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Implications of EU Milk Quota Abolition in Ireland: A Comprehensive Analysis

This study investigates the effects of EU milk quota removal on the Irish dairy sector, including production, prices, exports, and market dynamics. It provides insights into the impact on milk production, prices, consumption, and exports post-quota elimination.

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Implications of EU Milk Quota Abolition in Ireland: A Comprehensive Analysis

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  1. Implications of EU Milk Quota Abolition Trevor Donnellan & Thia Hennessy Teagasc - Irish Agriculture and Food Development Authority Dublin, Ireland with Special Emphasis on Ireland Patrick Westhoff Food and Agricultural Policy Research Institute (FAPRI) University of Missouri, USA

  2. Overview • Background • Methodology • Quota Removal • EU15 Aggregate • Ireland National Level • Irish Farm Level • Conclusions

  3. Background • In 1998 FAPRI asked to examine a number of dairy policy options. • Scenarios that would eliminate the EU dairy quota programme • allow EU dairy product prices to fall to market-clearing levels

  4. Methodology • FAPRI used a structural model of the EU dairy sector, • based on assumed elasticities of supply and demand. • analysis enhanced by a panel of dairy industry analyst • reviewed model parameters and preliminary results • challenge was estimating milk supply response • based on estimates of milk production costs and quota values reported in the literature • modified in response to panel comments

  5. Detail of Scenario • In the run-up to Agenda 2000 the study compared EU dairy market projections under two alternative scenarios: • 1) Baseline scenario: continue 1998 policies indefinitely. • 2) Alternative scenario: • eliminated EU dairy quotas and the intervention regime in 2001 • No compensation • GATT limits apply (no new WTO changes) • No intervention • No EU internal subsidised disposal

  6. EU Milk Production • With no quotas, milk production increases • up 5% in 2001 • up 8% in 2007 • Sharply lower prices limit production increase

  7. EU Milk Prices • With no quotas, milk prices decline 20% in the first year • In the seventh year, the decline is 27%

  8. EU Cheese Consumption • Consumption grows under current policies • Lower prices without quotas mean even more cheese consumption

  9. EU Dairy Exports • Lower prices without quotas result in more exports • Export markets absorb about half of the increase in milk production

  10. EU and World Butter Prices, 2007 • EU butter prices also fall, but remain above world prices • Thus, EU butter exports would still require subsidies

  11. EU and World SMP prices, 2007 • SMP prices fall to world levels under no quotas • EU can export SMP without subsidy

  12. Quota Elimination Summary • Milk production increases 5-9 percent • Milk prices fall 20-29 percent • Domestic dairy consumption increases • Dairy exports increase 16-41 percent

  13. Events since analysis completed • European Union adopted the Agenda 2000 reforms. • Small increase in quota • Intervention price reductions, 2005-2007 • FAPRI (2000) estimated result would be • Higher production (but increase less than quota increase) • Lower prices (but decrease less than intervention price reduction) • Many other factors have affected dairy markets • Resulting market outcomes for 1998-2001 have differed from 1998 baseline projections

  14. 1998 baseline, 1998 no quota scenario, preliminary 2002 baseline weaker price outlook Milk Price 3.7% fat basis

  15. Ireland in EU Context • Ireland has just 4 % of EU15 milk quota • But Ireland only 1 % of EU 15 population • Ireland has a significant dairy product surplus • circa 70% of milk equivalent exported to • EU member states and third countries • Average dairy farm has 38 cows • Milk output per cow low relative to EU average

  16. Milk Output per Cow • Some imponderables to consider • Irish milk output per cow relatively static in last 10 years • Genetic potential increasing but not shown in performance ? • Short lactations ? • 7% of production fed to calves • Why do we have 200,000 surplus dairy cows? • What will be effect of quota removal?

  17. Focus of Irish Product Mix • Butter and SMP dominate the product mix • represent about 60 % of manufacturing milk use • cheese is small in relative terms (20% of manufacturing milk use) • Disproportionate dependence to intervention products

  18. Irish Milk Price and Production • Irish Milk price lower than EU Average • But grass based production system • Lower Costs • Ireland considered to be low in cost relative to some feed grain systems

  19. Geography of Current Production Smaller Farms, Higher Cost • Possible to generalise Ireland into two areas • “South East” segment • lower costs and larger farms • “North West” segment • higher costs smaller farms • Currently quota is ring fenced • prohibits internal migration of production • South East has expansion potential Larger Farms, Lower Cost

  20. Post Quotas what would the future hold? • In no quota situation • the Irish milk price decline would be greater than the EU average • because of unfavourable product mix • small domestic market relative to production • limited access to internal EU Markets • relatively greater dependency on intervention, subsidised disposal and 3rd country markets • Decline in milk price greater than EU average • in the range of 30 to 35 per cent given these factors

  21. Irish Farm Level Analysis Thia Hennessy

  22. The Impact at Farm Level • The focus was on 1. Potential to expand production 2. Expansion required given lower price 3. Feasibility of expansion

  23. Assessing the Production Potential • Latent potential in cow yields and numbers • Shortened Lactation • Level of specialisation in dairy 50 – 60% • Potential increase 35-65% • Largest potential – smallest producer

  24. What is the Potential Increase ?

  25. Impact on Income • Assuming Abolition in 2008 - three scenarios • 20c per litre price & 2.7c compenstation • 20c per litre price & 5.4c compenstation • 22.4c per litre price & 4.2c compenstation • Assume production costs 6-7% higher than present

  26. What volume of production is required?

  27. Is it feasible? • Large investment required • Cash surplus during repayment • Small farms less than minimum wage • Medium group less than industrial wage • Serious implications for farm numbers

  28. Take Home Message • EU • production up 8 % • price down 27 % • Ireland • poor product mix • intervention dependent • price down 30 - 35 % • Ireland Farms • large potential to expand • but not sufficient to maintain income given milk price

  29. Thank You www.tnet.teagasc.ie/fapri Further information on our work is available on our websites at: www.fapri.missouri.edu

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