Irish Dairying – A Competitive Industry?

Fiona Thorne & Billy Fingleton

Teagasc Glanbia Regional Seminars 2006

Overview Background & Rationale

• Methods

Competitiveness Results

• FADN Results

• Productivity Analysis

• Inter-Country Cost & Returns

• IFCN Results

• Inter-Country Cost & Returns

• Implications in a reduced milk price scenario

Distribution of costs & returns for the Irish dairy sector

Conclusions & Implications of findings

Background & Rationale

Why it is important to be competitive?

•WTO

•CAP Reform

•EU Enlargement

Competitiveness is about survival & not just

about being the best

Questions answeredQuestions answered How competitive are Irish dairy farms?

• Within the EU-15?

• Within the international world of dairy production?

• Distribution of costs and returns within Ireland?

What is the future of Irish dairy production?• In the short to medium term?

• In the long term?

• In the context of WTO reform?

Methods

Measures•Profit•Partial productivity indicators

Cost elements•Cash costs•Economic costs

Cash & Economic Costs ?????

Cash Costs Economic Costs

PLUS

Methods

Measures•Profit•Partial productivity indicators

Cost elements•Cash costs•Economic costs

Data•Farm Accountancy Data Network• International Farm Comparisons Network

Cost Competitiveness & Productivity of Irish Dairy

Production (1996-2003)

Cost Competitiveness & Productivity of Irish Dairy Production (1996-2003)

Productivity of Irish Milk Production (‘96-’03)

Ireland relative to the average of all countries (Average = 100)

0

50

100

150

200

Milk yd/cow kg Milk solids/cow kg

Inde

x (I

rela

nd =

100

)

Belgium Denmark France Germany Ireland Italy Netherlands UK

Productivity of Irish Milk Production (‘96-’03)

Ireland relative to the average of all countries (Average = 100)

0

50

100

150

200

Milk yd/cow kg Milk solids/cow kg

Inde

x (I

rela

nd =

100

)

Belgium Denmark France Germany Ireland Italy Netherlands UK

Productivity of Irish Milk Production (‘96-’03)

Ireland relative to the average of all countries (Average = 100)

0

50

100

150

200

250

Stocking rate LU/ha Milk prod /lab. Units

Inde

x (I

rela

nd =

100

)

Belgium Denmark France Germany Ireland Italy Netherlands UK

Productivity of Irish Milk Production (‘96-’03)

Ireland relative to the average of all countries (Average = 100)

0

50

100

150

200

250

Stocking rate LU/ha Milk prod /lab. Units

Inde

x (I

rela

nd =

100

)

Belgium Denmark France Germany Ireland Italy Netherlands UK

Relatively low compared to competing countriesBUT, only part of the story

Productivity Levels conti…. 50-99 dairy cow category

•Rankings similar but disparities reduced Rankings over time (1996-2003)

•Average size farm:

•Milk solids per cow

•Stocking rate per hectare

•Milk solids per hectare

• ‘Larger’ dairy farm:

•No significant relative trend

•But +ive trend for milk yields & solids per cow, & labour prod.

Costs for Specialist Dairy producers per output value (1996-2003)

0

20

40

60

80

100

120

140

% o

f to

tal dair

y o

utp

ut valu

e

Total Cash Costs Imputed Owned Land Costs Imputed Labour & Other Costs

Average Irish farm: second lowest cash costs but the second highest total economic

costs;Larger Irish farms: on a par with average

total economic costs;Owned land important in longer term.

Costs for Specialist Dairy producers per kg of milk solids (1996-2003)

0

1

2

3

4

5

6

per

kg o

f m

ilkso

lids

Cash Costs Imputed (owned) land cost Non land imputed costs

1

Lowest cash costs;On a par with average total economic

costs;Owned land important in longer term.

‘Average’ versus ‘Larger’ Dairy Farms

versus

Costs for ‘Large’ Specialist Dairy producers per kg of milk solids (1996-2003)

1

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Costs p

er k

g o

f m

ilk s

old

is

Total cash costs I mputed (owned) land costs I mputed (owbed) non land costs

Sub sample of larger farms:Lowest cash costs

AND lower than average costs total economic costs;

Owned land important in longer term.

€ economic costs per kg of milk solids:

‘Large’ Irish farms relative to the average

y = -0.1032x + 206.21

R 2 = 0.8306-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Co

sts

rela

tive t

o t

he a

verag

e

Looking outside EU-15

A look at profit margins…..

Farm income as per cent of total returns:

Ireland v other non EU countries (2004)

-15%

0%

15%

30%

45%

60% On an international basis:Profit margins for the ‘large’ Irish dairy farms are one of the highest in the world

Cash & Economic Costs ?????

Cash Costs Economic Costs

PLUS

Total Costs and Returns of the Dairy Enterprise: Ireland v other non EU countries (2004)

US$ per 100kg milk (ECM)

0

10

20

30

40

50

60

70

80

90

Cash costs Economic Costs Dairy Enterprise Receipts

Positive outlook even in the longer term, for larger size dairy farmsCompetitiveness is about survival & NOT about being the best.

Milk Price & Competitiveness - WTO Implications

• Current Policies

• Even under current policy milk price declining;

• Extreme WTO reform

• To reduce milk price further;

• But, Ireland not adversely affected compared to other EU

countries;

•Volume of butter exports (twice World price) versus

•Volume of SMP (equiv. to World price) & cheese

• Ability to compete similar to longer term outlook presented.

Farm Quintiles by Cost Levels & Related Net Margins

0

5

10

15

20

25

Very lowcosts

Low costs Mediumcosts

High costs Very highcosts

Cent

per

litr

e

Direct Costs Overhead Costs

Source: B. Fingleton, (based on 2002 NFS)

Discussion & Conclusions

Conclusions Productivity Indicators

•Partial productivity indicators for Ireland were ‘worrying’;

•Land productivity for average size Irish farms declined from 1996 – 2003;

•BUT, Total Factor Productivity is what is N.B.

Very competitive on a cash cost basis

• Ireland had one of the lowest costs per unit of production;

•Positive outlook in the short to medium term;

Conclusions Deterioration when total economic costs are calculated:

• Implications for competitiveness in the longer term;

•Warning signal for average size Irish dairy farm;

•AND, ‘large’ Irish farms more competitive in the longer term;

Important considerations:

•Relatively low scale primary agricultural activity

•BUT, as average size increases:•Better able to cope with a cost price squeeze.

•Scope for increasing productivity levels.

Key Take Home Message

Short to medium term outlook is positive

AND in the longer term, as farm size increases, the competitive outlook is also positive.