High Cost Producers Will Not Survive under New Dairy Policy

November 12, 2003

Cost of production will be the key survival factor under the new EU dairy reforms, a leading Teagasc research scientist has warned.

Pat Dillon of the Teagasc Dairy Research Centre at Moorepark, Fermoy, told the Teagasc National Dairy Conferences that the drop in milk price will make Ireland’s highest cost producers unviable.

“Teagasc cost analysis figures show a difference of 8c/litre in the cost of production between the most efficient and least efficient dairy farmers.”

“Currently the 25% of producers with highest costs require 440,000 litres (96,000 gallons) to earn an income of €40,000. They will require 820,000 litres (180,000) in 2010 to make an income of €40,000. Clearly, increased scale alone will not be sufficient to maintain income for these farmers.”

“In stark contrast, the 25% most efficient producers can now make an income of €40,000 from 220,000 litres (48,000 gallons). By 2010, they will need to increase, their milk output to 250,000 litres (55,000 gallons) in order to maintain income,” said Pat Dillon.

He said selecting the right strain of cow combined with continued innovation in grass management, improved labour productivity and use of low cost housing for expansion are critical to the future competitiveness of Irish dairy farming.

“Results from in-depth research at Moorepark show that a cow selected for the Irish grass-bred milk production system can increase profit by 2.5c/litre, or up to €6,000 on the average dairy farm. Using this type of cow will be an imperative in a lower milk price scenario. Providing farmers with this type of genetics is the challenge facing the Irish dairy breeding sector,” he stressed.

Pat Dillon said that reducing labour input from the current level of 45 hours per cow per year to 25 hours must be another priority.

“The immediate target should be one person managing a herd of 75 cows. The long-term target is one person managing a herd of at least 100 cows,” he said.

He also warned that farmers who expand using high cost conventional systems face an increased risk of financial loss. Expansion must be centred on low cost animal accommodation or with buildings previously used for drystock.

“Our analysis shows that it is possible to make a good income from dairy farming through increased scale and efficiency. There will be a period of adjustment required. Farmers who embark on a policy of expansion have the potential to maintain income, while those who remain static face the inevitability of reduced incomes,” said Pat Dillon.

Teagasc dairy specialist, John Donworth, advised that expansion in dairying can cost from €3,000 to €6,000 per cow in purchased quota, housing and adjustments to milking facilities.

He outlined three case studies which showed an increase of between 20% and 50% in profitability where expansion and improved efficiency were pursued to the limit.

“Our studies show that the higher profitability is accompanied by high borrowings. Therefore, the increase in bank payments leads to only a small improvement in cash flow while borrowing are being repaid.”

“While expansion will be necessary in the new policy environment, the huge investment involved means that only efficient farmers who minimise capital costs will reap the rewards” said John Donworth

Click here for the proceedings of the 2003 National Dairy Conference.