• Home
>
• Newsletters
>
• 2001 April
>
• Dairy Farming in Europe

Dairy Farming in Europe

It has been easy for us in the past to be envious of or snigger at European dairy farmers with the knowledge that they receive a good price for their milk and many subsidies and grants to offset their costs.  However, the dairy cow is the same the world over and the gap between our farming systems is becoming less clear.  Just as we have emulated the high-producing herds in the Northern Hemisphere on some of our farms, some European farms have been adopting less intensive farming practices of Australian and New Zealand farms.

In the late 60's when the Common Agricultural Policy of the EC was formed, the rift between the two systems was most obvious.  At that stage Australia had an infantile dairy export industry.  The price of Australian milk since then has been influenced by the world market price despite the fact that in 1985, we were still only producing enough milk to cover domestic consumption.

As Australia's dairy industry has grown such that more than half our production is exported, we are more exposed to the brunt of the EU policy of tariff barriers to entry of our products.  In addition, the economic policies of the EU are aimed at protecting the agriculture industries of each country despite the lack of direct economic rationale.  In other words, they are prepared to subsidise rural communities and the production of food to sustain these communities and to guarantee self-sufficiency in food production regardless of the cost.

The consequence of these policies is that farmers are paid well above the price on the world market.  This sends economic signals to farmers which allows them to produce at a cost higher than in other parts of the world where the milk price is more aligned to world prices.

The world price is ultimately set by a supply and demand.  If large producers such as the EU produce surplus to their requirements and dispose of it at subsidised prices, then the world price will fall and when coinciding with a decrease in demand for the product, there can be a significant effect.

In industries where subsidisation and tariffs are not influencing markets, an equilibrium point is theoretically reached whereby the price is set by the lowest cost producer, given a uniform product in the world.  At present, the lowest cost producers in the world include Australia, New Zealand and parts of North and South America.

Apart from a comparative geographical and input cost advantage to farmers in these lower production cost regions, they have been forced to introduce farming practices which continually drive costs down.

These include adoption of new technologies especially in the areas of feed production, milk harvesting technology, labour efficiencies, genetic improvement and processing.

These economically driven cost efficiencies, especially at the farm level have given these regions, including Australia, a distinct advantage.  This cannot be capitalised without sufficient demand for the product or removal of tariffs and subsidies.

At the Uruguay round of trade talks in 1997, the USA along with Australia and many other food exporting countries attempted unsuccessfully to begin the process in the EU of reducing and dismantling their agricultural subsidies and tariffs.  At stake for these countries are rural communities, long held agricultural infrastructures, political motives and influences.  At the World Trade Organisation talks in Seattle in 1999, the conclusion was reached that to have an influence on such policies in the EU, requires a much broader approach encompassing a number of trade commodities rather than just agriculture.  Using this approach, a country which may be a food importer if it does not heavily subsidise its agriculture, may be able to make up for such losses by gains in industries for which it has a comparative advantage.  The likelihood that such policy changes will influence our milk price in the next 10 years is minimal.

For some European farmers, however, there are already some long term changes occurring which will ultimately cause a continuing decrease in their profits.  Britain is one of the EU countries hardest hit, with a milk price in the last 12 months averaging 42 cents/litre.  Italy, Switzerland and the Netherlands on the other hand have been given strong government support resulting in a milk price of over 60 cents/litre.

Such a milk price brings on some interesting economic scenarios as the following table demonstrates.  These figures are from a number of estimates in different regions of each country.  All prices are in Australian dollars.

It would appear that Dutch dairy farming are on a good wicket and that at that milk price, how could they possibly go wrong. However, if we have a look at the typical Dutch farm, the situation becomes less attractive.

200 Cows and young stock	$200,000
200 Acres	$2,000,000
Quota Value (700,000 ltr)	$2,100,000
Machinery	$200,000
Total Farm Value	$4,500,000

It is easy to understand why only those who are born into a dairy farm in Holland, can afford to be dairy farmers. In fact, much of the wealth of these dairy farms has not come from milk production but from increased capital value of land and quota. These farms have competition for land use from urbanisation and flower farming.

The country's population fits into an area smaller than Victoria and the growth and profitability of the Dutch flower industry allow it to pay substantially more for land than dairy farmers. The government has also had a policy of reducing allowable quota in the long term.

Dutch farmers, like those in the rest of the world, have adopted farming systems which reflect the price received for their product. There are few large farms (over 200 cows) and milk harvesting and labour  efficiencies are well behind those in Australia. The cost of purchased feeds is about 30% higher with barley at $200/tonne and purchased hay about $180 - $220 / tonne.

Many of the leading farms have returned to housing of cattle all year following trends in recent years to graze pasture in summer. The reason for the change being the effect on production and the inability to harvest as much pasture as with repeated cuts of silage.  Five cuts of silage yielding 12-15 tonnes dry matter per hectare are typical of these farms.  Perennial ryegrasses silage is harvested between April and November. The last cut is sometimes processed by large driers to make hay since it is not possible to wilt in late Autumn, adding $180/tonne to the cost of the forage.

Many farmers have TMR wagons and cows access feed 24 hrs per day. Some farms feed pellets in the milking parlour, some in the TMR and some have auto ID computer automated pellet feeders in the cow barns which are accessed by cows at all times. Extra shedding provided for all stock during winter adds extra cost of land, however cheaper more effective free stall barns are becoming more common on farms.  Most barns are attached to the house with a breeze way between animals and kitchen. Preparing for morning milking involves a short walk indoors, opening a few gates and starting the machines.

Average farms production exceeds 7000 litres per cow per year. Most do not have a concentrated calving but some choose to produce more milk in autumn and early winter when the price is 15% higher. A typical cow will consume 2 tonnes of pellets (cereals, canola, soy, lupins) a tonne of maize silage and 3-4 tonnes of pasture silage or hay.  Most farmers grow their own maize either on their own land or on leased land from neighbouring cropping farms. Yields of 25-50 tonnes/ha are achieved in their warm wet summers.

In Holland a number of farmer owned cooperatives and multinationals such as Nestle operate. Prices between supply factories are similar. Factories require farmers to have at least two and sometimes three day storage capacity.

At $3/litre for quota and $1500 for a cow, astute farmers are able to increase production profitability. At $5000 gross income per cow, the $4,000 outlay for a cow and its quota can be returned however purchase of quota includes the risk of it maintaining that value in the market.

It appears that the Dutch government is keen to preserve the dairy industry with its current milk price. It also offers relief to farmers to preserve areas frequented by wildlife. However, the environmental laws are strict and increasing in requirements. Water quality is an important issue in the Netherlands which is subject to run off from much of Europe and threats from the sea. Billions of dollars have been spent to reclaim and protect the land, much of which is below sea level. British dairy farmers are in a much less envious situation than the Dutch. Apart from a milk price which is 24 cents/litre lower than their counterparts, they have a government which is less sympathetic to their needs and less able to subsidise their costs or farm gate price. The cost of quota, the lower milk  price and many years where higher prices bred inefficiencies or more expensive production systems have caught the British farmers on the hop. The suicide rate amongst dairy farmers is alarmingly high.

Progressive farmers have managed to cut costs, increase the size of their quota and produce more efficiently. There is a growing band of such farmers who are adopting new technologies and experimenting with lower yields at lower cost.  Feeding strategies are similar to those of the Dutch with dependence on maize silage and pasture silage. Cows are more commonly grazed on summer pastures and taken indoors by late November. Pastures are ideally rested over winter with at least 2000kg dry matter per hectare by 1st December. This avoids too much frost damage and expedites early  spring growth. Winters are milder than in Holland for much of Southern Britain.

There are some increasingly larger farms in Britain now. The commercial dairy farmer of the year in 2000 was a Scottish farmer milking over 400 cows.

In addition to lower milk prices British dairy farmers have had to contend with BSE (Mad Cow Disease). This has had a major impact on domestic beef consumption. A number of farms have now had their entire stock slaughtered and herds in other parts  of Europe are being identified sporadically with the disease. Most of these trace back to British cattle imported in the last 20 years.

Meanwhile, domestic dairy product consumption has been on a long term decline due more to changing lifestyle eating habits and health perceptions. A generic dairy products advertising campaign "The White Stuff - a Legend" has been able to reverse this trend.

Dairy farmers throughout the world follow a very similar pattern of profitability despite the differences in farm gate price and cost strategies. The majority of farmers will be able to provide enough income to justify their physical and management inputs. They will lift their cost of production to a level such that there is very little return on their business investment. Financial decisions are based on the premise of whether or not they can afford it rather than, if it is a profitable business decision.

At the top end across the world however, are a group of farmers who will, over the long term, be able to make a sustainable profit from their investment. These farmers may only represent a few percent when prices are low and seasons tough. They are astute business people who do not allow production costs to exceed marginal returns.

Quite commonly we see farmers build up their assets through capital gain well above inflation rates. This has been the case in Holland where land prices have risen dramatically due to demand from other agricultural sectors. Without dairy farming, many business decisions are based on lifestyle, tradition, career opportunities, family aspiration and ego rather than on pure business fact. It is unlikely that this will change while dairy farming is still viewed as a way of life and families with high equity are prepared to continue on with fewer rewards.

The leaders will continue to expand, update their farming practices and dominate the industry.

Click here to view the rest of the 2001 April newsletter.