Impacts of different policy options on the EU dairy market

The economic effects of certain changes in the EU dairy regime and of marke t liberalization are analyzed within the framework of a partial equilibrium model. Using a joint input, multi-product formulation the model confronts the agricultural production of raw milk with the processing and the final c onsumption of five milk products. While the two valuable components of raw milk (fat and protein) are kept in balance at all levels of the marketing c hain the model describes the economic and technical relations between input and output quantities. Although the model is nonspatial (in the sense of t ranspotation costs being omitted) there is a regional aspect with 14 EU reg ions (member states) and all other countries as a whole (Rest of the World) . Simulation of prospective policy effects in 2005 necessitates a projectio n of supply and demand for this year, starting from 1993 as a base year. Different scenarios were considered: Expanding the EU milk quota by 2 % and cutting the intervention prices by 1 5 % (Agenda 2000) compared to the base year will result in decreasing EU pr oducer prices by 6-7 %. Cutting intervention prices by 15 % compared to bas eline will lead to a producer price reduction of more than 10 %. The influe nce on the Rest of the World is very small. The abolition of the milk quota regime and the intervention system will lea d to a producer price decrease of 18 %, but the milk production in the EU w ill increase. When a very low world market price for dairy products is considered (starti ng from the world market situation in 1993), market liberalization results in a marked decrease of EU producer price of about 40 %. The decreasing mil k production coupled with rising demand makes the EU a net importer of dair y products (with the exception of skimmed milk powder and other milk produc ts). These imports will lead to an increase in producer prices in the Rest of the World. If in the latter case consumer preferences for fresh milk products and chee se allow for price differentials to the benefit of EU producers there are c onsiderably less pressures on EU markets but still big changes in the patte rn of trade to the detriment of butter and skimmed milk powder.