Dairy prices will become more volatile as a result of the upcoming CAP reforms, says Dairy UK policy director Peter Dawson It's Common Agricultural Policy reform time, and the dairy sector is the focus of many of the changes. The European Commission's proposals are due out on 20 May, and will confirm that milk quotas are to go in 2015. That means export subsidies must also be phased out, linking EU prices more directly to those on the world market. Businesses operating in the dairy sector will therefore have to deal with more volatility as prices will fluctuate according to the global market. This has always been the analysis of Dairy UK and is confirmed by a report, Phasing Out Milk Quotas in the EU, recently published by Defra. However, Dairy UK welcomes the abolition of the quota regime. A sustainable future for the industry will only be obtained by taking on and surmounting the challenges of the marketplace, which essentially means moving to a future without public support. To prosper in an environment strongly influenced by world market forces, the UK dairy industry is pursuing four distinct strategies of efficiency, innovation, supply chain co-operation and consolidation. The recent formal announcement of the merger of Friesland foods and Campina brings into particular focus the need for consolidation. The new Continental co-op will be a colossus compared with anything in the UK. Its estimated £7.1bn turnover will be within hailing distance of that of the entire British dairy industry. Consolidation delivers many benefits. It enhances efficiency by facilitating rationalisation of plant; strengthens negotiating leverage with suppliers and customers; creates a greater capability to mobilise resources to finance product innovation and marketing; provides a platform to deliver supply chain co-operation; and makes it easier for companies to manage the risk that greater exposure to the world market will bring. The UK dairy industry is still overcoming the fragmentation created by de-regulation in 1994. Significant consolidation has already taken place since then, but the abolition of quotas and the dismantling of the CAP market support regime for the dairy sector will intensify the pressure on the industry to seek structural changes in order to prosper. The breakdown of the merger talks between First Milk and Milk Link will ultimately only be a hiccup on the road to a more consolidated UK dairy industry. In an internationalised market place this is an inescapable requirement for the UK industry.