Select Committee on European Scrutiny Ninth Report



Special Report No. 6/2001 of the Court of Auditors on milk quotas.
Legal base: Article 248(4) EC
Document originated:
Forwarded to the Council: 2 October 2001
Deposited in Parliament: 23 October 2001
Department: Environment, Food and Rural Affairs
Basis of consideration: EM of 2 November 2001
Previous Committee Report: None
To be discussed in Council: No date set
Committee's assessment: Politically important
Committee's decision: Cleared, but relevant to a debate on the mid-term reforms of the dairy regime


  18.1  Largely because of its high support prices, the Community has for many years had a substantial milk surplus, despite the large sums it has spent on subsidising consumption both internally and on its export markets. As a result, the milk quota regime was introduced in 1984 — when supplies amounted to 120% of internal demand — in an attempt to reduce the imbalance by capping production at a certain level. This involved the introduction of "reference quotas" of milk (individual quotas) for producers, based on the distribution at national level of a reference quantity fixed for each Member State by the Council, and with production above quota being subject to a dissuasive "superlevy".

  18.2  Initially, the total of the national quotas for the (then) 10 Member States was established at 103.7 million tonnes, broadly equivalent to average deliveries in the years 1981-83. However, as a result of subsequent decisions, the quota was reduced by 8% in the nine year period to 1993. Apart from a one-off allocation in 1993-94, which largely benefited Greece, Italy and Spain, no further adjustments to national reference quantities have been made since, and, after allowing an additional 8.4 million tonnes for the subsequent accession of Austria, Finland and Sweden, the quota in the period to 1998-99 was stabilised at around 117.5 million tonnes. However, more recent decisions arising from the Agenda 2000 reforms provided for a 1.8% increase between April 2000 and April 2001, and a further increase of 1.28% as from 1 April 2005.

  18.3  Transfers of quota are not allowed between Member States, but are permitted between producers within a Member State, subject to rules laid down by the Member State in question. In reality, the approaches adopted have ranged from an almost free market in the trading of quota to central control of all transfers on the basis of such criteria as rural, social or economic development.

  18.4  This report by the Court of Auditors seeks to assess the effectiveness of the quota regime in controlling Community milk production and achieving market equilibrium. In particular, it examined (a) the extent to which the Commission has correctly monitored implementation and taken the steps needed to reinforce the regime in the case of infringements; and (b) its implementation by Member States, particularly as regards quota assignment, controls on declarations of milk produced, checks on sellers and purchasers, and collection of any superlevy due.

The current document

— Impact of the quota regime on the Community milk market

  18.5  In this section of the Court's report, it first notes that milk production has stabilised at around 120 million tonnes since 1993, with most Member States having decreased their production by about 10% in relation to 1984. However, reference quantities for deliveries to dairies have been systematically exceeded by about 1% since 1995-96, due essentially to the quantities delivered being adjusted to reflect increases in the fat content of the milk. It also comments that the increase in quota level occurred despite the structural surplus in the Community market, with (for example) the share of the internal market taken by subsidised butter having increased.

  18.6  The report goes on to examine the effect of quotas in a number of other areas. It says that, although budgetary expenditure on the subsidised disposal measures needed to maintain market equilibrium has decreased since the introduction of the quota system, from 27% of European Agricultural Guidance and Guarantee Fund (EAGGF) expenditure to around 6.5% in 1999, it nevertheless amounted to around _2.5 billion, even after taking superlevy receipts into account. The Court comments that this figure is still "relatively high to finance what is in effect a surplus implicitly authorised by Member States", and that this level of support from the Community taxpayer is in addition to the high prices paid by consumers (which it says are double what they would be in a free market). It is also critical of the lack of any rigorous assessment of the alternative methods of disposal available.

  18.7  As regards producer prices and incomes, the Court notes that incomes of dairy farms between 1984 and 1996 increased by more than farm incomes as a whole, and were significantly higher than average farm income. It attributes this to support for production prices, increased productivity (driven in part by increases in farm size), and direct Community aid from other sectors. However, it also points out that prices and incomes differed significantly from one Member State to another, though it puts this down, not to the quota regime, but to structural differences among both producers and purchasers, production costs and levels of demand. The Court also notes that the initial distribution of quota was made to eligible producers without charge, but that its existence has generated a monetary value (including, in Member States where a market for quota does not exist, that of the attached land). As a result, the Court says that entry into the milk market, or increases in the scale of individual holdings, have become more difficult, and it is also concerned that abolition of quotas would give rise to demands for compensation.

— Implementation of the quota regime

  18.8  The Court observes that the existence of 15 national quotas without provision for transfers between producers in different Member States means that the resources used cannot be optimised, thus hindering the rational development of production and limiting it in those areas of the Community best suited to it. The Court regards this as anachronistic from the point of view of the single market, and comments that it has led some producers in countries — such as the UK — where production is lower than consumption to regard the system as unfair, or, in others such as Italy, has created "strong social opposition". It also criticises three Member States (Greece, Spain and Italy) for their "fragmentary" application of the regime, not least as regards the collection of levy due (which it says has been hindered by lengthy legal proceedings arising from appeals).

  18.9  The Court comments further on a number of detailed points, as follows:

  • the opportunity for Member States to use quota shortfalls to offset overruns at producer or dairy level has led to differences between Member States, and to an erosion of the ability of quotas to reduce the milk surplus;

  • since withdrawal of a Member State's approval of a purchaser is the only sanction available in the event of non-compliance, this is reserved for the most flagrant abuses, and, in the case of larger purchasers, is often not realistic in view of its effect on producers;

  • in general, producers selling milk direct showed considerable weaknesses in their book-keeping;

  • although specific checks must be carried out on purchasers, the practice followed by Member States varies widely;

  • when the levy due has to be adjusted for the butter fat content of the producer's milk, the resultant calculations were often manipulated; and

  • although penalties are required when a Member State sends in late declarations or underestimates the levy due, these have never been applied by the Commission, and interest has not been charged on late payments of levy.

  18.10  The Court concludes that the quota regime can generally be regarded as achieving the objective of restricting production to the target level, and has not, to any great extent, prevented the restructuring of the dairy sector within each Member State. Moreover, it notes that the previously increasing budgetary cost of the milk regime has been reversed since 1993. However, it also says that the level of quota set appears to be more in line with the political goal of maintaining the status quo, rather than the economic goal of bringing milk production into line with unsubsidised internal consumption and export demand. In addition, several measurers have been introduced to limit the deterrent effect on producers of exceeding their quota. The Court suggests that the structural surplus, requiring substantial financial support from the Community's budget to aid disposal, is likely to continue, and might well increase in future as a result of enlargement, and further restrictions on export refunds imposed by the World Trade Organisation (WTO).

  18.11  The Court therefore recommends that the Commission should in the short term examine the possibility of allowing quota transfers between producers in different Member States and subsequently reduce overall quota; specify in more detail the checks to be made by paying agencies; provide for the application of graduated sanctions for dairies in breach of quota; tighten the arrangements for enforcing and accounting for the levy; and ensure the availability of sufficient reliable data on dairy products to provide the necessary market management information. It also says that the Commission should in 2002 make proposals for a fundamental reform of the dairy sector, with the aim of achieving equilibrium between overall milk production and unsubsidised internal consumption and exports. In particular, it should provide for the ending of the quota regime, while ensuring a fair standard of living for dairy farmers.

  18.12  In its reply, the Commission opposes cross-border transfers of quota for administrative and control reasons, and expresses concern about the environmental problems and potential loss of diversity of milk products which could arise through the concentration of production in the most efficient areas. It also expresses more general reservations about the Court's recommendations, arguing that budgetary expenditure should not be the only consideration; that reduction of quotas would be inconsistent with both political, economic and regional balance, and with their eventual abolition; and that a reduction in support prices would not resolve budgetary problems as it would imply the need for direct aid to producers.

The Government's view

  18.13  In his Explanatory Memorandum of 2 November 2001, the Parliamentary Under-Secretary of State at the Department for Environment, Food and Rural Affairs (Lord Whitty) says that the report will contribute to the Council's discussions on the mid-term review of the dairy regime in 2002, and that the Government supports its general conclusion that further reform of the milk quota regime is needed, particularly in view of the constraints on subsidy levels imposed by the WTO. However, he says that the Government does not agree with the recommendation that quotas should in the meantime be substantially reduced, which he suggests is a perverse way of preparing for the Court's stated aim of a further liberalisation of the market.

  18.14  The Minister also refers to two points on which the Court criticises practice within the UK. The first is late payment of levy to the Commission, which he says has arisen because of the wish, for the benefit of producers, to allow the free trading of quota up to the end of the quota year. The other point is that the Court alleges that the UK has not charged interest on later payment of levy. However, the Minister says that the money had been sent to the Commission, but had simply been posted to the wrong budget item.


  18.15  Although the Court's report deals with a subject of some significance within the operation of the Common Agricultural Policy, its findings, at least as regards the general operation of the quota scheme, tend to confirm existing views as to its relative successes and failures. Also, we have noted that some of its recommendations are regarded by the Government — rightly, it would seem to us — as somewhat perverse. We are therefore clearing the document, though we believe it would be relevant should there be a debate next year on the mid-term reforms of the dairy regime which the Commission is expected to bring forward then.

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