Download Competitiveness of the Dairy Sector at Farm Level in the EU Trevor

Competitiveness of the Dairy
Sector at Farm Level in the EU
Trevor Donnellan1, Thia Hennessy1,
Michael Keane2 & Fiona Thorne1
1
Agricultural Economics Dept., Teagasc
2 University College Cork, Ireland
European Grasslands Federation 2012
Lublin, Poland
1
Overview
 Background & Rationale
 Methods
 Competitiveness Results
 FADN Results
 Inter-Country Cost & Returns
 IFCN Results
 Inter-Country Cost & Returns
 Conclusions & Implications of findings
2
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 ?
3
Producer milk prices EU15, US and NZ
US Dollars per 100kg
60
50
Competitor prices
converging on EU level
40
30
20
10
0
2000
2002
2004
EU
2006
US
2008
2010
NZ
Source: FAPRI
4
SMP exports by EU, NZ and US
450
EU share of world dairy
trade in decline
400
000 tonnes
350
300
250
200
150
100
50
0
2000
2002
2004
EU
2006
NZ
2008
2010
US
SMP Skimmed Milk Powder
5
no. of dairy cows
Average dairy herd size in selected EU15
Member States, NZ and US
400
350
300
250
200
150
100
50
0
NZ and US average herd size
well ahead of most of EU
BE
UK
NE
DE FR
DK
IE IT
EU15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
US
NZ
EU15
BE
IE
DK
FR
IT
NE
UK
DE
6
Feed and Fertiliser Price Indices
260
index 2000 = 100
240
220
200
Declining cost advantage of grass
over concentrates ?
180
160
140
120
100
80
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
Feed
Fertiliser
Source: Central Statistics Office Ireland
7
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)
8
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
9
Cash Costs Defined
 Usual costs within profit and loss statement
 Includes:
 Variable Costs
 Fixed Costs
 But excludes depreciation
10
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
11
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
12
Productivity indicators Ireland vs
other EU Member States (1)
2.5
Somewhat less variation
in stocking rates
DK NE
High solids
DK and NE
High yields
Index Ireland = 1
2.0
1.5
1.0
0.5
0.0
Milk yield/cow (kg)
IE
Milk solids/cow (kg)
BE
DE
DK
FR
IT
Stocking rate (LU/ha)
NE
UK
Average 2005-2007 for all specialist farms
13
Productivity indicators Ireland vs
other EU Member States (1)
3.0
Index Ireland = 1
2.5
DK NE and
UK labour
productivity
DK NE
High solids
Somewhat less variation
on volume/ha basis
2.0
1.5
1.0
0.5
0.0
Milk Production kg/ha
IE
Milk solids kg/ha
BE
DE
DK
FR
Milk production/labour unit
IT
NE
UK
Average 2005-2007 for all specialist farms
14
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
15
Cash and Economic Costs as % of
output value (2005-2007)
IE and BE show lowest Cash Costs
NE and UK show lowest imputed Costs
Costs as a per cent of Output
120
100
80
60
40
20
0
IE
BE
DK
FR
DE
IT
NE
UK
Imputed Costs
41
26
20
27
26
30
21
21
Cash Costs
67
61
92
83
77
67
75
78
Cash Costs
Imputed Costs
16
Cash and Economic Costs as % of
output value (2008-2010)
Convergence of Cash Costs (DK an outlier)
UK and NE improve overall position
Costs as a per cent of Output
120
100
80
60
40
20
0
IE
BE
DK
FR
DE
IT
NE
UK
Imputed Costs
37
35
14
25
28
34
16
14
Cash Costs
63
56
96
67
70
59
64
65
Cash Costs
Im puted Costs
17
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
18
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
19
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
20
Cash Costs and Milk Price (2008-2010)
80
70
US $ per 100kg milk
Larger Polish herd
Large NZ herd
Medium and small
Polish herd
60
50
40
30
20
10
PL-15
US-402NY
US-1577NY
US-5000
US-66NY
US-3000TX
PL-65
US-2000ID
US-1000ID
US-1710CA
US-350WI
PL-147
US-65WI
US-80WI
IE-48
NZ-316
AU-226WA
NZ-551
NZ-913
AU-816WA
IE-110
AR-600
AR-400
AR-170
0
cash costs
milk price
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
21
Economic Costs and Milk Price (2008-2010)
80
Larger Polish herd
US $ per 100kg milk
70
Medium and small
Polish herd
Large NZ herd
60
50
40
30
20
10
PL-15
US-66NY
PL-65
IE-48
US-402NY
US-65WI
US-80WI
US-1577NY
US-1000ID
US-5000
US-3000TX
US-2000ID
IE-110
PL-147
US-350WI
NZ-316
US-1710CA
NZ-551
AU-266WA
NZ-913
AU-816WA
AR-170
AR-600
AR-400
0
economic costs
milk price
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
22
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
23
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
24