19 March 1999

Dairymen set to be hardest hit by the reforms

OF all the sectors up for reform, dairy farmers are likely to suffer the most, with price cuts and compensation seriously out of kilter and rising market pressures not properly dealt with.

With dairy margins already at rock bottom – a situation made potentially worse by the failure of Milk Marques latest selling round – it is a source of some comfort that the reforms do not kick in until 2003/04. That should provide some vital breathing space.

It is also a relief that some of the more extreme suggestions in the commissions original Agenda 2000 proposals are not part of the final package. As predicted by farmers weekly a year ago, the idea to give half the extra milk quota to mountain regions has sunk without a trace.

Instead, there is to be a 1.5% linear rise in milk quotas, with no strings attached. While this appears fairer, there are still a number of special deals for member states with specific difficulties. This will give Italy 6% more quota, Ireland +3%, Greece +11% and Spain +10%. The UK also benefits slightly, with Northern Ireland getting another 20m litres of quota – or 1.4% – on top of the 1.5% general rise.

But, while the top-up in Northern Ireland is welcome, there is no denying the discriminatory nature of these special allocations. Of particular concern is the fact they will be applied immediately (in 2000 and 2001), whereas the support price cuts and general quota increases do not start until 2003.

That means there will be more milk on the EU market looking for a home from next year. Export refunds are already being used to the full, so the prospects of shipping this product outside the EU look slim.

In some cases that extra milk will head for intervention. But, in the case of the Irish Republic, with 150m extra litres, that product is likely to find its home in the UK, putting further pressure on cheese and butter prices.

While that wont make life any easier in the short term, there is at least the prospect of lower feed costs from next year following on from the 20% price cut agreed in the cereal sector. This should lead to a small increase in gross margins in the next couple of years, according to analysis by the NFU.

But this benefit will be short-lived, with the first of three 5% annual price cuts hitting returns from 2003. The NFU reckons that, after allowing for yield (and quota) increases and continued savings in variable costs, overall net margins will fall by 6% over the reform period. (See table)

The reason is clear – the compensation package is insufficient.

farmers weekly estimates that, for a 100-cow herd averaging 6500 litres, the net loss in income amounts to £6600 in the last year of reform. For each cow in that herd, output is expected to drop £185, while compensation only amounts to £119.

This assumes that the national envelope is paid in full. When asked what his intentions were in this respect last week, UK farm minister, Nick Brown, was evasive. He wanted to discuss it first with other departments, (ie, the Treasury), and was not prepared to commit himself.

This is just one of many details still to be decided. The agreement also gives national government numerous options in quota management. Will it operate a siphon on quota transfers? Will it ring fence quota movement? Will it confiscate an individuals quota for a national reserve if less than 70% is used?

Another uncertainty is what will happen with area aid on maize and grass silage. It seems likely that the separate maize area will continue in its present form. But an option to introduce a grass silage premium will not be taken up, as this would have to come out of the arable base area, where UK growers are already up against the ceiling.

On the plus side, compensation is only likely to be paid to active producers. But there is the possibility of scalebacks. The total amount of compensation available to the UK will be based on the national quota at the end of 1999. Additional quota introduced thereafter will have the effect of diluting individual payments. &#42

&#8226 Direct EU aid worth k5.75/t (0.38p/litre) in 2003, k11.49/t (0.77p/litre) in 2004 and k17.24/t (1.16p/litre) in 2005.

&#8226 National aid worth k38m (£25m) in 2003, k75m (£50m) in 2004 and k113m (£76m) in 2004. This is equivalent to 0.17p/litre, then 0.34p/litre, then 0.51p/litre.

&#8226 Dairy cow slaughter premium worth k80 a cow (£54 a cow).

&#8226 Compensation will not be paid to non-active producers.

&#8226 Reform delayed until 2003/04.

&#8226 15% cut in butter and skimmed milk powder intervention prices in three equal steps.

&#8226 Compensation paid according to farmers quota holding at end of each milk year.

&#8226 Milk quotas extended to 2006, with a review in 2003.

&#8226 Milk quota increase of 1.5% starting in 2003 in three steps.

&#8226 Greater increases for Italy (600,000t), Spain (550,000t), Ireland (150,000t) and Greece (70,000t) in 2000.

&#8226 A 19,700t quota "top-up" for Northern Ireland.

&#8226 Government option to operate a quota siphon, ring fence quota transfers, extend leasing until Mar 31 and confiscate quota which is less than 70% used.

&#8226 Silage maize still eligible for area aid of up to k389/ha (£260/ha).

1996-1998 2003/04 2004/05 2005/06

Output(after calf sales 21.7 20.6 19.5 18.4

and herd replacements)

Variable costs 9.25 8.85 8.81 8.39

Compensation 0.67 1.33 1.91

Gross margin 11.71 11.42 11.06 11.03 (-6%)

Key assumptions: Yield growth of 1.3% a year, exchange rate of 1 euro = 70p, concentrate costs fall 4%, national envelope paid in full, dairy cow life span of 5 years.

Source NFU.