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Why Europe is crying over spilled milk

Elvis Barukcic | AFP | Getty Images

Plans to scrap one of the European Union's longest-standing measures – its milk quota -- have been met with anger as politicians and analysts warn that any volatility in supply and prices could hit some countries' already-fragile economies.

The milk quota was introduced in the 1980s in response to surplus production and acts to maintain dairy prices plummeting. The measure is crucial to famers in poorer regions of Europe who rely on the market stability the quota brings.

In 2015, the European Union will abolish the milk quota, sparking concerns that the move would open the door to market instability.

"After the quota, there will be a tremendous impact in market. The volatility of milk price is high already, but when the quota ends, the volatility will increase further," Paolo de Castro, chair of the European Parliament's agriculture committee told CNBC.

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A "soft landing" is predicted because many countries' production remains under the quota, so scrapping the limit will not have a major effect, according to the European Commission, the EU's executive arm.

But five member states including Germany and Cyprus were fined a total of 46 million euros on Tuesday for exceeding their milk quotas, casting doubts over the Commission's hopes of calm in the dairy market after the quota rules end.

Agricultural experts said that the quota could be holding back production in some countries and a boost in milk production is possible after it has ended.

Removing the quota in countries that have already exceeded the cap is going to help increase the supply of milk, Professor Jeremy Franks from Newcastle University's School of Agriculture told CNBC, adding that it is "holding back production".

The scrapping of the milk production limit comes as the Common Agricultural Policy, which provides help to farmers across the continent, undergoes sweeping reform.

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Any end to the quota could also accelerate the trend of dairy production being abandoned in the higher-cost – also poorer – areas of Europe to low-coast – or more developed – areas, according to Alan Renwick, professor of agriculture & food economy at University College Dublin.

"Areas of higher costs and more disadvantaged places, are likely to reduce production, therefore there will be winners and loser across EU," he told CNBC.

Renwick said milk prices are likely to fall with the boost in milk production after the 2015 quota lift, but global prices will play a big role.

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"What has been happening in recent years is that EU price has been closely linked to world price. With the opening up in markets and reduced use of price support, the EU is closer to world market."

While the increased milk supply could push down prices, Renwick said price cuts may not be passed on to consumers as companies bag the extra profit.





—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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