Removing EU milk quotas, soft landing versus hard landing

This paper analyses EU dairy policy reforms and mainly focus on EU milk quota removal scenarios. The model used to evaluate the scenario is a spatial equilibrium model of the dairy sector. It integrates the main competitor of the EU on world markets, Oceania, as well as the main importing regions in the rest of the world. The paper first assesses the impact of the Luxembourg scenario in the prospect of a new WTO agreement in the future. It then provide a quantitative assessment of the impact of the abolition of EU milk quotas on the EU dairy sector either through a gradual phasing out or through an abrupt abolition of milk quotas. Compared to a status-quo policy, the Luxembourg policy leads to a 7.6 percent milk price decrease and a 1.9 percent milk production increase. A gradual increase of milk quotas as recently proposed by the European Commission (+ 7% over 6 years) generate a 9% drop in the EU milk price (compared to the Luxembourg scenario) and an increase in production by 3.5%. A complete elimination of quotas leads to an additional 1% increase in production and an additional 3% drop in the EU milk price. As compared to the baseline scenario, in the Luxembourg scenario in 2014- 15, producers gain 1.3 billion €, whereas in the same year they lose 2.6 billion € in the soft landing scenario. As such the direct payments are more than sufficient to compensate producers for the loss of producer surplus in the Luxembourg scenario, but fall short to achieve full compensation in the soft landing scenario.