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 CostsEconomic 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)

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) 1  Lowest cash costs;  On a par with average total economic costs;  Owned land important in longer term.

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

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

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

19. Costs Itemised Relatively Low Costs Seeds & Plants Interest charges Depreciation & Machinery Relatively High Costs Imputed Charges for owned land Imputed charges for owned labour

20. Looking outside EU-15

21. A look at profit margins…..

22. 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

23. Cash & Economic Costs ????? Cash CostsEconomic Costs PLUS

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

25. 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.

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

27. Cash & Economic Cost Distributions Source: Thorne (2004) Based on FADN data

28. Discussion & Conclusions

29. 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;

30. 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.

31. 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.