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Planning For a Future in Irish Dairy Farming Thia Hennessy

Planning For a Future in Irish Dairy Farming Thia Hennessy. Outline. Factors that will shape the future Facing the challenges Current policy framework Quota abolition. Factors to Consider. Celtic Tiger Higher incomes and inflation Demographic Trends. Number of children aged 16 to 20

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Planning For a Future in Irish Dairy Farming Thia Hennessy

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  1. Planning For a Future in Irish Dairy Farming Thia Hennessy

  2. Outline • Factors that will shape the future • Facing the challenges • Current policy framework • Quota abolition

  3. Factors to Consider • Celtic Tiger • Higher incomes and inflation • Demographic Trends Number of children aged 16 to 20 1981 44,412 100 1991 35,359 80 2011 12,075 27

  4. The Policy Climate • Recent Changes – Agenda 2000 & quota policy • Continued reform • Medium-term review of CAP • WTO • EU enlargement

  5. Facing the Challenges • Change is inevitable • For better or worse? • How do we respond? • Winners and losers?

  6. FAPRI-Ireland • Established in 1995 – following J Bruton’s visit • Partnership with FAPRI-Missouri • Ireland • Teagasc • Irish Universities • Industry • Modelling policy scenarios - agri-food sector

  7. Modelling • Economic models  projections • Not prediciton  based on best information • Two types of modelling

  8. World Model of Agriculture World supply and Demand European Model of Agriculture FAPRI-Ireland Commodity Models How does it work? Representative Farms

  9. Current Policy Framework • Agenda 2000 • Policy on milk quota transfer • Market demand strong in Asia and Russia • After 2004 increased quota and lower price

  10. Milk Price

  11. Milk Price Total Irish Milk Sector Revenue

  12. Representative Farms • Four Dairy Farms 1. Small less than 20,000 gals contracting (11,000) 2. 30,000 gals young and developing (8,000) 3. Large 100,000 gals (1,000) 4. Typical 40,000 gals (13,000)

  13. Impact on Farms • Gross Output remains static • Price – cost squeeze • Margins are falling • Combat with economies of scale or efficiency • Run faster to standstill

  14. How will Farms Respond? • Key to success is quota • Typical dairy farm by 2010 farm margins are 35% higher than in 1998 (nominal terms) • Purchasing quota leased and extra increase in quota farmed by 25% (up to 47,000 gals)

  15. How will Farms Respond? • Developer farm margins up 35% by 2010 from 1998 • Increase in quota farmed by 35% • Large farm margins up 15% higher in 2010 than in 1998 (real loss) • Leased quota purchased no extra but benefits from increase in SBP limit

  16. How will Farms Respond? • Small dairy farm to exit • Expansion uneconomical • Price cost squeeze • Lure of off farm incomes • Part-time beef system

  17. What if Policy Changes? • London Club in favour of abolition • Germany also in support • Discussed in 2002 • What would the impact be if abolished in 2008? • (i)70p per gallon plus 10p compensation on 1998/99 production. • (ii)70p per gallon plus 20p compensation on 1998/99 production. • (iii)80p per gallon plus 15p compensation on 1998/99 production.

  18. What is the Production Potential? • Before investment • Maximum possible deliveries per cow • Maximum number of cows • Productivity improvements - 1.3% yearly • Sale of milk retained - 50-60 gallons per cow • Lengthening Lactation - 9%

  19. Possible Deliveries Per Cow * National Farm Survey 1999

  20. Possible Cow Numbers • Specialisation in dairy production • Dairy cows and replacements only • Land • Housing • Milking Parlour • Labour

  21. Possible Cow Numbers

  22. 5 10 45 40 What Limits Expansion? housing labour Land Parlours Labour Housing

  23. What is the potential increase?

  24. Costs • FAPRI - 2000-2008 costs up 12-14% • 1990-1998 costs up 6% • Theory if quotas are abolished costs should fall • Costs linked to agriculture will fall • Volume of inputs not linked to agriculture will fall • Assume: costs will be 6 to 7% higher than present

  25. <30 30-50 50-70 >70 What volume of production is required? 200% 150% 100% 50% 0% Potential 70p &10p 70p &20p 80p & 15p

  26. What investments are required? • Land Rental • Housing • Parlour • Labour • Borrowing over 7 years at 7.25% interest

  27. Capital requirements • Magnitude varies but breakdown similar • 70% on housing • 20% parlour • 5% on labour • 5% land

  28. What is feasible? • Large investments required • Incomes derived • Cash surplus - effect of repayments

  29. What income can be earned? • Cash Surplus - disposable income • Less than 30,000 gals group • 35% to 50% earn less than minimum wage • 30,000-50,000 gals group • all earn minimum • 2% to 17% earn less than industrial wage

  30. What income can be earned? • 50,000-70,000 gals group • all can earn industrial • 7% to 20% can maintain current level of income • Greater than 70,000 gals group • all can earn industrial • 30-86% can maintain current level of income

  31. Take Home Messages • Projection – not prediction • Inflation a major factor • Margins squeezed – expansion necessary • Smaller farms unable – exit? • Quota abolition will affect all farm sizes • Current potential not sufficient • May be favourable for those leasing

  32. Thank You www.tnet.teagasc.ie/fapri

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