.
Part of the excess production
goes into diary products that are
subsidized for sale outside the EC.
In 1983, the EC exported nearly 3
million tons of cheese, nonfat dry
milk, and butter - more than 10
times the U.S. export volume of
these products.
Even with a large export
program, surplus stocks are huge
and growing. Inventories of nonfat
dry milk and butter reached a
record 1.9 million tons in
December 1983, compared with
U.S. butter and dry milk stocks of
less than 800,000 tons. To help
finance the surpluses, EC farmers
pay a 2-percent “co
responsibility” tax on their
deliveries to dairy processors, but
the tax hasn’t cut production.
Milk output has increased at an
average rate of 2.1 percent per
year since 1970, with 1983’s 3.7-
percent gain well above the
average. Like their American
counterparts, EC farmers have
boosted the productivity of their
cows through genetic im
provements in the herd, as well as
higher yielding management and
feeding practices. While milk cow
numbers held fairly steady at
around 25% million, annual yields
rose from 6,929 pounds of milk per
cow in 1970 to 9,689 pounds last
year.
Excess production in the dairy
sector, and in several other
have a massive dairy problem, too
commodities, has a price. The
price has escalated so much and so
rapidly that it precipitated a
budget crisis in the EC last year -
a situation that is not yet fully
resolved. And dairy is the EC’s
most expensive commodity price
support program.
Costs for disposing of surplus
butter and nonfat dry milk are
estimated at more than $4 billion
for 1983, about 30 percent of total
EC price support expenditures. In
1975, the tab was only $l.l billion.
Three-fifths of 1983’s expenditures
went for storage, export market
development, and subsidies for
feed use of skim milk and domestic
butter consumption. Two-fifths
went for export subsidies.
lime for action
Faced with mounting surpluses
and rising costs that were bumping
up against budget ceilings, the EC
recognized that it had to take
action. Of the two dairy program
decisions, the quota on milk
deliveries is the most significant.
The decision not to raise dairy
support prices in 1984/85 is largely
symbolic because the target price
is set in European Currency Units
(ECUs), an artificial currency that
is based on weighted averages of
members’ currencies. When ECUs
are converted to francs, pounds,
lire, and other national currencies
that farmers actually receive,
milk prices will rise in most of the
EC countries. The increases,
however, are not enough to keep up
with the costs of production as they
have usually been in previous
years.
The approval of 5-year quotas on
milk deliveries to processors
represents a much sharper break
with the past - and with the basic
philosophical underpinnings of EC
agricultural policy. EC
agricultural policy originated in an
environment of food shortages,
and it was intended to stimulate,
not inhibit, prodution growth.
Under the quota system,
producers will receive the
guaranteed price support for milk
deliveries falling within
established quotas. Milk deliveries
above the quota will be subject to a
levy or tax amounting to 75 percent
of the milk target price.
For the 1984/85 marketing year,
EC agricultural ministers ap
proved an overall milk quota of
99.2 million tons, plus a small
reserve divided among Ireland,
Northern Ireland (part of the
United Kingdom), and Luxem
burg. Together, the quota and the
reserve amount to 99.6 million
tons, 4 percent below the EC’s milk
deliveries in 1983. For the next 4
years, the overall quota drops to
98.4 million tons.
Most of the individual quotas for
member nations are based on their
1981 milk deliveries, plus about 1
percent. This means a substantial
cutback from 1983 production for
West Germany, the United
Kingdom, and the Netherlands.
For Ireland, Italy, and Greece, the
base is 1983 deliveries, with a small
upward adjustment.
The establishment of these
quotas is not a minor ac
complishment, given the dif
ferences in interests and the in
tense debate that prceded
agreement. Ireland, for example,
had asked that it be completely
exempt from any quota because its
dairy sector has been slow to
develop and could be frozen at a
lower state of technology relative
to other EC members. In one of
many compromises, Ireland was
guaranteed that is quota would not
be reduced.
Measuring impact
The impact of the delivery
quotas can be viewed from dif
ferent perspectives because there
are implications both for the EC
dairy sector and for other nations,
including the United States.
Most EC Members Produce Far More Milk Than They Can Use
5,550
175%
(Milk production in
i thousand metric
27 ’ 905 tons, 1983)
(Milk production as a
122% percent of use, 1981)
'Combined figures for Belgium and Luxembourg
Latest figures available on self-sufficiency by country
Within the EC, the relatively
small reduction in milk production
stemming from the quotas is not
expected to trim the number of
dairy farms. An estimated one
third of EC farmers produce milk
for sale off the farm. Pressure to
support farm incomes by main
taining high support prices for
milk will, therefore, remain
strong, and the EC may be more
likely to give in to such demands
under the security umbrella of a
quota.
To meet on-farm needs and to
ensure that they fulfill their
quotas, EC dairy farmers will
probably continue to produce more
milk than they deliver to dairies.
However, with the 75-percent tax
on additional marketings, milk
producers can be expected to cut
their output close to their quotas.
In 1983, milk deliveries from EC
producers to dairy prcessors
totaled 104 milliot metric tons,
about 93 percent of the 112 million
tons of milk produced. Domestic
use, excluding stock accumulation,
is eistimated at 91 million tons, so
the EC producers about 21 million
tons more than it needs to meet
internal demand. If the quota
reductions in deliveries translate
into a comparable cut in
production, the surplus will be
reduced only about one-fourth.
Consequently, the EC will still be
burdened with large surpluses, and
it will remain the world’s largest
exporter of dairy products.
Trade implications
The reductions in milk output
will be achieved through a culling
of less productive cows and a
cutback in the feeding of con
centrates. Culling is likely to get
the most emphasis because the
program lasts for 5 years. Most
cull cows will probably be sold for
slaughter rather than converted to
suckling cows because the
typically small EC dairy farms do
not have the graxing land
available for producing beef
animals.
With fewer EC dairy cows on
feed and more slaughter cow meat
coming to market, the direct trade
implications for exporters of feed
and lower priced beef are not
favorable. If many cows are
slaughtered, this could depress
world prices and add to the already
burdensome EC stocks of beef.
More significant to the United
States is the impact on EC imports
of feedstuffs for its dairy herd. It
must be noted that not only will
4,100*
153%
milk production be reduced, but
the 2 to 4 percent annual growth
rate in milk output, characteristic
of the last decade, will cease.
EC dairy rations make heavy
use of corn gluten feed and citrus
pellets imported from the United
States. Lst year, the EC purchased
3.8 million tons of U.S. corn gluten
feed and meal and a half-million
tons of U.S. citrus pellets.
Another U.S. concern is the
recent EC decision to negotiate
controls on imports of U.S. corn
gluten feed through the GATT
Dairy Sector Comparisons for 1983;
EC versus USA
Cow milk produced (million metric tons)
Number of milk cows (millions)
Average yield per cow (pounds)
Average number of cows per farm
Annual rate of increase in milk production
since 1970 (percent)
Milk target price ($ per 100 lbs.)
Butter stocks (thousand tons)
Nonfat dry milk stocks (thousand tons)
Per capita butter consumption (pounds)
Per capita liquid milk consumptions (pounds)
Butter exports (thousand tons)
Cheese exports (thousand tons)
Nonfat dairy milk exports (thousand tons)
At 1980 exchange rates, the current EC target price would be $17.29.
5,425
128%
13,090
135%
27,000
132%
Italy
11,121
*
(General Agreement on Tariffs
and Trade). The United States has
refused to voluntarily limit its
exports and has lodged a strong
objection to the EC action.
The only potential benefit to U.S.
agriculture relates to U.S. dairy
exports, which are relatively small
in volume and value. And even this
benefit won’t materialize unless
the EC cutback in milk production
eventually leads to reduced
European diary exports and im
proved world prices.
European United
Community States
112.1
25.5
9,689
14.3
2.1
10.91
866
1,006
14.1
278
804
1,178
957-
690
80%
63.5
11.1
12,587
35.7