1. By Peter Hinrichs & Petra Jaegersberg Federal Agricultural Research Centre (FAL), Braunschweig, Germany End User Meeting Brussels, 14.06.2001 Working Package 4 (Economics) First Year´s Example Where are the farms located that are the most vulnerable with regard to a milk price reduction?

2. Vulnerability By Peter Hinrichs & Petra Jaegersberg Vulnerability... - in this context - means, how strongly a dairy farm will be “hurt“ by a price drop.... has to be defined in economic terms: - The surplus for net investments (farm growth) vanishes - the liquidity reserve shrinks below a critical amount, and/or - the income does no longer pay for the farmer´s basic needs. Defining a vulnerablility indicator: Relation between milk price as product-bound parameter and a criterion denoting the whole farm´s economic performance, the Family Farm Income. From this, we subtract the amount the unpaid family workers‘ need for their living, which is derived from the paid workers` net wages.

3. Vulnerability By Peter Hinrichs & Petra Jaegersberg 0,00 € Price drop Com- pens- ation Family workers` Income claim Paid Wages Paid Rents, Interest and VAT on Investment Farm Net Value Added Family Farm Income Surplus available for net investment, more consumption or risk prevention (as long as subsidies remain unchanged) Net Sub- sidies Calculation scheme of the surplus available for net investment and/or improved liquidity.

4. Vulnerability By Peter Hinrichs & Petra Jaegersberg Our primary vulnerability indicator: Surplus of Family Farm Income over income claims of family workers, per milk quantity produced and sold (expressed in € / 100 kg milk). This surplus is used for:Net investment (farm growth) More consumption Liquidity risk prevention Our criterion: If the FFI - Income claims > 0: the long term losses do not exceed the initial decrease of receipts, and the farms have a chance to recover form the initial impact << 0: the farms will be handicapped materially. The amount of the price drop was taken from the actual mid-2001 discussion about the New Agenda: 0,0525 € per kg milk. A compensation of 66 % is assumed. The resulting price drop: 0,0175 € per kg milk.

5. Available Surplus (€ /100 kg milk) in Europe‘s milk producing farms (by member country) Compensation Final price decline Family workers' income claim (after tax) per 100 kg milk sold Total wages paid per 100 kg milk sold Total net payments for other external factors, per 100 kg milk sold B DK D GR E F IRL I L NL A PT SF S UK 3 289 4 627 23 958 6 130 10 814 252 12 734 2 912 1 508 2 709 3 738 15 895 27 174 457 4 681 Net subsidies -30,00 0,00 30,0060,00 € Milk Prod 1000t Peter Hinrichs & Petra Jaegersberg: Vulnerability

6. Available Surplus (€/100 kg milk) in Europe‘s milk producing farms by FADN farm type Compensation Final price decline Net Subsidies Family workers' income claim (after tax) / 100 kgM sold Total wages paid per 100 kg milk sold Total net payments for other external factors, per 100 kg milk sold Peter Hinrichs & Petra Jaegersberg: Vulnerability

7. Available surplus (€/100 kg milk) in Europe‘s milk producing farms by production system Net Subsidies Compensation Final price decline Family workers' income claim (after tax) / 100 kgM sold Total wages paid per 100 kg milk sold Total net payments for other external factors, per 100 kg milk sold Peter Hinrichs & Petra Jaegersberg: Vulnerability

8. Compensation Final price decline Family workers' income claim (after tax) / 100 kgM sold Total wages paid per 100 kg milk sold Total net payments for other external factors, per 100 kg milk sold D-Sachsen, 81, Convent. F-BasseNorm, 411, IntGrass I-Lombardia, 411, Industrial I-EmiRom, 411, Commerc. Netherlands, 411, IntGrass Ireland, 411, Lowland UK-WestEngl, 411, IntGrass GR-Mak-Thrak, 81, Commerc. E-Galicia, 411, IntGrass PT-NorCent, 411, Commerc. Austria, 411, LI-Grass S-Skog&Mell, 411, LI-Grass Available Surplus (€/100 kg milk) in selected groups of European dairy farms (by EU farm type & production system) 186 969 696 865 3080 1086 76 1333 528 3300 778 451 RegionTypeProdSys kt Milk Herd size Milk yield Milk price Wage Rate Perm. Past. ha / k t M Conc. Feed € /100 kg Milk 145 691630,09,41206 42532434,27,3985 126755745,27,909 32553148,47,4012 64747833,110,5575 41469931,05,31615 94650132,48,6476 15396532,21,912 18466728,12,8176 24 585429,41,6211 14487434,74,92105 30798734,813,514511 0 Net Subsidies 030 € Peter Hinrichs & Petra Jaegersberg: Vulnerability

9. € 0 20.000 40.000 60.000 80.000 100.000 2000200120022003200420052006 MP -17 %MP -5,6% MP - 0% MP-17%, high loans 2007 Family Farm Income of a 100 cow farm in Eastern Germany, with different milk price projections and the influence of high loans Peter Hinrichs & Petra Jaegersberg: Vulnerability

10. Family Farm Income of a 165 cow farm in Wales/UK with the effect of exchange rate & milk price Peter Hinrichs & Petra Jaegersberg: Vulnerability

11. Vulnerability By Peter Hinrichs & Petra Jaegersberg Summary 1) The most vulnerable farms are those ones that are already handicapped without a price drop. 2) There are great national differences: Italy, Ireland, Spain, Greece, Austria and versus Sweden, Finland and Germany (without subsidies), Denmark and Portugal. 3) Within the countries, the regional variance is less spectacular, although in the Mediterranian countries, it is much greater than in Northern Europe. 4) A special case is the UK where the strong British Pound distorted the price / cost relation remarkably.

12. Vulnerability By Peter Hinrichs & Petra Jaegersberg Summary (cont.) 5) A comparison of the EU farm types shows that there is no specialization bonus in most of the countries. In the contrary, the mixed (livestock) farms looked more successful in the year 1997/98 than the specialized dairy farms, due mainly to higher subsidies for crops and non-dairy livestock. 6) Grouping by production system revealed advantages of: - dairy farms without permanent grassland (commerc./industr.) - large herds (scale effects, labour productivity, investment costs) 7) Additionally, there are significant effects of the Milk Prices, the Wages, the Land Rents, and Interest on borrowed capital.

13. Vulnerability By Peter Hinrichs & Petra Jaegersberg Outlook for the next months: 1) Analyse economic impact of different quota policies on farm level, stratified by region, farm type, production system, and other economically relevant indicators (herd size, fodder basis, capital structure, wage rate, e. g.), interpret regional differences. Preference for the dairy problems: Most important livestock sector, high political relevance, actual measures to be evaluated; data supply relatively good. 2) Provide and apply economic standard rules for assessing farmers´ response and adjustment strategies, based on - case studies (typical farms, IFCN) and - model calculations using the FADN database and an existing approach for estimating input/output coefficients. (FAL has now access to FADN farm level data.) 3) Organize access to regional production databases for other livestock production sectors, as will be defined in future agreements.