The reforms could result in the price of skimmed milk powder falling by 15 per cent over the next four years. The initial phase of this process has already begun with the lowering of the EU's intervention price from 1 July 2004.
Overall effects on EU production and consumption from CAP reform are likely to be small because support price cuts are limited to a handful of commodities. But skimmed milk powder is a commodity that is likely to be most affected, because under the CAP reform, support prices for this particular commodity will be cut.
However, Arla's ingredients division, which is responsible for Arla Foods' sales of milk powder, is optimistic that the company has put in place an adequate strategy.
"Once the Vimmerby plant in Sweden starts producing the more profitable full-cream milk powder, we will reduce the production of skimmed milk powder by 20,000 tons," said ingredients division sales director Jais Valeur.
"We also intend to discontinue sales to some markets where we sell skimmed milk powder at unsatisfactory prices and switch sales to Europe instead. To avoid dramatic price falls, we will have to look closely at our product range and costs."
Valeur points out that global demand for skimmed milk powder is currently strong. This is partly due to the fact that European milk volumes have been almost 2 per cent below normal up until May, and that Australian volumes have fallen by 2.5 per cent because of last year's drought.
In addition, European dairies have cut their production of skimmed milk powder by up to 20 per cent in the peak season because of the impending price falls stemming from the EU reform.
But although Arla has done much to restructure its operations, it accepts that it has not done enough to offset the price falls wanted by the EU.
"These circumstances upon which we have no influence mean that the effects of the EU reform will be delayed for some months, but they'll come," said Valeur.
In June 2003, the European Union (EU) adopted a programme of agricultural policy reform, building on earlier agricultural policy reforms enacted since 1992. This program was expanded to include additional commodities in 2004.
The policy changes under these recent reforms will dramatically alter the way that producers are supported and alter the incentive structure for EU farmers, but are likely to have modest impacts on EU production and consumption.