EU dairy policy reforms: Luxembourg reform, WTO negotiations and the quota regime

The EU dairy policy has undergone several changes over its near forty year life. The most significant of these changes were the introduction of the milk quotas in 1984, and more recently the 2003 CAP reform (Luxembourg Agreement). Whereas since the MacSharry reform of 1992 several other agricultural sectors were already subject to a regime-switch implying the reduction in price support partly compensated by direct payments, the dairy sector had initially be largely exempted from this policy turn to increase the competitiveness of EU agriculture. The Luxembourg Agreement not only deepened the reform of the 1990s, but further completed it by including the dairy sector, as well as by decoupling the direct payments from production. As regards dairy it implied significant declines in support prices for butter and skimmed milk powder, partly compensated for by newly introduced milk premiums. The milk quota regime was prolonged till 2014-15. In the upcoming evaluation of the CAP (Health Check in 2008) the future of the quota regime will be at the core of the discussions. Many countries are now in favour of an expiry of the quota regime.With these policy changes the EU dairy sector is set on a more market-oriented course, improving its chances at the world markets. In addition, the EU has been enlarged with ten new member states in2004 and another two in 2007. All of them are dairy producing countries with some heavily dependent on milk production (European Commission, 2006). This significantly increased both the productioncapacities as well as the demand for dairy products in the EU. It also increased the EU’s importance as a big player in the world’s dairy sector. With the ‘transition’ process in the new member states stillgoing on and supply management likely to be abandoned in the future, the EUs role in dairy trade might significantly change over time. However, trade will not be influenced by policy changes within the EU only. It will also be affected by what happens on the international scene, in particular by theimpacts the outcome of the ongoing Doha Round of the WTO trade negotiations may have on trade policies world wide. This article aims at three goals. First an assessment is made of the 2003 dairy policy reform and itsimpacts both within the EU and on the EU’s trade in dairy products. Second, the impact of further trade liberalisation will be analysed by simulating a new Doha Round agreement on dairy trade policies. Given a new WTO agreement and the likely abolition of the milk quota regime in 2014-15, asa third scenario we look at the implications of a gradual phasing out of the milk quota system.