The competitive strength of the Danish milk production from a Global and EU perspective Preben Mikkelsen Danish Cattle Federation

EDF Congress 2006, Denmark

1. 2. 3. 4. 5. 6.

Danish Cattle Federation The Global milk production structure The political framework in EU The future of milk quota in EU Future challenges and possibilities Competitive strength of Danish milk production 7. Concluding remarks

EDF Congress 2006, Denmark

1. Danish Cattle Federation

EDF Congress 2006, Denmark

The Danish Cattle Federation The Danish Cattle Federation is a unifying body working to improve specific conditions of cattle farming and being the spokesman of cattle farmers and we work to z

Ensure the best possible earnings for cattle farmers

z

Optimise the industry by a plough to plate approach and viewing the industry as a whole

z

Organise service, advising and control assignments

EDF Congress 2006, Denmark

The Danish Cattle Federation – stands on three legs • Cattle and industrial policy • Primary production and advising • Veterinary conditions and primary product quality

EDF Congress 2006, Denmark

Danish Cattle Federation Objective: Being the most competitive European cattle industry as regards economy, sustainability and quality Danish Cattle Federation is formed by: Danish Agriculture (the national farmers’ organisation) A.I. Centre Dansire Danish Dairy Board Danish Meat Board

EDF Congress 2006, Denmark

2. The Global milk production structure

EDF Congress 2006, Denmark

The largest milk producing countries of the world 140.000

132.250

Metric tonnes

120.000 100.000 82.250

80.000 60.000 39.450

40.000

32.000

33.800

7.750

10.285

Mexico

20.000

Canada

24.680 13.800

10.300

8.210

5.700

10.750

14.100

North America

EDF Congress 2006, Denmark

South America

Europe

Former South Soviet Asia Union

Asia

New Zealand

Australia

Japan

China

India

Ukraine

Russia

Romania

EU 25

Brazil

Argentina

United States

0

Oceania

The biggest players on the world market 1990

2004 Others 17%

Others 24%

EU 40%

New Zealand 23% Australia 7%

USA 6%

Argentina 3%

New Zealand 33%

EU is loosing market shares to Oceania! EDF Congress 2006, Denmark

EU 35%

USA 2% Australia 10%

Farm structure around the world

EDF Congress 2006, Denmark

Milk price around the world (2004)

22

32

Milk price in US-$ / 100 kg milk

Source: IFCN Dairy Report 2005, national statistics, estimations

EDF Congress 2006, Denmark

> 40 30-40 25-30 20-25 < 20

Costs of producing milk around the world ? ?

Cost of milk production in US-$ / 100 kg milk > 40 30 - 40 20 - 30 Source: IFCN Dairy Report 2005

EDF Congress 2006, Denmark

15 - 20 700 cows: 2,500$

3. The political framework in EU

EDF Congress 2006, Denmark

Reform of the milk policy Quotas: z Extension of the quota system until 2014/15 z 3 x 0.5% quota increase in Denmark from 2006/07-2008/09 Prices: z Reduction of the intervention price – butter: 3x7% in 2004, ’05 and ’06 + 4% in 2007 – SMP: 3x5% in 2004-2006 z Intervention ceiling of 70,000 t for butter in 2004/05 dropping to 30,000 t in 2008/09 Compensation: z Partial compensation for the reduction of intervention prices z Decoupling in Denmark in 2005

05.08.2003

EDF Congress 2006, Denmark

EU-enlargement – Bulgaria and Romania from 2007 ? Milk-reform

Quota system + 1,5% increase

CAP-reform

WTO I

WTO II

EU-budget – 2013 (financial discipline)

EDF Congress 2006, Denmark

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Political perspectives 2015

Price pressure New markets

Milk price -22% 50% compensation Decoupling Modulation

Export refunds eliminated Increased market access Reduction in subsidies

4. The future of milk quotas in EU

EDF Congress 2006, Denmark

Market balance in EU28

130

120

120

110

110

100

100

90

90

- Quota: +0,5% p.a.*

80

80

70

70

- Imports: 2.5% of comsumption p.a. in 2006/07 rising to 5% p.a. in 2012-2015

60

60

Exports Sales EU

Mio. tons

Milk deliveries + imports Milk deliveries Prognosis 2006-2015: - Consumption in EU: +1% p.a.

- Exports: 13.5 mio. tons p.a. falling to 10 mio. tons in 2013-2015

20 14

20 12

130

20 10

140

20 08

140

20 06

150

20 04

150

20 02

160

20 00

160

19 98

Mio. tons

To ensure the good balance

* Quota increase not included for B, F, GR, LUX, AUST, FIN, SW and U.K.

EDF Congress 2006, Denmark

The market and the quota The expected market development leaves room for a gradual, annual quota enlargement of 0.5-1% with a continued market balance – should be evaluated on an annual basis dependent on the development.

Impact: • Preparation for termination of the quota system • Gives certain possibilities for competitive countries • It is expected that Denmark will utilize the quota increase – an increase will have a minor, calming impact on the quota price • Countries not utilizing the quota, will have no negative impact EDF Congress 2006, Denmark

Future of the quota system Several countries discuss termination of the quota system It ”simply” calls for a blocking minority (90 seats) to terminate quotas (Sweden, Denmark, U.K., Italy and Poland)

Requirements up to 2015: • flexibility • gradual phasing out / gradual increase of quota • clear signal in due time

EDF Congress 2006, Denmark

Is it realistic to give up milk quotas? YES! z

If the Council of Ministers does not decide otherwise, the milk quota system will be abolished by 2015. An extension requires the EU Commission to put forward a proposal.

z

A blocking minority may secure that the present quota system is not extended.

z

90 votes out of 321 form a blocking minority: I.e. Great Britain, Italy, Poland, and Denmark may together block a proposal.

EDF Congress 2006, Denmark

5. Future challenges and possibilities

EDF Congress 2006, Denmark

Challenges and countermoves The challenges – Lower milk price – Less economic support – Stricter environmental regulations – More focus on animal welfare

The countermove of the dairy farmer – Cost minimization – Increase in farm size – Exploitation of new technological advances and new knowledge – Focus on strategy, leadership and management EDF Congress 2006, Denmark

New knowledge and new technology Better machinery

Better feeding equipment

EDF Congress 2006, Denmark

Better housing facilities

Better milking systems

New knowledge and new technology Better genetic

Better ”chemistry” • Plant protection • Fertilizers • Medicine

More knowledge • More knowledge regarding • Feeding of cows • Management of heifers • Roughage-growing • More and better knowledge of usage of technology

EDF Congress 2006, Denmark

Technology will monitor the herd Health and reproduction

Feed uptake

Health and reproduction

The registrations are converted into useful information EDF Congress 2006, Denmark

The role of the farmer is changing From • Doing all the farm work – – – –

From

Milking Feeding Field work Monitoring the herd

To • Strategy formulation • Management of production and economy • Management of labor • “Management” of consultants • Monitoring the herd by use of technology EDF Congress 2006, Denmark

Skilled craftsman

To Manager and leader

Trends for the coming years regarding ownership From

To

The family farm

C Cr. The family farm

S

The network

The limited company EDF Congress 2006, Denmark

Trends for the coming years – the production system From

To

An fully integrated unit

Out sourcing

A fully integrated unit

Consisting of individual units EDF Congress 2006, Denmark

The role of the advisor is changing The traditional role • Specialist on specific subjects such as: Feeding, animal health, economy etc. • Treatment of sick animals • The recipient of the advice is the dairy farmer • Little communication between the different advisors • Little focus on the farm as a whole • Knowledge and advisory tools are very

EDF Congress 2006, Denmark

The new role • Technology takes over much of the registration on the farm • Due to technology diseases can be identified at an earlier stage • Prevention of diseases • Specialist and discussion partner • The recipient of the advice could be several people on the farm • More focus on the farm as a whole • The advisor acts in a team of advisors • Knowledge and advisory tools are important but so are collaboration and communication skills • Sharing knowledge

6. Competitive strength of the Danish milk production

EDF Congress 2006, Denmark

Net capital and liabilities Denmark

Sweden Norway Finland

Netherlands Germany France Spain U.K. Ireland Poland Hungary

USA Brasil Kina Australia New Zealand

0%

10%

20%

30%

40%

50%

Net capital

EDF Congress 2006, Denmark

60%

70%

Liabilities

80%

90%

100%

Structural development: Increase in cows p.a. (1996-2003) Average number of cows per holding 86

Denmark

45 17 19

Sweden Norway Finland

65 39 38 28 81 46 4 17

Netherlands Germany France Spaion U.K. Ireland Poland Hungary

117 16

USA Brazil

229 316

Australia New Zealand 0

2

4

6 Per cent

EDF Congress 2006, Denmark

8

10

12

Labour productivity (Kilo milk/hour) Denmark

Sweden Norway Finland

Netherlands Germany France Spain U.K: Ireland Poland Hungary

USA Brasil China Australia New Zealand

0

50

EDF Congress 2006, Denmark

100

150

200

250 Kilo milk/hour

300

350

Danish milk production International competitiveness Structure:

6.8% annual increase in farm sizes

Working productivity:

Only exceeded by NZ and Australia. High wages, but welleducated, efficient and ready for readjustments

Debt ratio:

75% = top achievement, but result is a high investment level = geared for international competition

EDF Congress 2006, Denmark

Investments on dairy farms

Investments, DKK per cow

7000 6000

Quota exchange introduced

5000 4000 3000 2000 1000

EDF Congress 2006, Denmark

04 20

03 20

02 20

01 20

00 20

99 19

98 19

97 19

96 19

95 19

19

94

93 19

19

92

0

Earnings on farms with dairy cattle Operating result, 1,000 DKK

No of cows per farm

300

120 100

250

80

200 60 150 40

100 50

20

0

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005* * Provisional result based on 1/3 of the accounts.

EDF Congress 2006, Denmark

No of cows per farm

Operating result, 1000 DKK

350

Milk price paid to the producer 4.2% fat and 3.4% protein

DKK/100 kg 260

255

256

255 251

250

249

247

245

246 246

244

240

241 236

235 230

227

225

EDF Congress 2006, Denmark

04/05

03/04

02/03

01/02

00/01

99/00

98/99

97/98

96/97

95/96

94/95

220

Milk price paid to the producer in other countries DKK per 100 kg (4.2% fat and 3.4% protein) Year

DK

FIN

FR

NL

UK

DE

PL

US

NZ

2001

255

263

241

255

233

256

166

290

140

2002

256

266

233

241

206

233

147

218

120

2003

251

266

230

230

198

222

130

188

116

2004

236

260

222

224

206

218

150

225

135

2005

227

256

216

221

204

216

178

210

133*

1

Change in 2005 compared to 2004, percentage in DKK

-4%

-2%

-3%

-2%

-1%

-1%

+18%

-7%

-1%

in nat’l currency

-4%

-2%

-3%

-2%

-1%

-1%

+5%

-6%

-5%

Note:

1) The Danish prices are October year prices * Estimated prices

EDF Congress 2006, Denmark

Cause of improvement of the operating result z

Productivity progress more than equals the price reduction

z

Milk allowance

z

Falling animal feed prices and a satisfactory harvest of coarse fodder

z

High beef prices

z

Fall in taxes of tenancies

z

New accounting method

EDF Congress 2006, Denmark

7. Concluding remarks

EDF Congress 2006, Denmark

Some concluding remarks • The surrounding environment of the dairy farms in the EU is changing – Milk price is decreasing and the income of the farms is under pressure – Economic support to farmers is likely to decrease – Decoupling of support from production changes the competitiveness of the dairy farms EDF Congress 2006, Denmark

Some concluding remarks • The likely countermove of the dairy farmers – Lowering the cost of production – Structural development and larger farms – Investment in technology – A change from craftsman to manager/leader EDF Congress 2006, Denmark

If you prepare and change focus from support to the market – there will be a bright future for the European milk producer.

EDF Congress 2006, Denmark