A gradual increase in milk production allowances would ensure steady prices for producers and processors during the switchover towards a no quota system, preventing a possible price shock, says new research by the Institut d'Economie Industrielle.
The report's findings are likely to support current EU policy on gradually lifting production quotas for milk as part of plans to improve competitiveness of the without having to rely on government support.
The study, which has been funded by the European Union, looked at four different scenarios for phasing out the quotas.
Two of these plans are identified as being 'soft landing' plans that propose a gradual quota increase annually of between either one or two per cent, ahead of a complete repeal of the quotas between 2015 to 2016.
Two other strategies considered by the report, which were viewed by the authors as 'hard landing' solutions, propose removing quotas either by 2009 to 2010, or 2015 to 2016 without gradually increases in production.
The report suggested that adopting the 'hard landing' solutions would offer some benefit to lower cost dairy producers, though the expense of adjusting to non-quota production would possibly be higher.
By contrast, although the impact of gradual quota increases was expected to vary among member states, the quota increases would be partial fulfilled, the researchers claimed.
Quota reform impacts
The report said that all the propsed changes to quota reforms were likely to be felt much more in the market for dairy ingredients than in final consumption products like fresh dairy goods, liquid milk and cheeses.
Researchers also claimed that in the event that the EU continued to use export refunds on butter, which were temporarily revoked last year due to high dairy costs, an extended presence of EU producers on the global commodity market would affect global price.
These expected declines would be expected to be in line with cost reductions within the EU, the researchers said.
The European council has already implemented a two per cent increase in production quotas as of 1 April this year.
A spokesperson for the Commission added that further increases are to be proposed during next month's Common Agricultural Policy (CAP) reforms 'health check', with a vote on the issue to then take place in November.
The aim of the reforms is to create a dairy industry that is not reliant on government protection to remain efficient, while also ensuring balanced supply and demand for farmers and processors.
However, increasing global demand and declining supply have combined to drive record hikes in prices for conventional dairy commodities, affecting the margins of a number of processors.
Total global milk production for 2008 is projected to rise to 188.6bn pounds (lbs) from 184.3bn lbs last year, according to findings by the US Department of Agriculture (USDA).
Despite this expected growth, sustained high demand for dairy, both on a domestic and international basis, is expected to ensure milk prices remain high.
In this market, the EU Commissioner for agriculture and rural development, Marianne Fischer Boel, believes there is even less reason to use a quota system.
"Milk quotas have played an important role in the past in keeping supply and demand in balance," she stated. "But since the CAP reforms came into effect, farmers are free to produce for the market and quotas are increasingly an anachronism."
With the quotas set to be fully phased out by 2015, Fischer Boel said that the dairy industry now needed to establish what sort of transitional measures would be required to remain profitable.
She added that these measures would be one of the key topics in the upcoming 'Health Check'.