Dairy production accounts for 18% of Community agricultural output of the European Union and is the pillar of all agricultural activities. European Union is the world’s primary exporter of dairy products, even with a reduction in its market share (Zervoudaki 2011). The EU dairy market is regulated by the Common Market Organization (CMO) for its milk products, one of which is the milk quota system. The milk quota system was introduced to the EU in 1984 and the idea was embraced because it offered a way to control milk production, stabilize milk price and farm income (Seville 2009; Petit 1987). As the markets become more free-flowing and globalized, disputes about the system arose. Since the implementation of the system, the negative aspects of it have reared its ugly heads. It not only put a cap on milk production,but also lost the competitive edge in the world market due to the stabilization of milk prices (Seville 2009). Therefore, the reforms made on June 26th 2003 in Luxembourg have proposed major changes to the European Common Agricultural Policy (CAP). Direct subsidies were to be independent from production and strict compliance with EU standards on environment and health was enforced. In reality, milk producers take market demand into consideration rather than the influence from subsidies to determine their production quota. (Bouamra-Mechemache and Requillart 2004). However, EU dairy market is still regulated by the mandatory quota system because the agreement of the regime lasts until the end of 2015. In addition to that, there has been a milk quota increase of 1.5% in three years since 2006 (Zervoudaki 2011). Furthermore, within the Health Check of the Common Agricultural Policy (CAP), the European Commission accepted the proposal to make amendments to the system and suggested an increase of quota by 1% annually from 2009 to 2013 to allow a "soft landing" of the milk sector. (Seville 2009). Dairy policy reform is a controversial subject, Member states can’t distinguish what the best option is for the system. The core of this controversy is related to the quota system (Bouamra-Mechemache and Requillart 2004). The purpose of this paper is to pose the question, “did the removal of the milk quota system along with the increased payment of CAP reform have a negative impact on farm-level supply and income?” It is expected that the removal of milk quota would have a negative impact on the income of milk producers due to the condition of inelastic demand and elastic supply of milk product in the essence of milk quota. General Analysis of removal milk quota regime
Before starting the analysis, it is essential to be aware of the key attributes of the European milk industry. An inelastic and growing demand
Domestic consumption accounts for over 85% of the total use of milk and is price inelastic since dairy products are primarily used for human consumption and without close substitutes. In addition, the remaining milk products are exported with subsidies and EU export can’t expand due to WTO agreement (Bouamra-Mechemache and Requillart 2004). The inelastic aggregate demand indicates that a decrease in price does not result in a significant increase in consumption. According to Bouamra-Mechemache, the decrease of milk price by 3 to 4 per cent can cause a 1 per cent increase in milk consumption, making its price elasticity of milk demand range between -0.33 and -0.25. So we can see that its impact on the profits of milk producers is rather small. Moreover, higher income, comsumption pattern and population contribute to greater demand for milk products: the aggregate demand for milk in the EU is increasing by approximately 0.75% every year. Should this trend continue, this will create about 1 million tones of additional demand for milk products every year (Bouamra-Mechemache and Requillart 2004). An elastic supply in the absence of quotas
In the absence of quotas, milk supply is price elastic which means...
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