12 September 1997

AGENDA 2000 SETS SCENE FOR THE UKDAIRY FUTURE

How will UK dairy producers fare under reform of the EU dairy regime? Not well, as James Attrill explains in his outline of the Agenda 2000 proposals for CAP reform

DAIRY farmers have had a glimpse into the future – the newly released Agenda 2000 outlining the EUs proposals for CAP reform gave some pointers to milk support proposals for the next century. These are:

&#8226 Quotas stay to the year 2006

&#8226 Milk price support to be cut by 10%

&#8226 Milk price drop to be compensated by cow headage premium

Also to be considered are cheaper ruminant feedstuffs through further cuts in the cereal intervention price.

There are two important points to be grasped when considering these proposals:

&#8226 There is significant negotiation and discussion yet to be undertaken before the proposals are agreed and certainly before they are implemented.

&#8226 The proposals will provide a framework – it will be up to individual member states to decide how the reforms are implemented. In the case of the UK, these decisions will be down to MAFF.

This proposed reform has failed to tackle the biggest issue – milk quota.

The proposal that milk quotas will survive another eight years highlights that the EU believes a protected market is a preferable route to a more free market orientated choice. While it introduces certainty, the continuation of quotas in their current form does not give any flexibility to what most consider a restrictive regime. This element of the reform, however, would seem least likely to be altered before final ratification and it is, therefore, secondary areas of reform which perhaps require more thought.

Support package

The cut in milk price support of 10% will not necessarily manifest itself in a 10% cut in producer prices. Currently the total milk support package accounts for perhaps 4p a litre. A crude calculation would, therefore, lead to milk prices falling 0.5p a litre. Changes which the 10% support cut bring will probably be more subtle. How the cut impacts will be crucial – cuts in export subsidies on specific products could well lead to greater tonnages of milk products being dumped back into Europe; coupled with the next round of GATT in 1999 and currency fluctuations, the effect could be quite significant on producer prices. Time will tell.

Compensatory cow headage premium is not a new idea. The McSharry reforms of 1992 raised the possibility of this mechanism – it was abandoned then and could possibly be abandoned now. The current proposal sets the headage payment at £155 a head but does not state whether it would be capped to a particular herd size or any other criteria.

McSharry reforms proposed a limit of 40 cows a herd. It is interesting to note that 84% of UK dairy herds are above 40 cows while, taking the EU as a whole, the figure drops to 38%. With an average herd size of 69 cows, the UK would clearly be disadvantaged by this particular element of reform; that said, convincing 38% of European dairy farmers that 40 cows is the right limit may well be difficult.

The last round of CAP reform in 1992 placed heavy reliance on falling grain prices to give additional support to livestock producers. In reality, strong world prices denied the livestock sector this benefit but the 20% cut in cereal intervention prices proposed in the Agenda 2000 package could genuinely put downward pressure on feed prices.

So how does all of this reflect on potential dairy profitability?

Margin over concentrates of three herd sizes at a range of yields is tracked in the graph. The model assumes a worst case drop in milk prices of 2p a litre and a drop in concentrate prices of £40/t. Assuming cow premiums are capped at 40 cows a herd, the effects can be seen quite clearly.

Improved margin

The 75-cow herd enjoys an improved margin over concentrates at a wide range of yields; conversely herds ranging between 120 and 150 cows start to show a drop in margin beyond a modest 5000 litres a cow.

It is quite clear that the proposals as they stand will be viewed as unfair by most UK farmers and, if implemented, will automatically create a two-tier support system – one protecting the smaller herd and the other penalising the large herd. While the biggest guess has been taken out of the equation – quotas are staying for some time yet – dairy farmers should monitor these reforms closely to see how their individual business fits into the final set of proposals.

&#8226 James Attrill is a farming consultant with Strutt & Parker. The company will be attending next weeks European Dairy Farming Event. &#42

DAIRY farmers have had a glimpse into the future – the newly released Agenda 2000 outlining the EUs proposals for CAP reform gave some pointers to milk support proposals for the next century. These are:

&#8226 Quotas stay to the year 2006

&#8226 Milk price support to be cut by 10%

&#8226 Milk price drop to be compensated by cow headage premium

Also to be considered are cheaper ruminant feedstuffs through further cuts in the cereal intervention price.

There are two important points to be grasped when considering these proposals:

&#8226 There is significant negotiation and discussion yet to be undertaken before the proposals are agreed and certainly before they are implemented.

&#8226 The proposals will provide a framework – it will be up to individual member states to decide how the reforms are implemented. In the case of the UK, these decisions will be down to MAFF.

This proposed reform has failed to tackle the biggest issue – milk quota.

The proposal that milk quotas will survive another eight years highlights that the EU believes a protected market is a preferable route to a more free market orientated choice. While it introduces certainty, the continuation of quotas in their current form does not give any flexibility to what most consider a restrictive regime. This element of the reform, however, would seem least likely to be altered before final ratification and it is, therefore, secondary areas of reform which perhaps require more thought.

Support package

The cut in milk price support of 10% will not necessarily manifest itself in a 10% cut in producer prices. Currently the total milk support package accounts for perhaps 4p a litre. A crude calculation would, therefore, lead to milk prices falling 0.5p a litre. Changes which the 10% support cut bring will probably be more subtle. How the cut impacts will be crucial – cuts in export subsidies on specific products could well lead to greater tonnages of milk products being dumped back into Europe; coupled with the next round of GATT in 1999 and currency fluctuations, the effect could be quite significant on producer prices. Time will tell.

Compensatory cow headage premium is not a new idea. The McSharry reforms of 1992 raised the possibility of this mechanism – it was abandoned then and could possibly be abandoned now. The current proposal sets the headage payment at £155 a head but does not state whether it would be capped to a particular herd size or any other criteria.

McSharry reforms proposed a limit of 40 cows a herd. It is interesting to note that 84% of UK dairy herds are above 40 cows while, taking the EU as a whole, the figure drops to 38%. With an average herd size of 69 cows, the UK would clearly be disadvantaged by this particular element of reform; that said, convincing 38% of European dairy farmers that 40 cows is the right limit may well be difficult.

The last round of CAP reform in 1992 placed heavy reliance on falling grain prices to give additional support to livestock producers. In reality, strong world prices denied the livestock sector this benefit but the 20% cut in cereal intervention prices proposed in the Agenda 2000 package could genuinely put downward pressure on feed prices.

So how does all of this reflect on potential dairy profitability?

Margin over concentrates of three herd sizes at a range of yields is tracked in the graph. The model assumes a worst case drop in milk prices of 2p a litre and a drop in concentrate prices of £40/t. Assuming cow premiums are capped at 40 cows a herd, the effects can be seen quite clearly.

Improved margin

The 75-cow herd enjoys an improved margin over concentrates at a wide range of yields; conversely herds ranging between 120 and 150 cows start to show a drop in margin beyond a modest 5000 litres a cow.

It is quite clear that the proposals as they stand will be viewed as unfair by most UK farmers and, if implemented, will automatically create a two-tier support system – one protecting the smaller herd and the other penalising the large herd. While the biggest guess has been taken out of the equation – quotas are staying for some time yet – dairy farmers should monitor these reforms closely to see how their individual business fits into the final set of proposals.

&#8226 James Attrill is a farming consultant with Strutt & Parker. The company will be attending next weeks European Dairy Farming Event. &#42

Agenda 2000 – The road to better dairy profits? Not for producers in the UK where average herd size is larger than that in the EU.

James Attrill… The proposals as they stand will be viewed as unfair by most dairy farmers.

IMPACTOFAGENDA 2000

&#8226 Milk price support cut of 10% – reducing milk price by 0.5p/litre.

&#8226 Headage payment of £155/head for first 40 cows.

&#8226 Two-tier support – penalising larger UK herds

&#8226 Milk quotas in place for another eight years.