The EU dairy sector is facing a period of significant changes that are due to three major decisions: the EU enlargement, the Luxembourg reform and on-going WTO negotiations. In this paper, we explore the impact of alternative dairy policies in the context of a WTO agreement and further dairy policy adjustments. In particular, we analyse the impact of gradual and significant increases in the EU milk quota and discuss the implications of different changes in the allocation of milk quotas. We compare these scenarios with a status-quo scenario that is the Luxemburg CAP reform as decided in 2003.