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Coughlan announces progress in consultations on Milk Quota Trading

The Minister for Agriculture and Food, Mary Coughlan T.D., announced today that substantial progress had been made in her Department's consultations with stakeholders on the future of milk quota policy. The Minister said that the necessity to take a new approach to how milk quota is re-cycled from those who wish to exit milk production to those who see their future as progressive dairy farmers had been clear to her for some time.

Quota Trading

In March the Minister announced her intention to progress to a more open market system of trading milk quotas. She expressed her satisfaction with the response she received and the quality of the debate that has ensued. The Minister said that her objective in changing the delivery mechanisms for milk quota is solely to achieve a viable, sustainable and efficient dairy industry in Ireland. The clear purpose in this policy change is to release greater quantities of quota to committed and progressive dairy farmers at a faster pace that before. With sustained pressure on market supports and milk prices the Minister said that we need to do better than recycle just 3% or less per annum.

Quota Exchange

The Minister detailed many of the issues that the consultation process had considered. In stressing that no final decisions had been made she said that there appears to be consensus around the establishment of an Exchange as a quota trading system and that there would be no role for auction type arrangements. It was envisaged that one Exchange would operate in each Coop area though an Exchange area could be broadened to cater for situations where the size of the individual Coops are quite small and in order to generate a more active market, without affecting ring fencing.

There also appears to be consensus that the Exchanges will run in December 2006 for the first time. This would provide adequate time for quota purchasers to scale up their enterprises for the new quota, which would become available to them in April 2007.

There is a generally held view that some proportion of traded quota should be reserved for distribution at a fixed price. The fixed price proportion should be allocated in accordance with objective criteria to priority groups, possibly including young farmers and lost leases. It is intended that all quota transactions without land would be transacted through the Exchange other than family transfers and the buyout of leases.

Operation of Exchange

It seems preferable that Exchanges will be operationally managed at Coop level, though the Department will have an overall supervisory role, including the development, control and rollout of the software applications driving the Exchanges. Departmental offices may become the points of receipt of offers and bids from sellers and buyers respectively, retaining these until the closing date when they will be transferred to the relevant Coop. The Coop will verify the ownership of the offers and input appropriate sales and bids into the system and subsequently run the Exchange.

As regards the functional aspects of the Exchange, the Minister said that she was keen to emphasise that this is not an auction; the Exchange is quite different. It would function on the basis that producers wishing to sell quota will make an offer detailing the amount of quota in litres on offer and the minimum selling price per litre, while producers wishing to purchase quota make an offer stating the amount of quota in litres they wish to purchase and the maximum price they are willing to pay.

All offers and bids entered into the Exchange will enable the equilibrium or market-clearing price to be calculated. Offers to sell quota at or below the equilibrium price are deemed to be sold at the equilibrium price while bids to buy quota at or above the equilibrium price are deemed to have been purchased at the equilibrium price. In effect, there is just one Exchange price at which buyer and seller transactions are cleared.

Price Cooling

Minister Coughlan said that concerns had been expressed that the system would lead to escalating quota prices. A range of measures are proposed to alleviate such concerns. On the supply side one option would be to require the fixed price proportion of quota to be sold to priority categories irrespective of whether the balance of quota offered is sold on the Exchange. This would act as a deterrent to those attempting to speculate on the Exchange.

On the demand side bids will be excluded from the Exchange if they exceed the computed equilibrium price by an agreed percentage. This removes purchasers that make excessive bids and the Exchange is then run without the excluded bids, re-calculating the market-clearing price at a lower level. A further element being considered is to impose a quantity limit on buyers. This would prevent large producers dominating the sales activity at the Exchange by purchasing a disproportionate volume.

Also limiting the Exchange to one annually would reduce the risk of speculation by encouraging buyers and sellers to make genuine bids or otherwise be locked-out of quota transactions for a full year. There would also be limits placed on the resale of quota bought through the Exchange in order to prevent speculation.

The Minister said that she would finalise this stage of consultations in the coming weeks and she expects to announce full and complete details of the new scheme in September.

26 July, 2006

Date Released: 26 July 2006