EU incentives for milk production

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.

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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.

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