Milk quota plans revealed

By Pat O'Keeffe

The plans are still up for discussion but the Department hope to have made a final decision by the end of September.

An initial reading of the proposals would suggest a major emphasis on "price cooling'' mechanisms.

Fears that milk quota price would escalate to unrealistic levels dominated consultation. As a result, the Department have proposed a price cooling mechanism which may disappointment quota vendors expecting a high price for their milk quota.

A fixed percentage of all milk quota offered for sale will be transferred at a pre-determined price to priority categories such as new entrants, lost leases etc. This percentage is not yet fixed, but could be 10%, 15% or 20% for example. The price for this quota has yet to be set, but the likelihood is that it will remain at the current price for restructuring quota, 12 cent per litre (55c/gallon).

In a move that will anger some sellers, the Department is proposing that quota holders who offer milk quota for sale at a price higher than the market clearing price will have to "surrender'' a portion of their quota to the fixed price scheme. This "entry fee'' will undoubtedly force sellers to dampen their price expectations. For example, if the market clearing price was 20 cent, a seller that has sought 50 cent per litre in the exchange will not get to sell their quota and will also have to sell a fixed proportion (10%?) at the fixed price (12cent/litre?). Their next opportunity to sell would be 12 months later.

A further price cooling mechanism is proposed. After the market price is set, the bids that exceed this price by a set percentage - 40% is used in the German system - are excluded. These bidders get no milk. The market price is then set again, with these bids excluded, so the high bids do not affect the actual price set.

A new Statutory Instrument would be published in October, with bids and offers of quota likely to be sought this November.

Ireland's first milk quota exchange would then run in December on a processor level. In a move designed to encourage buyers and sellers to be "realistic'', only one exchange will take place per year.

In the quota exchange, sellers will offer their quota for sale and state the minimum price they are willing to accept. Buyers bid for a specified volume of quota and state their maximum price. An exchange is run on computer software. This sets the price at which the supply and demand curves meet.

This is the "market clearing price''. If you bid at this price or above it, you get to purchase quota at the market clearing price. If you offered to sell at this price or lower than it, you get to sell, at the market clearing price. In other words, if you bid too low or ask too high a price, you don't get to sell or buy any quota.

Consultations will now begin in earnest on the proposed new system. The detail will take some time to understand and the Department plans to run a series of information meetings. There are likely to be heated arguments on the "entry fee''. The Department of Agriculture regard it as a powerful price cooling mechanism on the supply side, but some sellers will regard it as "draconian'', especially if it takes 20 to 30% of their quota.

There are about 400 individual milk quota leases due to expire in 2007/2008. Rather than sell their quota through the exchange and risk losing a set percentage of it at the fixed price, sellers may decide to do a deal with the farmer leasing the quota and agree to sell the full amount at the quota exchange price, thus saving themselves the "entry fee''.

The fixed price element will have two important effects:

It is likely to be used by many buyers and sellers when deciding on their bid and offer prices

If a seller seeks an excessively high price and their quota is not sold through the exchange, they will be returned their quota, minus the fixed proportion, for example, 10%. They will then have to wait another year to offer their (reduced) quota for sale.