The EU Mid-Term Review of the dairy sector, introduced from July 2004, was intended to reduce the overall level of price support over a four-year period, mainly by reducing intervention prices by an average of 22% and by cutting export subsidies and other domestic support measures. The third phase of cuts is due to come into operation from July when the butter intervention price will come down by a further 8% and that for SMP by 5%.
The cuts in support measures have been slower than expected to impact on the market prices for the main commodities but prices have been falling and further reductions will filter through over the rest of 2006.
The biggest impact so far has been on butter and other butterfat products such as bulk cream. The latest markets reports show that bulk butter quotations, currently at around £1,700 per tonne in the UK, are 11% lower than at the same time last year.
Bulk cream, much of which is exported to the Continent, is down year-on-year by 13%. Bulk butter prices on the Continent are also down 10%.
Skim milk powder, which is directly affected by the intervention price cuts, is only down on last spring by a marginal 2%, due mainly to a shortage of supplies which pushed up market prices in the late winter. Prices are now, however, falling sharply, having come down in the Netherlands, for example, by 7% since March.
Cheese prices have been the least affected so far by reform, partly because consumption has been moving ahead by at least 2% a year, which has kept the markets in balance. During recent weeks, however, there has been some easing of Mild Cheddar prices in the UK and these are now down by 7% compared with May last year.
Looking ahead, the support cuts are only half way through their four-year programme and further downward pressure on market prices must be expected over the next two years - unless, of course, milk output falls across the EU as the farmers react to lower returns and create tighter markets.