Recent Common Agricultural Policy (CAP) reforms have affected dairy policy, including the milk quota system, and increased the market orientation of the sector. A modelling exercise, using the European Dairy Industry Model (EDIM), simulates an initial sharp decline in the EU milk price in response to the decrease in the intervention prices of butter and SMP after 2003, followed by a period of stability and an increase from 2007/08 as the demand for dairy protein products increases over time and EU milk supply is still restricted by quotas. The phasing out of the milk quota following the implementation of the 2009 Health Check is estimated to lead to an increase in milk production and a decrease in the milk price both within and without the European Union. The gap between EU domestic and border prices is expected to continue to narrow. Looking at developments in dairy markets between 2000 and 2007, the study finds that milk prices did not decrease as much as expected because the intervention prices were no longer binding, in particular for skimmed milk powder. The income of dairy farms increased as decline in milk prices was more than compensated by the introduction of dairy premium and higher farm productivity due to the increase in farm size. However, since 2007, incomes of dairy farmers have strongly fluctuated as both milk and feed prices have been highly variable in opposite directions.

The reform of the Common Agricultural Policy (CAP) in 2003 has resulted in substantial changes to the way in which dairy farmers are subsidized. Moreover, dairy farmers are also facing an unprecedented situation with major price fluctuations of agricultural raw materials. In this chapter, we discuss the cross effects on the productive strategy of French dairy farms due to the 2003 reform and to price variation. A model based on mathematical programming has been developed to determine how dairy farmers might re-evaluate their systems to identify an optimal production plan. While respecting the principle of agent rationality (maximization of profit), the model incorporates the economic risk related to the volatility of input and output prices. Thus, the model maximizes the expected utility of income while taking into account a set of constraints: regulatory, structural, zoo-technical, agronomic and environmental. This model allows a large choice in term of intensification level (input use) and productive combination. The model is applied to four types of dairy farms to show their different reactions to the reform. The simulations show how the implementation of the single payment scheme encourages farmers to increase the share of grassland. However, the increase in cereal prices is a strong incentive for farmers to intensify forage production in order to free up land for crop production. The decoupling of premiums for male bovines led farmers to reduce, all things being equal, this activity in order to increase cereal production.