By Peter Hinrichs & Petra JaegersbergFederal Agricultural Research Centre (FAL),

Braunschweig, Germany

End User Meeting Brussels, 14.06.2001

Working Package 4 (Economics)First Year´s Example

Where are the farms locatedthat are the most vulnerable

with regard to a milk price reduction?

VulnerabilityBy Peter Hinrichs & Petra Jaegersberg

Vulnerability ...- in this context - means, how strongly a dairy farm will be “hurt“ by a price drop.

... has to be defined in economic terms:- The surplus for net investments (farm growth) vanishes- the liquidity reserve shrinks below a critical amount, and/or- the income does no longer pay for the farmer´s basic needs.

Defining a vulnerablility indicator:Relation between milk price as product-bound parameter and a criterion denoting the whole farm´s economic performance, the Family Farm Income. From this, we subtract the amount the unpaid family workers‘ need for their living, which is derived from the paid workers` net wages.

VulnerabilityBy Peter Hinrichs & Petra Jaegersberg

0,00 €

Price drop

Com-pens-ation

Family workers

`Income

claim

Paid Wages

Paid Rents, Interest and

VAT on Investment

Farm Net Value Added

Family Farm Income

Surplus available for net investment, more consumption or risk prevention(as long as subsidies remain unchanged)

Net Sub-

sidies

Calculation scheme of the surplus available for net investment and/or improved liquidity.

VulnerabilityBy Peter Hinrichs & Petra Jaegersberg

Our primary vulnerability indicator:Surplus of Family Farm Income over income claims of family workers, per milk quantity produced and sold (expressed in € / 100 kg milk).

This surplus is used for: Net investment (farm growth)More consumptionLiquidity risk prevention

Our criterion: If the FFI - Income claims

> 0: the long term losses do not exceed the initial decrease of receipts, and the farms have a chance to recover form the initial impact

<< 0: the farms will be handicapped materially.

The amount of the price drop was taken from the actual mid-2001 discussion about the New Agenda: 0,0525 € per kg milk. A compensation of 66 % is assumed. The resulting price drop: 0,0175 € per kg milk.

Available Surplus (€ /100 kg milk) in Europe‘s milk producing farms

(by member country)

Compensation

Final price decline

Family workers' income claim (after tax) per 100 kg milk sold

Total wages paid per 100 kg milk sold

Total net payments for other external factors, per 100 kg milk sold

BDK

DGR

EF

IRLIL

NLA

PTSF

SUK

3 289

4 627

23 958

6 130

10 814

252

12 734

2 912

1 508

2 709

3 738

15 895

27 174

457

4 681

Net subsidies

-30,00 0,00 30,00 60,00€Milk Prod1000t

Peter Hinrichs & Petra Jaegersberg: Vulnerability

Available Surplus (€/100 kg milk) in Europe‘s milk producing farms

by FADN farm type

CompensationFinal price decline

Net Subsidies Family workers' income claim (after tax) / 100 kgM soldTotal wages paid per 100 kg milk soldTotal net payments for other external factors, per 100 kg milk sold

411

412

431

432

44

6711

712

721

723

81

82

69 667

21 072

6 954

130

896

502

2 805

1 668

116

14 664

514

Farm Type

Milk Prod. 1000 t

2 805

-30 0 30 60€

Peter Hinrichs & Petra Jaegersberg: Vulnerability

Available surplus (€/100 kg milk) in Europe‘s milk producing farms

by production system

Common systems (P1) 9 901

Lowland systems (G2) 17 670

Upland systems (G3) 3 481

Intensive grass (G1) 29 841

Conventional (CG1 (M1/2)) 22 018

Low-input (CG2 (M1/2)) 4 707

Small mixed (CG3 (M1/2)) 5 628

Industrial (L1) 6 650

Commercial (L2) 10 420

Small-scale (L3) 665

Low-input grassland 9 635

Extens. Grass (XX) 269(IRE only)

-30,00 0,00 30,00

Net SubsidiesCompensationFinal price decline

Family workers' income claim (after tax) / 100 kgM soldTotal wages paid per 100 kg milk soldTotal net payments for other external factors, per 100 kg milk sold

Peter Hinrichs & Petra Jaegersberg: Vulnerability

CompensationFinal price decline

Family workers' income claim (after tax) / 100 kgM soldTotal wages paid per 100 kg milk soldTotal net payments for other external factors, per 100 kg milk sold

D-Sachsen, 81, Convent.

F-BasseNorm, 411, IntGrass

I-Lombardia, 411, Industrial

I-EmiRom, 411, Commerc.

Netherlands, 411, IntGrass

Ireland, 411, Lowland

UK-WestEngl, 411, IntGrass

GR-Mak-Thrak, 81, Commerc.

E-Galicia, 411, IntGrass

PT-NorCent, 411, Commerc.

Austria, 411, LI-Grass

S-Skog&Mell, 411, LI-Grass

Available Surplus (€/100 kg milk) in selected groups of European dairy farms

(by EU farm type & production system)

186

969

696

865

3080

1086

76

1333

528

3300

778

451

Region Type ProdSyskt

MilkHerd size

Milk yield

Milk price

Wage Rate

Perm. Past. ha / k t M

Conc. Feed €

/100 kg Milk

145 6916 30,0 9,4 120 6

42 5324 34,2 7,3 98 5

126 7557 45,2 7,9 0 9

32 5531 48,4 7,4 0 12

64 7478 33,1 10,5 57 5

41 4699 31,0 5,3 161 5

94 6501 32,4 8,6 47 6

15 3965 32,2 1,9 12

18 4667 28,1 2,8 17 6

24 5854 29,4 1,6 2 11

14 4874 34,7 4,9 210 5

30 7987 34,8 13,5 145 11

0

Net Subsidies

0 30€

Peter Hinrichs & Petra Jaegersberg: Vulnerability

€ 0

20.000

40.000

60.000

80.000

100.000

2000 2001 2002 2003 2004 2005 2006

MP -17 %MP -5,6%MP - 0% MP-17%, high loans

2007

Family Farm Income of a 100 cow farm in Eastern Germany, with different milk price projections

and the influence of high loansPeter Hinrichs & Petra Jaegersberg:

Vulnerability

-40.000

-20.000

£ 0

20.000

40.000

60.000

80.000

1997 1998 1999 2000 2001 2002 2003 2004

Baseline MP -17 %MP -5,6 %

Family Farm Income of a 165 cow farm in Wales/UK with the effect of exchange rate & milk price

Peter Hinrichs & Petra Jaegersberg: Vulnerability

VulnerabilityBy Peter Hinrichs & Petra Jaegersberg

Summary

1) The most vulnerable farms are those ones that are already handicapped without a price drop.

2) There are great national differences: Italy, Ireland, Spain, Greece, Austria and versus Sweden, Finland and Germany (without subsidies), Denmark and Portugal. 3) Within the countries, the regional variance is less spectacular, although in the Mediterranian countries, it is much greater than in Northern Europe.

4) A special case is the UK where the strong British Pound distorted the price / cost relation remarkably.

VulnerabilityBy Peter Hinrichs & Petra Jaegersberg

Summary (cont.)

5) A comparison of the EU farm types shows that there is no specialization bonus in most of the countries. In the contrary, the mixed (livestock) farms looked more successful in the year 1997/98 than the specialized dairy farms, due mainly to higher subsidies for crops and non-dairy livestock.

6) Grouping by production system revealed advantages of:- dairy farms without permanent grassland (commerc./industr.)- large herds (scale effects, labour productivity, investment costs)

7) Additionally, there are significant effects of the Milk Prices, the Wages, the Land Rents, and Interest on borrowed capital.