EU incentives for milk production

The re-introduction of intervention-buying and export subsidies for milk products in the EU comes after the steady fall of EU milk/milk-product prices to near the (undistorted) world market price over the past decade. The 'gap' between the distorted EU price and the undistorted world price is the 'nominal rate of assistance' (NRA) to EU milk that can be plotted in the Agricultural Incentives Database. As EU internal supports have fallen —dramatically in the late 1980s with the introduction of CAP reforms—and world market prices have risen (partly because of the EU reforms) this price gap has narrowed to about 100% of the undistorted world price (NRA of 1) and finally to near zero in 2007.

The same evolution can be traced from another 'angle' in the OECD Producer Subsidy Equivalent (PSE) data for milk. PSEs have fallen to zero (and below) for milk in Europe as world prices rose and the EC dropped first intervention buying and then duties when world prices rose to European levels.

So why has the EC now re-introduced the distortions that have so recently been wrung out of the system? Because European farmers are willing to live with the world price only if it's a high one. When the competitive world price falls—because the wholesalers and processors in the rest of the world can't get the credit to finance imports and working stocks—the European governments export the adverse impacts on price and investment and employment on the back of the new subsidies, to be borne by the rest of the world, including developing countries.

Tags for this entry: trade agriculture evidence subsidies ec dairy oecd