The milk market in the EU is regulated by a quota system. Every member state has a national production quota which it distributes to farmers. Whenever a member state exceeds its quota, it has to pay a penalty (called ‘super levy’) to the EU. This national penalty is in turn financed by penalties imposed on farmers who have exceeded their individual quotas.
The EU has decided in the 2009 ‘Health Check’ reform that national quotas shall be increased by 1% every year, so that their value is slowly eroded. This shall prepare a soft landing in 2015 when the quotas expire and production is liberalized.
Quota raise prices
The expansion and eventual abolition of milk quotas has been heavily criticized by farmers. However, milk quotas have many disadvantages. Apparently, less production is equivalent to higher prices. This means first that quotas do not create money for farmers from nothing but that consumers have to foot the bill. Second, higher prices on the EU market reduce EU exports of dairy products below the level its global comparative advantage would suggest. Artificially reduced milk production leads, for instance, to a loss to European cheese exporters. Third, higher prices on the EU market trigger additional imports. Some of the extra money paid by consumers thus goes to foreign suppliers.
Quotas distort markets
National quotas distort production across the EU. Some member states could competitively produce more milk than their quotas allow – notably Italy and Austria. Others are encouraged by their quota rights to produce a greater share of the EU’s total milk production than they would under free market conditions. By the same token, individual quotas for farmers distort competition within the member states. Less competitive farmers who own quota rights produce too much, while more efficient producers are restrained.
Quota are costly to administer
Governments need to register and compare quota rights and actual production for each farmer. Contributions are collected from farmers in advance to cover a potential national penalty and are subsequently reimbursed, minus individual penalties for farmers who have exceeded their quota in a year when the national quota has also been exceeded. Farmers engage in contracts to lease and transfer quota rights (in member states where this is allowed), and they have to weigh the risks of penalties in their production decisions.
Quota are unfair
Besides being economically damaging, a quota for milk production is also unfair. The ineffectiveness of quotas for running a prosperous economy has long been understood in the EU. Quotas are used to protect natural resources, such as fish, but not to create a rent for producers. Why should milk producers be privileged over other sectors of the farm and non-farm economy?