1. 1 Competitiveness of the Dairy Sector at Farm Level in the EU Trevor Donnellan 1, Thia Hennessy 1, Michael Keane 2 & Fiona Thorne 1 1 Agricultural Economics Dept., Teagasc 2 University College Cork, Ireland European Grasslands Federation 2012 Lublin, Poland

2. 2 Overview  Background & Rationale  Methods  Competitiveness Results  FADN Results  Inter-Country Cost & Returns  IFCN Results  Inter-Country Cost & Returns  Conclusions & Implications of findings

3. 3 Background & Rationale  Why it is important to assess competitiveness?  Competitiveness is about survival & not just about being the best  Competitiveness rankings are not “door numbers”  Can changes as circumstances change  Useful to examine competiveness on a periodic basis  Changes in relative costs and prices received for milk production  Greater price volatility internationally  EU dairy sector is no longer fully insulated from world dairy market  Policy reform (EU Enlargement, WTO, CAP milk quota removal, biofuel policies)  How competitive are dairy farms across the EU ?  Relative to other EU competitors ?  Relative to other dairy producers at world level ?

4. 4 Producer milk prices EU15, US and NZ Source: FAPRI Competitor prices converging on EU level

5. 5 SMP exports by EU, NZ and US EU share of world dairy trade in decline SMP Skimmed Milk Powder

6. 6 Average dairy herd size in selected EU15 Member States, NZ and US NZ and US average herd size well ahead of most of EU

7. 7 Feed and Fertiliser Price Indices Source: Central Statistics Office Ireland Declining cost advantage of grass over concentrates ?

8. 8 Methods  Measures  Partial productivity indicators  Costs and Profit  Costs per unit of product  Costs relative to output value  Cost elements  Cash costs (feed, fertiliser, fuel, hired labour, vet services etc.)  Economic costs (i.e. Cash Costs + plus cost for owned labour, land and capital)  Data  Farm Accountancy Data Network (FADN) from the European Commission  International Farm Comparisons Network (IFCN)

9. 9 Cash Costs vs Economic Costs  Comparing costs across countries is not easy  Need to deal with different accounting conventions  Need to understand variations in production systems which impact on particular costs  Look at “Cash Costs” and “Economic Costs”  “Economic Costs” exceed “Cash Costs” by definition as they include “hidden” costs of production  e.g owned land vs rented land

10. 10 Cash Costs Defined  Usual costs within profit and loss statement  Includes:  Variable Costs  Fixed Costs  But excludes depreciation

11. 11 Economic Costs Defined  Cash costs plus  Imputed charges for owned land, labour & capital  Imputed land value  Owned land * rental value of land  Imputed labour value  Unpaid labour * paid labour hourly rate  Imputed capital value  Owned capital * long term interest rate Cash Costs Land Cost Labour Cost Capital Cost Economic Cost + + + =

12. 12 Results  Look first as 8 key dairy countries in the EU15  Using data from the EU Farm Accountancy Network (FADN)  PRO: Statistically valid sample of farm population  CON: Currently mainly of use for EU15  Long term comparison with EU12 is not yet possible  Due to short time series since new members joined EU  Also a time lag in the provision of data  Should be possible to include a wider EU country comparison using FADN data set in a couple of years

13. 13 Productivity indicators Ireland vs other EU Member States (1) DK and NE High yields DK NE High solids Somewhat less variation in stocking rates Average 2005-2007 for all specialist farms

14. 14 Productivity indicators Ireland vs other EU Member States (1) Average 2005-2007 for all specialist farms DK NE High solids Somewhat less variation on volume/ha basis DK NE and UK labour productivity

15. 15 Need to delve further  So we have seen the variation in labour productivity, milk solids, stocking rate etc  Some countries which we typically characterise as having high cash costs also have high labour productivity and high output per ha  But high labour productivity or stocking rates or output per hectare does not necessarily mean high profitability  Need to look at selling price and cost of production also

16. 16 Cash and Economic Costs as % of output value (2005-2007) IE and BE show lowest Cash CostsNE and UK show lowest imputed Costs

17. 17 Cash and Economic Costs as % of output value (2008-2010) Convergence of Cash Costs (DK an outlier)UK and NE improve overall position

18. 18 Summary: EU15 Competitiveness  Competitive position of Irish grass based system deteriorates in period 2008-2010 relative to 2005-2007  Competitive position of FR, NE and UK improves in period 2008-2010 relative to 2005-2007

19. 19 Looking outside EU-15  Need to move from the FADN to a database that is internationally consistent  Use the International Farm Comparison Network (IFCN) for global comparisons  PRO: Methodologically reasonably consistent accounting framework  CON: Not statistically valid sample  Relies on “typical” farm definitions that represent an average level of managerial ability  Data compilation could be somewhat subjective

20. 20 IFCN country analysis  Comparative countries  Ireland, Argentina, US, NZ, Australia, Poland  Systems of production:  Feedlot systems:  Texas, California  Grazing:  Argentina, Ireland, NZ, Australia  Free stall & stanchion barns:  Poland, UK, Wisconsin, Idaho, US – North East

21. 21 Cash Costs and Milk Price (2008-2010) AR – Argentina,AU – Australia, IE – Ireland, NZ – New Zealand, PL- Poland, WI – Wisconsin, CA – California, ID – Idaho, TX – Texas, NY – New York, WA – Western Australia Large NZ herd Larger Polish herdMedium and small Polish herd

22. 22 Economic Costs and Milk Price (2008-2010) AR – Argentina,AU – Australia, IE – Ireland, NZ – New Zealand, PL- Poland, WI – Wisconsin, CA – California, ID – Idaho, TX – Texas, NY – New York, WA – Western Australia Larger Polish herdMedium and small Polish herd Large NZ herd

23. 23 Summary: Global Competitiveness  On cash cost basis average sized farms in EU member states can be characterised as lying between low cost and high cost systems internationally  However, when full economic costs are also considered the relative position of EU farms generally deteriorates due to the relatively high level of imputed costs on such farms  The international pressure to increase the scale of dairy farms in many EU countries is set to continue

24. 24 Overall Conclusions  Larger scale EU grass based production is internationally competitive on a cash cost basis  Positive outlook in the short to medium term  Picture deteriorates when total economic costs are calculated  Implications for competitiveness in the longer term  Warning signal for average sized dairy farm in some EU countries  The pressure to scale up production remains  May give rise to Economic, Sociological, and Environmental implications in grassland regions