IEEP CAP Health Check Review: Dairy

This is one of four briefings written by IEEP to analyse the outcomes of the 2008 CAP Health Check. One briefing provides an overview of the main outcomes, another examines Article 68 and a third examines cross compliance. This briefing examines the outcomes for the dairy sector.

German Pressure Results in Dairy Sector Concessions

One of the most noticeable aspects of the Health Check compromise text is the extent to which many of the amendments relate to the dairy sector. It appears that Germany, which has publically prioritised the creation of a ‘milk fund’, has been particularly influential in this regard, responding to pressure exerted by the German dairy industry. According to press reports, Germany plans to use the additional funds raised through modulation as well as ‘unspent amounts’ from the national reserve to create a milk fund which is estimated to be worth in the region of €350 million in 2013. The aim of this fund is to finance accompanying measures to support dairy farmers as EU milk quotas are phased out by 2015.

German pressure appears to have resulted in amendments to the Health Check proposals with the effect of expanding the scope of the Commission’s ‘new challenges’ to include accompanying measures for the dairy sector.

German pressure appears to have resulted in amendments to the Health Check proposals with the effect of expanding the scope of the Commission’s ‘new challenges’ to include accompanying measures for the dairy sector. This challenge is qualitatively different from the others, in that it is transitional in contrast to the more complex and longer-term nature of the environmental challenges. That said, it may serve to dilute the environmental effects of the additional funds as, in principle, Member States will be able to allocate the majority of additional funds raised through modulation towards measures with no explicit environmental objectives. Out of the four types of accompanying measures specified for the dairy sector, three relate primarily to competiveness and only one to agri-environmental measures, such as grassland premia and support for more extensive forms of production, including organic.

The Germans have negotiated successfully in a number of key areas such that the final outcome enables them to establish a milk fund whilst minimising additional national spending commitments. Germany opposed the higher rate of modulation proposed by the Commission, and appeared to play a significant role in setting the rate of national co-financing at 25 per cent rather than 50 per cent, as originally proposed. To compensate for these lower rates of modulation and of co-financing, Germany reportedly played a pivotal role in persuading the Commission to agree to allow ‘unspent’ CAP funds to be used to address the ‘new challenges’.

In the absence of a milk fund, this money would have been returned to the German Finance Ministry due to Germany’s position as a net contributor to the EU budget. It appears that the Ministry has reluctantly agreed to concede these funds in the face of pressure exerted on the German government by influential stakeholders in the German dairy industry, including the German Federal Dairy Farmers Association (BDM).

Is the Dairy Focus Justified?

The EU dairy sector has experienced a significant degree of market volatility in recent years due to variations in the milk price and significant increases in the cost of inputs required for dairy production (for example, inorganic fertilisers, feed crops, energy, etc). Whilst Germany is the largest milk producer in the EU accounting for approximately 20 per cent of production in the EU-27, it is by no means clear that such factors have affected Germany to a greater degree than other Member States. For example, a recent study for DG Agriculture on the impacts of the expiry of EU milk quota indicates that German milk production will increase by 5.1 per cent between 2008 and 2014, compared to an EU-27 average of 4.0 per cent, on the basis of modelling results.

Along with other Member States, Germany has experienced a steady long-term decline in the number of its dairy holdings balanced by an increase in the average farm size. By 2007, the number of dairy holdings in Germany had declined by 101,070, a reduction of 17 per cent since 2003, whilst average herd sizes stood at around 40 dairy cows per holding (slightly above the EU-15 average). However, there are significant regional variations in the structure of the German dairy sector which may have influenced the German position in the Health Check. For example, dairy holdings in Bavaria and Baden Württemberg, many of which are located in Less Favoured Areas (LFAs), account for about 60 per cent of all German dairy holdings, and are on average smaller (25 - 27 dairy cows per holding) and therefore more vulnerable to dramatic structural changes as a result of increased liberalisation. In contrast, dairy holdings in the East of Germany are much larger as a result of collectivisation policies dating to the Communist era.

Typically, dairy is one of the more intensive forms of agricultural production. Hence, the environmental impact of the German milk fund will depend very much on the how the funds are actually spent.

From an environmental perspective the extent to which dairy production is genuinely associated with environmentally beneficial management practices (for example, extensive grazing) either in the LFA or more generally is unclear. Typically, dairy is one of the more intensive forms of agricultural production. Hence, the environmental impact of the German milk fund will depend very much on the how the funds are actually spent. For example, expenditure on investments which mitigate the degree of diffuse pollution attributed to the dairy sector, or increase nutrient efficiency, could be positive in environmental terms, whilst the impact of area payments or agri-environment pasture payments would depend on the environmental conditionality attached to these payments.

1 comment posted

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PUBLICATION DATE

02 Dec 2008

AUTHOR

IEEP

FURTHER INFORMATION

The Institute for European Environmental Policy coordinates CAP2020. It is an independent not for profit institute which undertakes research in a number of policy areas including agriculture and rural development.


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