The effect of abolishing milk quotas : a study of comparative advantages amongst European member states

Abstract: The European Union provide 27 % of total volume raw milk produced in the world. This number is steadily decreasing due to that the world milk production increase is more rapid than EU production growth. The growing middle-class change the demand for food, a higher standard of living increase the demand of milk products as well as other various animal products. Since 1984 the EU milk quota has limited the supply from EU, but the quota will expire April 1st 2015. The European Milk Board expect that the removal of quotas will make the farm gate price decline. The fundamental question today is if European dairy producers can sustain a lowered milk price. The purpose of this study is to investigate anticipated effects from the removal of milk quotas April 2015. In this study export data gathered from the Eurostat database (EU-commission) and from FAO (Food and Agriculture Organization) together constituted the basis for a quantitative study. Five essential dairy commodities were selected; fresh milk, butter, cheese, yogurt and skim milk powder (SMP). In order to explain the current positioning with a quota restriction on supply, different indices were used to create a better understanding of likely outcomes. Normalized revealed comparative advantage index (NRCA) is applied when investigating comparative advantages for dairy products. The normalized nature of the NRCA-index allowed it to be utilized when investigating comparative advantages over a period of time. In this study export data over a period of 14 years was used, from year 1999 until 2013. Net export index was used in order to understand the flow of selected commodities in and out of each member state. Data regarding quota utilization were found to be a key factor when performing a cluster-analysis with purpose to group member states into clusters that share similarities with each other. Above mentioned indices along with data for deviance from allocated dairy quota were used for constructing a cluster-analysis and identifying similarities between member states. The result of this study provide incentives for an expected increase in milk volume and dairy products short after the removal of quotas, which will impact the market price. It is presumed that the market price of dairy commodities will drop. The concluding remark is that the individual effect on each member state will be determined by the current positioning and the ability to adapt according to the reformed dairy market. In this study it was established that countries with comparative advantage, history of high quota utilization and keeping a positive net export are generally better equipped to the deregulation of the market.