Policy Options to Increase Milk Production for Commercial Dairy Farmers

1. Policy Options to Increase Milk Production for Commercial Dairy Farmers Professor Gerry Boyle, Head, Department of Economics, NUI Maynooth January 2006

2. Objectives • To make the case that a substantial increase in the level of milk supply is vital to ensure the viability of the average commercial dairy farmer … and • To propose some feasible policy options that could accelerate the rate of increase in average supply ahead of the likely abolition of quotas over the next decade or so …

3. Outline • Factors affecting the sustainability of commercial full-time dairy farming • Quota required to achieve a minimum standard of living for a full-time farmer • Structural change in EU milk production • EU-level initiatives to increase Irish supplies • Quota policies in other countries • National initiatives to increase supplies • Conclusions

4. Sustainability of full-time commercial dairy farming • “Price-cost” squeeze • Productivity • Scale • Target standard of living for a family farm

5. Family farm income on specialist Irish dairy farms, € [EU FADN data]

6. Price-cost “squeeze”

7. Ratio of milk to input prices, 1995=100

8. Productivity and farm income

9. Scale and farm income

10. Target income and scale requirement • Target income reflects a mix of needs and aspirations • Needs are driven by the number of farm dependants – children and elderly relatives • Aspirations are driven by desired living standards and for family farmers the deep-seated desire to see their children keep on the tradition of farming • Thus target income will vary depending on circumstances

11. The average annual wage • Today as a working assumption only I will assume target income equals the average wage in the economy • No intention to suggest that this is an adequate or appropriate income target • However … most reasonable people would see this objective as a minimum target income

12. The trend in average earnings

13. Scale (gals.) required to achieve min. target income

14. Scale required to achieve minimum target income per Family Work Unit, € … “The Quota Treadmill” 2000 2003 2010 Average wage € p.a. 25,609 30,878 42,008 Required scale, gls. 82,397 105,709 154,948 Efficiency range -30% +60%

15. If we don’t take action now … • On the basis of the current national level and rate of change in the average supply of producers it would take … • 19 years to achieve the 2003 scale required to deliver national average earnings …and • 28 years to achieve the 2010 required scale

16. How do we fare in the viability stakes relative to our EU competitors?

17. The structure of EU milk production

18. Structural change in EU milk production

19. Ireland performing below expectations in terms of structural change

20. Key message … the commercial farmer must be given the freedom to expand … but how?

21. Policy options to increase production/quotas • EU level initiatives • Increase quotas/production (Commission’s own analysis) (ii) Re-structure quotas within EU • National-level initiatives • More aggressive restructuring of quotas

22. (i) Increase quotas/ production within the EU – 4 options • Status quo – keep Agenda 2000 to 2014/15 • Accelerated Agenda 2000 • A&C quotas – internal quota matched with demand and unlimited exports at “world prices” … • Quota abolition & corresponding cuts in intervention prices …

23. Impact vs. Agenda 2000 % change by 2014/15

24. (ii) Re-structuring of quotas within the EU • This would be an extension of what’s happening right now within several member states • Intra-EU quota tradability … quotas to flow from low comparative advantage to high comparative regions … Ireland to gain? • A variant on the above … allow tradability within defined EU regions only … based on low and high comparative advantage milk production areas • Either option could be pursued alongside expansion of quotas and ultimate abolition

25. National policy initiatives – what can we learn from other countries?

26. Quota policies in other countries • Ireland unique in not having regional-based transactions • France – a highly administered system … quota can be sold into the National Reserve for free re-allocation • Germany – 20 Lander-based quota exchanges but new Government could reduce exchanges to 2 – not entirely free market • Netherlands – farmer-to-farmer transactions (with restrictions) of quota only …

27. Quota policies in other countries contd. • Denmark – now a single national quota exchange with trades 4 times per year – complete free market • UK – farmer-to-farmer trading of quotas with no regional restrictions • Finland – farmer-to-farmer trading within regions but with restrictions … 60% of quota market traded but 40% to a regional pool at a controlled price

28. Quota policies in other countries contd. • Norway – 70% of quota sold to national pool at a fixed price but 30% can be traded farmer-to-farmer on the regional market • Spain – nationally funded re-structuring scheme … older farmers paid more to encourage quota surrender and younger farmers charged less to acquire quotas

29. Two key national initiatives • My preferred option would be to allow free quota trade between farmers … the cumbersome rationing required of a fixed price system satisfies no-one … In the absence of this I propose two modifications to current arrangements … • A special quota buy up scheme • A two-price quota trade model

30. A special quota “buy up” scheme • A State-supported “top up” Restructuring Scheme to encourage the surrender of 120 mill. gls. of quota • For a two-year window starting this year farmers surrending quotas would receive €1.05 per gl. – 55 c. from the present scheme and an additional 50 c. from the proposed “top up” • Buyers of quota would continue to pay the State prevailing fixed price

31. Justifying State support • Some other countries seem to be supporting their producers through financial subventions … are we being too virtuous? • A vital national interest is at stake … we’re among the most efficient producers of milk in the world … to guarantee a viable future for this industry makes sense • Government support could be viewed as the price for not allowing a market-based solution to re-structuring • At the very least the provision of long-term mortgage-type finance for the beneficiaries should be contemplated

32. Given the urgency of the issue and if State support is ruled out there is a good case in my view for a modest producer levy of say 3 c./gl. to apply for a two-year period to finance the scheme …

33. A two-price quota trade system • In addition to the special “buy out” scheme serious consideration should be given to adopting a variation on the Norwegian system • Allow 70% of quota sales and re-allocation to occur via the existing Re-structuring Scheme and allow the remaining 30% to be … • Traded farmer-to-farmer … • This should encourage more quota to be surrendered

34. Hoped for impact of proposed national policies

35. Conclusions • Significant scale is required to attain relatively modest income targets … 106,000 gls. now … 155,000 gls. by 2010 • We’re lagging our EU competitors in terms of increasing average supply • We need to prepare for the inevitable abolition of quotas … avoid the “hard landing” unlike sugar • Transitional policies needed to prepare us for a Europe without quotas – a combination of EU and national initiatives are urgently required

36. Conclusions contd. • EU level … permit inter-country trade in quotas from 2008 • National level … make release of quota much more attractive … special “buy up” scheme & allow 30% of quotas to be based on farmer-to-farmer trades • These policies to be part of upcoming National Partnership negotiations • Regarding producer partnerships – remove all bureaucratic encumberances to their establishment ASAP … a final remark …

37. A final remark from a producer … this week’s Journal • “We need urgent change to this scheme [Restructuring Scheme] and we need it now and not in five years time.” • “… what [should] I as a full-time dairy farmer with no other source of income … do to grow my business and build the productive capacity needed if I cannot secure decent volumes of extra quota. Do they think I should consider hanging up my dusters and bugger off and get a job tending to a brickie?” THANK YOU