ARE LAND AND GRASS THE NEW IRISH MILK QUOTAS?

The full paper can be downloaded as a pdf.

Are land and grass the new Irish milk quotas

As one often reads about how robust the Irish grass-fed dairy-farming model is and how competitive the industry is as a consequence, the author decided to investigate further. It is an idea that underpins the strategic and technical direction of the industry so one would assume that this most basic of assumptions has been verified; not least when it comes to creating a vision for the future in light of the most significant dairy industry policy change in three decades.

A starting point was to revisit some information that was used in the author’s review of Food Harvest 2020. It looked at the quantity of milk solids produced per farm across a few important milk producing nations. As expected, Ireland’s smaller herd size and grass-fed milk yields place it well below New Zealand, Denmark, the USA and the UK. Further, when labour use was factored in, Ireland was well below other exporting nations. Clearly labour costs are an issue.

One was aware that international comparisons have been based upon the variable costs of production plus the fixed costs that are cash items. They often exclude family labour and land ownership costs. The former is invariably paid [as monthly drawings from profits] and the latter is ignored unless an imputed rent or return on capital is factored into the equation. The omission of farmer remuneration and a return on some capital creates the ‘robust’ impression.

This is, apparently, nothing new. A Teagasc review of the international competitiveness of the dairy sector was fairly recently completed; albeit after the publication of FH2020 [even though one would have expected this work to have been completed before the FH2020 targets were set]. This review highlighted that, whilst being competitive in terms of cash costs, Ireland’s high labour and land costs made it no more than average on a full-cost basis. A further factor in the last five years has been a high cost of grains relative to grass and this will have emphasised the advantage of grass-fed milk systems. We are now seeing the opposite side of the coin with currently lower cereal prices.

New Zealand has, nevertheless, developed a cost advantage from its grass-fed systems but it has been done on the back of scale. Whilst New Zealand’s traditional dairy regions enjoy herd-size advantages over Ireland, it has been the development of South Island dairying that sets it apart. The region has seen dairy expansion and at a scale that, at times, delivers output levels that are many times those of an Irish dairy farm. Crucially they are investing in dryers and targeting similar global export markets. It is these investments that Ireland’s ‘new’ milk will be competing with.

What is recognized by the author’s finding [and others] is that when scale is achieved the Irish grass-fed model can be competitive; but it means doubling the average herd size in Ireland. Is it achievable? If it can be done the reduction in average fixed costs, including all labour and capital costs, will mean a competitive total cost of milk production.

The conundrum is how to do this in light of a fragmented, ‘immobile’ land structure. The Irish farmer also faces some of the highest rental and land purchase costs anywhere and, realistically, the cost of removing these land access constraints is so high that the cost alone can significantly increase production costs. As lands for grass is crucial to the grass-based system, it is land access and, hence, grass that is going to be acting, post 2015, as the new ‘milk’ quota. Increasing stocking rate may be a partial answer, but that also incur capital costs and that acts as another constraint.

Various approaches have been used to assess the economics and the industry’s competitiveness. The findings are by-and-large consistent. They also suggest that a milk price recovery will be vital to the expansion plans of the overall industry. Coming up short will probably have consequences across the industry and these are discussed in the second part of this paper along with some strategic issues that may arise if the rate of expansion has been over-estimated.

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