The basic principle of the EU dairy intervention system is to remove excess product from the market at times of plenty, store and sell it back onto the market when there is a shortage.

The end result of this system is a leveling of markets, preventing extreme fluctuations in price, whilst also creating a ‘floor’.

The scheme purchases skim milk powder (SMP) and butter; these products are chosen as they are globally traded, standardised products which can be easily stored.

Each country’s intervention agency (RPA in the UK), buys these products direct from milk processors rather than farmers, and then stores the product in designated facilities until the market is suitable for them to sell onto food processors, commodity traders etc.

In doing this the EC effectively underwrites the value of SMP and butter (and indirectly farmgate prices), at its intervention buying prices. Market prices therefore may rise above intervention prices at times when demand is greater than supply, however they should not drop significantly below intervention levels when demand is weakens.

Intervention stores are only open to buy in new product between 1 st March – 31 st August; this coincides with the time of excess supply due to seasonality of UK/EU milk supply.

There is a limit of 109,000 tonnes of SMP which can enter intervention in the EU. There is also a limit of 70,000 for EU butter in 2004 (which will be reduced to 30,000 by 2008), above which the EU commission have the option to use a tendering system for additional volumes.

As all intervention prices are set by the EU Commission in euros, the sterling/euro exchange rate is therefore critical to level of intervention prices in the UK, and thus the ‘floor’ to the market.

As part of the reform of the CAP and change from ‘coupled’ production subsidies to ‘de-coupled’ non production subsidies (i.e. single farm payment), intervention these prices will be cut by 25% for butter and 15% for SMP between July 2004 and July 2007.