EU Dairy after the Quota Abolition: Inelastic Asymmetric Price Responsiveness and Adverse Milk Supply during Crisis Time

Abstract

The abolition of the milk quota system in April 2015 has implied a transition towards a new “system” in which non-policy and non-EU elements have become important drivers of the EU dairy market. In terms of its contribution, after reviewing some of the existing literature, this article presents a theoretical framework to understand “irregular” supply behaviour, while it empirically identifies an “inverse” supply curve for the EU dairy sector. In doing so, milk prices have been decomposed by following the procedure proposed by James P. Houck. This exercise confirms the non-reversibility, and therefore an asymmetric response, in the behaviour of milk supply for most EU Member States. Moreover, this article also presents the results of a “stress” test of the dairy sector in order to analyse the responses of dairy production in a context of the asymmetrical behaviour of dairy farmers and assess the competitiveness of the dairy sector at Member State level. The outcomes emphasise the high competitiveness of the Irish dairy sector and suggest a deterioration of the competitiveness in the case of the United Kingdom and France. From the policy-making perspective, the identification of this type of farmer’s reactions is key for an appropriate design of policy interventions and crisis management strategies.

Keywords

• price asymmetry
• agricultural commodities
• price decomposition
• dairy production
• EU28