Committee Reports > List of Committees > Joint > 1978 > Committee on the Secondary Legislation of the European Communities > Report No. 32 - Situation in Milk Sector

REPORT

Commission’s Report

1. In May, 1978 the Council of Ministers asked the Commission to present a full report on the situation in the milk sector so that it could review the position in the market before 1st October, 1978. The report which the Commission made to the Council in September, 1978 [R/2369/78 (AGRI 689)] has been examined by the Joint Committee. The report was before the Council at its meeting on 25/26 September, 1978 but no opportunity was available for a substantive discussion at that meeting. The Commission has indicated that the analyses of the market and the discussion on possible action contained in the report will, after account is taken of the views expressed by those concerned, form the basis for specific proposals which the Commission intends to submit later this year for decision in the 1979/80 price packet.

Market Imbalance

2. The Commission’s analysis of the situation in the milk sector reveals a persistent and increasing imbalance between supply and demand. The imbalance is due in the main to the fact that while production is increasing at an annual rate of 1.7 per cent, consumption of milk products overall remains static. In 1976 the Commission estimated that the surplus amounted to 10 per cent of the deliveries to dairies and since then the situation has worsened. The imbalance is aggravated by the Community’s commitments under GATT to import fats and proteins of vegetable origin at zero or very low rates of duty and by its commitments to import butter from New Zealand and cheese from Switzerland, Austria and Finland.

Consumption

3. Butter consumption in the Community is decreasing in the long term. The annual consumption per head has fallen from 7 kg. in 1968 to 6.5 in 1976. Cheese consumption on the other hand is steadily increasing. The consumption per head was 8.7 kg. in 1968 and 10.7 in 1976. Human consumption of drinking milk and fresh products appears to be stable at around 102 kg. per head per annum.

4. With the aid of ever-increasing subsidies, large quantities of milk protein are now being used as animal feed. Liquid skimmed milk and skimmed-milk powder are used for feeding calves and pigs. The production of skimmed-milk powder exceeded 2 million tonnes in 1976, double the figure for ten years previously. More than 80 per cent of this production goes for animal feed with the aid of subsidies to enable it to compete with feeding stuffs produced from vegetable matter. There has been a steady decline, from 5.5 million tonnes in 1968 to 3.5 million in 1977, in the quantity of liquid milk used directly on the farm for feeding calves and pigs.

Production

5. The continuing increase in production has been due mainly to the continuous growth in the average milk yield per cow (from 3,444 kg. in 1968 to 3,770 kg. in 1976) for the number of cows has remained steady at about 25 million. An increasing proportion of milk produced is processed and marketed by dairies (84.9 per cent in 1968 and 90 per cent in 1976). Deliveries to dairies increased by over 10.5 million tonnes between 1968 and 1976. About one-third of this increase is attributable to the rise in milk yields and the balance to the increasing proportion of production delivered to dairies due to the decline in the practice of feeding calves on the farm and to structural changes. This has led to an increased production of butter (1.5 per cent annually) and skimmed-milk powder (4.9 per cent annually). In the past ten years the size of the average herd in the Community has doubled and there has been a continuing intensification of production with the aid of modern techniques.

External Trade

6. The Community has traditionally been one of the largest operators on the world market. For some products such as condensed milk (about 80 per cent), whole milk powder (65 per cent to 70 per cent) and cheese (35 per cent to 45 per cent), its share of the world market has remained relatively stable. For other products it has varied widely. Between 1973 and 1976 the Community’s share varied between 15 per cent and 60 per cent for butter and between 25 per cent and 40 per cent for skimmed-milk powder. In 1977 the Community’s exports of butter and skimmed-milk powder accounted for nearly half of the world market. However, the world market is often no more than a marginal outlet compared with the Community market and particularly so in the case of processed products such as cheese (7 per cent) and butter (11 per cent).

7. Milk products included in the Community Food Aid programme for Third World countries consist mainly of butteroil (about 45,000 t. per year) and skimmed milk powder (about 100,000 t. per year). The development of these supplies is hampered by inadequate organisation and inadequate transport and distribution in the recipient countries.

8. Imports into the Community comprise butter and cheese in respect of which import commitments have been undertaken. The undertaking in respect of butter imports from New Zealand extends until 1980 and involves importing 125,000, 120,000 and 115,000 tonnes in 1978, 1979 and 1980 respectively. Under GATT agreements the Community regularly imports 60,000 to 80,000 tonnes of cheese a year from Switzerland, Austria and Finland. These imports represent 7 per cent of Community production in the case of butter and 2.5 per cent in the case of cheese.

Measures Already Taken

9. In recent years the Commission has sought to achieve a balance in the milk sector by proposing to the Council a cautious price policy accompanied by other measures. However, the situation has continued to deteriorate while the cost of remedial measures continues to rise. In 1977 expenditure from the Guarantee Section of FEOGA represented 20 per cent of the value of the final production compared with 10 per cent in 1968. Expenditure has doubled since 1973 although the milk price increased by only 40 per cent. Between 1968 and 1977 the Community was forced to sell 15 per cent of butter production and 80 per cent of skimmed milk production at reduced prices.

10. On specific measures taken or proposed the Commission has the following comments:

(a) The co-responsibility levy introduced in 1977 has not served its purpose of cutting back production mainly, in the Commission’s view, because the idea of a variable levy was dropped;

(b) The system of non-marketing and conversion premiums introduced in 1977 resulted in the first ten months of its operation in the slaughter of 1.6 per cent of the dairy herd. However, although the system was re-enforced in 1978, the Commission does not believe it can solve the problem on its own;

(c) A proposal made by the Commission in the last price package for the suspension of intervention in respect of skimmed milk during the winter months has not been accepted by the Council at least as yet;

(d) Measures to increase outlets for milk products inside and outside the Community have given rise to increasingly heavy budgetary expenditure;

(e) With regard to animal feed the Community subsidises 45 per cent of the milk powder for feeding to calves and 85 per cent of the amount for pigs. Although the unit cost of the aid in the pig industry is high, one quarter of the Community’s production of skimmed milk powder was disposed of in this area in 1977. The aid granted for liquid skimmed milk has had the effect of making processing into powder unnecessary thus eliminating storage costs, and

(f) As far as exports are concerned refunds on butter represent about 70 per cent of value and up to 85 per cent in the case of skimmed milk powder. About one third of butter and milk powder exports go in food aid.

Possible Remedial Action

11. The Commission indicates its intention to continue those elements in the present policy which it considers beneficial, namely, moderate prices, active disposal of existing stocks and a search for new outlets. It also indicates a number of specific areas in which it believes action is called for.

12. The Commission considers that aids for investment at both farm and processing levels should be suspended except for limited purposes e.g. liquid milk and skim, research and new products.

13. The Commission remains committed to the special measures taken to dispose of surpluses and, in particular, supports continued aid for liquid skimmed milk and fresh skimmed milk powder to reduce intervention. The approach to trade with third countries, in the Commission’s view, should reflect the situation in the internal market and this applies in particular to the future of New Zealand imports after 1980. The Commission states that it will try to negotiate an International Dairy Agreement under the General Agreement on Tariffs and Trade (GATT) and any concessions on cheese to and by the EEC will have regard to their impact on the internal market.

14. The Commission considers that any policy which does not take account of the fact that the “open ended nature and the high level of the guarantees remain a barrier to the re-establishment of the milk market balance” must fail. While the principle of the guarantees must not be questioned, it argues that the adaptation of the support measures is necessary as long as the imbalance continues.

15. The Commission considers two main options in relation to adapting the support system viz. (a) quotas (at farm, dairy or country level), which it rejects in principle and for practical reasons and (b) action on the price guarantee which could involve one or more of the following:—

(i) relating intervention prices to the level of Community production;

(ii) relating intervention prices to the level of intervention stocks;

(iii) varying the co-responsibility levy with the level of Community production;

(iv) returning a proportion of deliveries to producers as liquid skim or skim powder;

(v) restricting unconditional access to intervention (no details specified).

16. To counteract the loss of revenue which certain producers would suffer, the Commission is considering a scheme of a social kind which might involve direct aids to the income of certain full time farmers who would have no realistic alternative to milk.

Dairy Industry in Ireland

17. Before commenting on the Commission document the Joint Committee would like to draw attention to the key position of dairying in the Irish economy. Milk produced on Irish farms (£400m. in 1977 and forecast at £490m. in 1978) accounts for 31 per cent of total agricultural production compared with a Community average of 19 per cent. In 1977 dairy products accounted for 23 per cent of total agricultural exports or 9 per cent of total exports.

18. One half of the country’s farms are engaged in commercial dairy enterprises. During 1977 the average dairy herd size in Ireland was 17 cows and in December, 1977, 79 per cent of all dairy farms had less than 20 cows. For the majority of these farmers dairying offers the only hope of survival in farming. In the past, creamery milk production has given the highest family farm income per acre apart from liquid milk and sugar beet.

19. In comparison with other EEC countries Irish dairying is underdeveloped. While Ireland has a comparative advantage in low cost milk production on grasslands, it is a potential rather than an actual advantage that remains to be exploited. The average milk yield per cow in 1977 was 603 gallons compared with a Community average of 870 gallons.

20. Dairying in Ireland is also the basis of the largest single item (37 per cent) of agricultural output i.e. cattle. About one-quarter of all cows in the national herd are specifically beef cows and consequently, beef production relies heavily on a regular supply of young cattle from the dairying areas.

21. At the industrial level the output of dairying processing in 1977 was valued at £663m. or 14.4 per cent of the total manufacturing output. About 8,800 people are employed in those industries. It has been calculated that employment in dairy processing could be increased by 13,750 by 1985 with increased milk output and a higher processing intensity.

Need for Special Treatment

22. Taken in a Community context milk production in Ireland is, notwithstanding climatic advantages, significantly underdeveloped. It is essential in the national interest that the dairying industry be developed to its full potential in view of the persistent high unemployment in the country and the difficult balance of payments situation. It was an important consideration when Ireland joined the EEC that such development would be encouraged. Moreover, it seems perfectly consonant with the stated objective of the Treaty of Rome to increase agricultural productivity that milk production in Ireland should be allowed to expand until the average yield is raised to the level at least of the Community average.

23. In the Community as a whole where 35 per cent of dairy farms have fewer than 5 cows, much of the over-production has been from small herds relying heavily on imported feeding stuffs obtained at favourable prices. The overall situation is in marked contrast to the position in Ireland where natural advantages for milk production are not fully utilised. In the long term at least it should be as much in the Community’s interest to encourage grassland production in Ireland as it is to curtail production on small farms which rely substantially on compound feeding stuffs.

24. In considering any proposals to remedy the milk imbalance it is important, in the Joint Committee’s view, to bear in mind that Ireland’s contribution to the creation of the problem has been small. Ireland at present produces only 4.1 per cent, 5 per cent and 2 per cent respectively of the Community’s milk, butter and cheese. No butter has been sold into intervention since we joined the Community and of the 700-800,000 tonnes of skimmed milk powder held in intervention, Ireland’s share is only 30,000 tonnes.

25. The Joint Committee can readily accept that it would be in the Community’s interest to restore a balance in the milk sector but it is adamant that it would be neither economic nor equitable to seek to achieve this position by across-the-board measures applicable to wholly dissimilar situations. In the Committee’s view, Ireland has an unanswerable case to be allowed to increase productivity in the milk sector up to the European average by fully utilising her natural resources. It is essential that this objective predominate in determining the Irish attitude to whatever specific measures are proposed.

Suspension of Aids

26. The Joint Committee is particularly concerned with the possible effect on Ireland of limiting aids for investment. The seasonal pattern of production in Ireland requires for a given level of supply, a higher processing capacity than in other EEC countries. Moreover, the curtailment of investment could have a disastrous effect on the expansion of employment in the industry as well as on the possibilities for product diversification. In view of the fact that our dairy industry has not been developed to anything like its potential, it is essential in the Committee’s opinion, that any measures limiting investment should not be made applicable to this country.

Co-Responsibility Levy

27. The Joint Committee has some difficulty in reconciling the co-responsibility levy, which increases the price to the consumer, with the stated objective of encouraging consumption. However, a modest levy can be accepted provided the proceeds are used solely for the promotion and increase of marketing outlets as such. It seems to the Joint Committee that before any question of varying the present levy is considered, an assessment should be made of the expenditure of the proceeds to date.

Skim Milk Use

28. The Joint Committee is pleased to note that the Commission favours the continuation of the subsidy on skim milk returned to the farm. It believes that greater use would be made of raw skim if pig producers were assured of its availability over an extended period, say, 7 to 10 years. The Committee considers that EEC grants should be available for investment in capital expenditure intended to increase consumption of liquid skim milk on the farm. In particular, farmers who have already had piggeries constructed, should receive grant aid for the costs of modifications to allow the use of skim milk.

Imports of Dairy Products

29. The Commission does not apparently see restrictions on imports from third countries as having much effect on the Community imbalance in the long term. Moreover, these imports arise from Treaty and other commitments. The Commission, however, accepts that the action necessary on the internal market should be reflected in the Community’s approach to import obligations.

30. While it is true that imports of dairy products represent only 7 per cent of Community butter production and 2.5 per cent of its cheese production, they exceed Ireland’s share of that production which is 5 per cent in the case of butter and 2 per cent in the case of cheese. Some action must be taken in regard to imports if Community preference is to have any meaning. It is not reasonable to expect dairy farmers within the Community to suffer a loss of income in the hope that the imbalance will be corrected while guaranteed slices of a declining market are given to non-EEC countries.

31. In regard to GATT negotiations it is essential for Ireland that there be no agreement for the import of cheddar cheese into the United Kingdom from non-EEC countries. That market is the only realistic one for Irish cheddar cheese.

32. The position of New Zealand butter on the United Kingdom market is also of vital concern to Ireland. At present New Zealand butter is selling on that market at £1,410 per tonne compared with £1,625 per tonne for Irish and Danish butter. Under the present arrangements, New Zealand is guaranteed about 40 per cent of the British butter market. With a static level of demand and domestic production increasing, total imports must decline thereby giving New Zealand, a non-EEC country, an in-built advantage over Community countries in a section of the Community market. The arrangements with New Zealand come up for review in 1980 and it is difficult to see in the light of the situation on the internal market, how any new commitments can be accepted after that date.

Imports of Feeding Stuffs

33. It seems clear that a good portion of the milk yield increase within the Community can be attributed to the use of concentrates, much of which is imported at prices well below prices for comparable Community products. Immediate steps should be taken to deconsolidate the tariff heading for manioc in GATT. The Community should then take the necessary measures to limit the growth in imports of manioc, brans of cereals, maize gluten, and molasses, and the price distortions in livestock products in the Community stemming from low price imports of these cereal substitutes. This should be achieved using the threshold price/levy system, and using coefficients based on the feeding value of barley. The import prices of cereal substitutes should be calculated in units of account. The coefficients of cereal substitutes should be calculated in relation to the feed value of barley, and should be applied without any ceiling on import levies, provided Community grain prices do not exceed threshold prices.

Non-Marketing and Conversion Premiums

34. The evidence tendered to the Joint Committee indicates that non-marketing and conversion premiums have not proved attractive for Irish dairy farmers. It has been suggested to the Committee that an increase of at least 25 per cent would be required if the premiums are to have any impact.

Guarantee System and Intervention

35. The Joint Committee is pleased to note that the Commission is not itself in favour of production quotas. In the Committee’s view, such quotas whether at farm, creamery or national level would have a stagnating effect on an industry that is and should be expanding and they are, therefore, wholly unsuited to the Irish situation.

36. The Joint Committee is likewise opposed to the suggestion that intervention prices be related to production levels or intervention sales. Any such measures could, in the Committee’s opinion, have a dis-proportionate effect on Irish producers.

New Outlets

37. The Joint Committee notes the Commission’s intention to continue to look for new outlets for milk products both within the Community and on export markets. Insofar as the internal market is concerned, one way of maximising consumption is by door step sales to the consumer. Consideration might be given to the possibility of reviving door step sales, with Community assistance, where they have been abandoned. Initially a number of pilot projects might be undertaken to enable the possibilities to be accurately assessed.

38. The Committee is pleased to note that the Commission is to examine the possibility of long term contracts for milk products on the export market. If such contracts do materialise, the Committee trusts that the distribution of opportunities to participate will be on an equitable basis and that Ireland will be allocated a due share.

Food Aid Programme

39. The Joint Committee notes that the Commission favours an effort to increase food aid to developing countries. Hitherto, Ireland’s share of Community food aid has not been satisfactory and the Committee recommends that pressure be exerted to increase Ireland’s share in the future. Insofar as the food aid programme is hampered by the inability of recipient countries to handle products adequately, the Committee believes that the possibility of Community aid for the provision of distribution depots and perhaps reconstitution plants should be considered. Such aid could be tied to the acceptance of products for, say, a period of five years.

Income Aids

40. The Commission states that it is considering a scheme of a social kind involving direct income aids to full time farmers who might be forced by changes in the guarantee system to give up milk production without being able to adopt any realistic alternative. The Joint Committee believes that the need, as far as Ireland is concerned, is to get the smaller farmer to increase his efficiency and to improve his productivity. In the current employment situation in this country, the possibility of another group being forced out of production and being compelled to survive on a social assistance type of income is one that cannot be faced with equanimity. For the reasons already given, the Joint Committee believes that in any measures to cut production, a derogation should be conceded recognising the special position of Ireland. Accordingly, it hopes that it will not be necessary to operate the proposed social scheme in this country.

Acknowledgements

41. The Joint Committee wishes to express its thanks to An Bord Bainne, the Irish Farmers’ Association, the Irish Creamery Milk Suppliers’ Association, and the Irish Dairy Industries Association Limited for the considerable help it received from them in considering the situation in the Milk Sector. Each of these bodies supplied the Committee with comprehensive memoranda on the subject and members of the Committee had the opportunity of discussing all aspects extensively with representatives of both farming organisations.

Chairman of the Joint Committee.

6 December, 1978.