‘Dark horse’ competitors may come from home rather than abroad in an open market
EUROPEAN competition for Irish dairy farmers as they seek to expand after 2015, could come from unlikely sources.
Some dark horses emerged from the International Farm Comparison Network’s recently published report on dairy farming around the world in 2011.
The IFCN group of agricultural economists has been analysing the costs of dairy farming in widely different farming and climatic environments for 14 years.
Their latest report includes 2011 data for 171 farms in 61 dairy regions and 51 countries. The costs and milk prices on “typical farms” in each of these regions are analysed and compared, in dollars per 100 kg of milk (see table).
Included is Irish data derived from the National Farm Survey carried out by Teagasc, (Dr Fiona Thorne of the Teagasc Rural Economy Research Centre is the Irish member of IFCN).
Two “typical” Irish farms are included, one with 62 cows, corresponding to the national average, and one with 117 cows. The smaller farm was estimated to have milk production costs of $46 (35.5c per litre), and was paid the same price for milk (35.5c per litre). The profitability picture looked better for the bigger farm, because the cost was lower, at $39 (30.2c per litre).
2011 was quite a good year for dairy farmers in most countries. The world market price for milk at $48 per 100 kg (37.1c per litre), was 16% higher than in 2010.
This price rise was also experienced in the EU, (the Irish increase was 15%). The price of beef also rose, leading to higher returns for calves and cull cows.
The cost of milk production, (including estimated costs of family labour and opportunity cost of land), also increased around the world, but by a smaller percentage — about 12%. This meant that profits increased, particularly in Europe and North America.
As the table indicates, the “typical farms” covered their costs, (including estimated costs for unpaid family labour and land), only in Ireland, the UK, and North Germany.
Of the typical larger farms, the Irish, North German and British farms (despite having a particularly low milk price in the UK) and the huge dairy farms in East Germany, earned a profit margin over total costs, according to IFCN. The larger Dutch and Italian farms broke even. However, the cost of buying or renting milk quota, which is significant in the Netherlands, was not included in their total costs.
These results imply that even large dairy farms elsewhere in the EU are unlikely to expand production significantly upon the ending of quotas — outside of Ireland, Germany and the UK.
In many EU member states, the price obtained for milk does not fully compensate for the total costs incurred, even in a favourable year like 2011. The farmer therefore depends on a subsidy to earn a living.
And there may also be reductions in these subsidies, after the negotiations on an EU budget and the Common Agricultural Policy are completed.
The bigger worry for Irish farmers may be the significantly lower milk production costs in the major competing areas outside of Europe.
Compared to Ireland’s rating of milk production costs at $39 (30.2c per litre) on larger farms, the IFCN analysis showed considerably lower costs on large farms in Argentina ($28, 21.6 c/l), Australia ($30, 23.2 c/l), New Zealand ($31, 24 c/l), California ($36, 27.8 c/l)) and Idaho ($38, 29.4 c/l)).
Their milk prices realised, were lower than European prices — but there was profit over total costs in all five countries.
One-year snapshot
How much can be read into the IFCN analysis — a one-year snapshot, which will look different when IFCN next compiles figures, for 2012?
It was noted in their 2011 report that by June of 2012, there had been a big fall in world milk prices because abundant supply outstripped the strong demand. Meanwhile, feed prices rose. Clearly, 2012 was not so good a year for the dairy farmer worldwide, particularly those highly dependent on feed.
The global milk feed price ratio, (which is seen as favourable to dairy farmers above levels of 1.5), was about 1.8 in 2010, but declined to 1.5 in 2011, (because of the big increase in feed costs), and fell further to 1.1 in June 2012.
Which farmers win or lose when feed prices rise? The share of feed in total milk production costs in Western Europe is on average 46%, while it is 53% in the USA, and 72% in the Middle East.
But part of the reason why feed costs seem relatively low in Western Europe is that milk quota, building and other costs are high. (In Ireland, forage account for 28% of total costs.)
