Policy reform in the European Union dairy sector: Effects on markets and welfare

This paper analyzes the impacts of policy reforms in the EU dairy sector. I t is shown that the implementation of GATT agreements leads to a 4% decreas e in the milk price. Prices of SMP and WMP decrease more than butter and ch eese prices. EU welfare increases marginally but distributive effects are l arge. The increase in quotas decided by the Berlin Agreement will cause a d ramatic cut in the milk price (-10% to -15% depending on how EU demand will increase in the future). Moreover, because of the constraints on subsidize d exports, the implicit price of protein will decrease much more than the p rice of fat. Finally if demand expands sufficiently, then compensatory paym ents (including national envelopes) will cover about 90% of the loss in pro ducer surplus due to the milk price cut. We also investigate the impact of a two-tiered quota system and show that its impacts are similar to those ge nerated by the implementation of GATT agreements.