Irish Dairying – A Competitive Industry?

1. Irish Dairying – A Competitive Industry? Fiona Thorne & Billy Fingleton Teagasc Glanbia Regional Seminars 2006

2. 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

3. Background & Rationale • Why it is important to be competitive? • WTO • CAP Reform • EU Enlargement • Competitiveness is about survival & not just about being the best

4. Questions 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?

5. Methods • Measures • Profit • Partial productivity indicators • Cost elements • Cash costs • Economic costs

6. Cash & Economic Costs ????? Cash Costs Economic Costs PLUS

7. Methods • Measures • Profit • Partial productivity indicators • Cost elements • Cash costs • Economic costs • Data • Farm Accountancy Data Network • International Farm Comparisons Network

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

9. Productivity of Irish Milk Production (‘96-’03) Ireland relative to the average of all countries (Average = 100)

10. Productivity of Irish Milk Production (‘96-’03) Ireland relative to the average of all countries (Average = 100)

11. Productivity of Irish Milk Production (‘96-’03) Ireland relative to the average of all countries (Average = 100)

12. Productivity of Irish Milk Production (‘96-’03) Ireland relative to the average of all countries (Average = 100) • Relatively low compared to competing countries • BUT, only part of the story

13. 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.

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

15. Costs for Specialist Dairy producers per kg of milk solids (1996-2003) • Lowest cash costs; • On a par with average total economic costs; • Owned land important in longer term. 1

16. ‘Average’ versus ‘Larger’ Dairy Farms versus

17. Costs for ‘Large’ Specialist Dairy producers per kg of milk solids (1996-2003) • Sub sample of larger farms: • Lowest cash costs • AND lower than average costs total economic costs; • Owned land important in longer term. 1

18. € economic costs per kg of milk solids: ‘Large’ Irish farms relative to the average

19. Looking outside EU-15

20. A look at profit margins…..

21. Farm income as per cent of total returns: Ireland v other non EU countries (2004) • On an international basis: • Profit margins for the ‘large’ Irish dairy farms are one of the highest in the world

22. Cash & Economic Costs ????? Cash Costs Economic Costs PLUS

23. Total Costs and Returns of the Dairy Enterprise: Ireland v other non EU countries (2004) • Positive outlook even in the longer term, for larger size dairy farms • Competitiveness is about survival & NOT about being the best. US$ per 100kg milk (ECM)

24. 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.

25. Farm Quintiles by Cost Levels & Related Net Margins Source: B. Fingleton, (based on 2002 NFS)

26. Discussion & Conclusions

27. 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;

28. 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.

29. 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.