Since 1984, a quota regime is applied to the milk market in the European Union (EU). The objective of the regulation was to reduce surpluses in production, guarantee a fair income to farmers and maintain farms in production. The introduction of the system was a very controversial issue, because it was expected to slow down structural change considerably, thereby reducing the sector’s international competitiveness in the long run. This was especially relevant in the early stages of implementation when quota rights were attached to land and quota trade was not possible.
The initial quota allocations to member states and individual producers were made on the basis of production quantities in the years before 1984, freezing production patterns at the levels corresponding to the base year. Already in 1987, some member states started to allow temporary quota exchange using their discretion in implementing the system under the common EU regulation. Since then, considerable diversity in quota trade regulations across member states developed, covering the whole range between a free quota market and no quota transferability.
At any point in time, there is considerable variation in the distribution and development of marginal costs of production among producers and across regions. Without the quota constraint, the more efficient producers would expand in scale whilst the least efficient are likely to abandon milk production. Production quotas together with the high support price for milk in the EU prevent part of these dynamic tendencies by allowing the least efficient producers to remain in business and complicate the expansion of the most efficient ones. The introduction of the quota system fell in a period where strong structural change in the dairy sector took place but farm statistics show that also under quota this trend continued. (European Commission 2002 p.10)
The introduction of the quota regime has inspired a considerable amount of economic research. Besides cost estimations for the dairy sector (e.g. Moschini 1988a, Hubbard 1993, Helming et al. 1993), questions of efficiency in the allocation of quota rights (e.g. Burrell 1989, Boots et al. 1997, Colman 2000), regional competitiveness (e.g. Burton 1989, Boots et al. 1997, Guyomard et al. 1996), resource use and technical efficiency under constrained outputs (e.g. Moschini 1988b, Hallam and Machado 1996, Brümmer et al. 2002, Pierani and Rizzi 2003) were at the centre of discussion. Questions of structural development under the quota regime and the impact of quota mobility were other issues considered (Oskam and Speijer 1992, Colman et al. 1998, Barthélemy et al. 2001, Colman et al. 2002).
Some of the studies used a profit function framework (Helming et al. 1993, Moschini 1988b, Boots et al. 1997), but most employed cost function approaches (Burrell 1989, Burton 1989, Guyomard et al. 1996, Colman et al. 1998, Colman 2000). The research focused mainly on the development within one member state (e.g. Burton 1989, Helming et al. 1993, Guyomard et al. 1996, Boots et al. 1997) and little has been done on a comparison between different member states (exception Barkaouli et al. 1997, INRA-Wageningen Consortium 2002) and with respect to the analysis of distributions of marginal cost.
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