Simulating a market for milk quota under policy reforms: an Irish study

In the wake of policy reforms such as the MTR of the CAP and WTO arrangements, many policy analysts are questioning the value of retaining the EU milk quota system in its current form and one policy reform option that has been discussed in advance of the 2008 "Health Check" of the CAP is the international transfer of quota rights between member states. A methodology for simulating a "free market" for milk quota is outlined in this paper with a view to extending the work to other member states to determine which member states would supply and demand milk quota if an international market for quotas was established. The analysis, conducted for Ireland, uses National Farm Survey data from 491 dairy farms to estimate the aggregate demand for and supply of milk quota. A profit maximization model is used to simulate the production decisions of farmers and aggregation techniques are applied to arrive at national and regional demand and supply curves. Two policy scenarios are analysed; one assumes that there is no WTO reform and that the policies agreed under the MTR of the CAP in 2003 continue indefinitely, the second scenario assumes that a WTO agreement is reached and that export subsidies are phased out. The analysis also considers the effect of the Single Farm Payment on the market for milk quota and a sensitivity analysis is conducted on the lifespan of the milk quota. The methodologies developed in this paper, offer policy makers in Ireland a useful tool to analyse the effect of imposing different constraints on the milk quota market, be they regional, volume based or some other measures. The analysis also offer some insight into the capitalisation of policy measures into asset values; this is evident from the substantially lower market equilibrium price for quotas in a scenario where there is no export subsidies relative to a continuation of these policies and also from the effect of re-investment of the Single Farm Payment on quota values. The approach adopted is sufficiently general to be applied to FADN data for the major dairy producing countries in Europe to determine where milk production may move to if there was an international free market for quota rights.