Implications of EU Milk Quota Abolition

1
Implications of EU Milk Quota Abolition
with Special Emphasis on Ireland
Patrick Westhoff Food and Agricultural Policy
Research Institute (FAPRI) University of
Missouri, USA

• Trevor Donnellan Thia Hennessy
• Teagasc - Irish Agriculture and Food Development
  Authority
• Dublin, Ireland

2
Overview

• Background
• Methodology
• Quota Removal
• EU15 Aggregate
• Ireland National Level
• Irish Farm Level
• Conclusions

3
Background

• In 1998 FAPRI asked to examine a number of dairy
  policy options.
• Scenarios that would eliminate the EU dairy quota
  programme
• allow EU dairy product prices to fall to
  market-clearing levels

4
Methodology

• FAPRI used a structural model of the EU dairy
  sector,
• based on assumed elasticities of supply and
  demand.
• analysis enhanced by a panel of dairy industry
  analyst
• reviewed model parameters and preliminary results
  
• challenge was estimating milk supply response
• based on estimates of milk production costs and
  quota values reported in the literature
• modified in response to panel comments

5
Detail of Scenario

• In the run-up to Agenda 2000 the study compared
  EU dairy market projections under two alternative
  scenarios
• 1) Baseline scenario continue 1998 policies
  indefinitely.
• 2) Alternative scenario
• eliminated EU dairy quotas and the intervention
  regime in 2001
• No compensation
• GATT limits apply (no new WTO changes)
• No intervention
• No EU internal subsidised disposal

6
EU Milk Production

• With no quotas, milk production increases
• up 5 in 2001
• up 8 in 2007
• Sharply lower prices limit production increase

7
EU Milk Prices

• With no quotas, milk prices decline 20 in the
  first year
• In the seventh year, the decline is 27

8
EU Cheese Consumption

• Consumption grows under current policies
• Lower prices without quotas mean even more cheese
  consumption

9
EU Dairy Exports

• Lower prices without quotas result in more
  exports
• Export markets absorb about half of the increase
  in milk production

10
EU and World Butter Prices, 2007

• EU butter prices also fall, but remain above
  world prices
• Thus, EU butter exports would still require
  subsidies

11
EU and World SMP prices, 2007

• SMP prices fall to world levels under no quotas
• EU can export SMP without subsidy

12
Quota Elimination Summary

• Milk production increases 5-9 percent
• Milk prices fall 20-29 percent
• Domestic dairy consumption increases
• Dairy exports increase 16-41 percent

13
Events since analysis completed

• European Union adopted the Agenda 2000 reforms.
• Small increase in quota
• Intervention price reductions, 2005-2007
• FAPRI (2000) estimated result would be
• Higher production (but increase less than quota
  increase)
• Lower prices (but decrease less than intervention
  price reduction)
• Many other factors have affected dairy markets
• Resulting market outcomes for 1998-2001 have
  differed from 1998 baseline projections

14
Milk Price 3.7 fat basis

• 1998 baseline,
• 1998 no quota scenario,
• preliminary 2002 baseline
• weaker price outlook

15
Ireland in EU Context

• Ireland has just 4 of EU15 milk quota
• But Ireland only 1 of EU 15 population
• Ireland has a significant dairy product surplus
• circa 70 of milk equivalent exported to
• EU member states and third countries
• Average dairy farm has 38 cows
• Milk output per cow low relative to EU average

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Milk Output per Cow

• Some imponderables to consider
• Irish milk output per cow relatively static in
  last 10 years
• Genetic potential increasing but not shown in
  performance ?
• Short lactations ?
• 7 of production fed to calves
• Why do we have 200,000 surplus dairy cows?
• What will be effect of quota removal?

17
Focus of Irish Product Mix

• Butter and SMP dominate the product mix
• represent about 60 of manufacturing milk use
• cheese is small in relative terms (20 of
  manufacturing milk use)
• Disproportionate dependence to intervention
  products

18
Irish Milk Price and Production

• Irish Milk price lower than EU Average
• But grass based production system
• Lower Costs
• Ireland considered to be low in cost relative to
  some feed grain systems

19
Geography of Current Production
Smaller Farms, Higher Cost

• Possible to generalise Ireland into two areas
• South East segment
• lower costs and larger farms
• North West segment
• higher costs smaller farms
• Currently quota is ring fenced
• prohibits internal migration of production
• South East has expansion potential

Larger Farms, Lower Cost
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Post Quotas what would the future hold?

• In no quota situation
• the Irish milk price decline would be greater
  than the EU average
• because of unfavourable product mix
• small domestic market relative to production
• limited access to internal EU Markets
• relatively greater dependency on intervention,
  subsidised disposal and 3rd country markets
• Decline in milk price greater than EU average
• in the range of 30 to 35 per cent given these
  factors

21
Irish Farm Level Analysis

• Thia Hennessy

22
The Impact at Farm Level

• The focus was on
• 1. Potential to expand production
• 2. Expansion required given lower price
• 3. Feasibility of expansion

23
Assessing the Production Potential

• Latent potential in cow yields and numbers
• Shortened Lactation
• Level of specialisation in dairy 50 60
• Potential increase 35-65
• Largest potential smallest producer

24
What is the Potential Increase ?
25
Impact on Income

• Assuming Abolition in 2008 - three scenarios
• 20c per litre price 2.7c compenstation
• 20c per litre price 5.4c compenstation
• 22.4c per litre price 4.2c compenstation
• Assume production costs 6-7 higher than present

26
What volume of production is required?
27
Is it feasible?

• Large investment required
• Cash surplus during repayment
• Small farms less than minimum wage
• Medium group less than industrial wage
• Serious implications for farm numbers

28
Take Home Message

• EU
• production up 8
• price down 27
• Ireland
• poor product mix
• intervention dependent
• price down 30 - 35
• Ireland Farms
• large potential to expand
• but not sufficient to maintain income given milk
  price

29
Thank You
Further information on our work is available on
our websites at

• www.tnet.teagasc.ie/fapri

www.fapri.missouri.edu