June 4 (Reuters) - Following is a profile of milk production in the European Union and how the bloc's system of national quotas works:
Milk production is the main farming activity in almost all EU countries individually and in the 27-member bloc as a whole, where it accounts for nearly a fifth of the total value of farm output.
All EU countries produce milk, to varying extents. But the bulk of the EU's output of cow's milk comes from just a few countries -- Germany and France are by far the largest producers, while Britain, the Netherlands, Italy and Poland trail some way behind. Together, these six countries account for around 70 percent of EU milk production.
The share of milk in a country's overall dairy output varies widely, roughly between 6 and 33 percent. It tends to be higher in northern Europe, especially in Estonia and Finland, and below 10 percent in Mediterranean countries like Greece and Spain.
For a story on the French dairy sector reaching a deal on 2009 prices, please see
PRODUCTION QUOTAS
EU dairy policy revolves around milk production quotas, and traditional market instruments such as intervention buying for milk and butter, as well as export subsidies. Quotas were set up in the mid-1980s to deal with notorious EU milk surpluses.
During the mammoth reform of the Common Agricultural Policy in 2003, EU ministers agreed to prolong a reformed dairy quota system until the 2014/15 campaign. In April 2008, there was a one-off quota increase of two percent agreed for 2008/09. Later that year, as part of a wider farm reform, EU farm ministers agreed a "soft landing" for the dairy sector with a gradual liberalisation of the milk market, increasing quotas by one percent annually in the run-up to the system's expiry.
Since then, due to low prices and repeated requests from certain countries, the European Union has taken steps to help support prices and guarantee farmer incomes.
These include:
- reinstating export subsidies temporarily for a range of products (butter, cheese, and whole and skimmed milk powder)
- bringing forward funding earmarked for dairy farmers under the EU's 2008 farm policy reform
- raising ceilings on volumes of butter and skimmed milk powder that can bought into public intervention stores
- reinstating flat-rate subsidies for private storage of butter; granting smaller extra daily payments handed out to cover variable costs for cold storage and financing
QUOTAS
EU countries are allocated two types of milk quota, one for deliveries to dairies -- by far the larger -- and one for direct sales to consumers. These quotas are further shared out among individual farmers based on their historical production.
Wholesale quota is held by milk producers who deliver milk to a purchaser -- usually a dairy or co-operative, with which the producer's quota is registered.
Direct sales quota is held by producers who sell their milk directly to market without going via a purchaser, or who sell products other than milk, such as skimmed milk, cream, butter, yoghurt and cheese. Producers can hold one or both quota types.
Any unused quota may be reallocated to other producers in the same country. Producers may convert their wholesale quota into direct sales quota or vice-versa to reflect their actual production -- and conversions can be permanent or temporary.
They can also transfer and trade quotas to match production, with quota prices determined by the market. But there are huge price differences around the EU for trading milk quotas for farmers who want to produce milk qualifying for EU subsidies.
EU SUMMITS SOURED BY MILK
Milk quotas have a long history of assuming an importance that diplomats say is disproportionate to their significance, even souring the harmony of EU summits and other major meetings.
In 2003, EU heads of state found themselves discussing the amount of quota allocated to dairy farmers in Portugal's remote Azores islands -- a long-term grievance held by Lisbon.
That was also said to be the reason for Portugal becoming the only EU country among the bloc's 15 member states at the time to vote against CAP reform that year.
Also in 2003, Italy irritated EU finance ministers, trying to clinch a long-awaited savings tax deal, by its refusal to back the plan unless it got a partial write-off on massive fines the EU had imposed on its farmers for overproducing milk.
SUPERLEVY
If production of either or both quota types is above the annual national allowance, those producers who have exceeded their individual quotas must pay a punitive levy on their overproduction after the end of the quota year.
The levy collected is used to offset the cost of storing and disposing of surplus milk within the EU market.
Each year, before Sept. 1, all national milk production figures must be reported to the European Commission for the previous marketing year, which runs from April 1 to March 31.
That fine is calculated at a base rate multiplied by each kilo of quota surplus, after any unused quantities are re-allocated. The so-called superlevy dates from 1984 and was designed to dissuade countries from exceeding annual quotas.
In 2007/08, for example, the European Commission slapped a combined fine of 340 million euros ($482.3 million) on seven EU countries for exceeding quotas.
Italy, yet again, was singled out as the main offender and also came top of the EU league for the preceding four years. (Writing by Jeremy Smith, editing by Anthony Barker)