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The End of the Quota Era

Thia Hennessy, Trevor Donnellan, Fiona Thorne

Agricultural Economics and Farm Surveys Department

Teagasc

April 1st 2015

A history of the Irish Dairy Sectorin the Milk Quota Era

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Overview

Why quotas were introduced

The development of the sector under the quota

Farm Numbers

Productivity

Profit & Income

Where we are today

How will we develop in the future (later presentation)

Why Quotas were introduced

A golden era for Irish Farming

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Generous Price Policy

Joining the EEC – a golden era

Irish production doubled from 1974 to 1984

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Price Increases underpinned growth

Irish milk price increased by 75% 1975 to 1984

Something had to give

“The CAP has become unwieldy, inefficient and grossly

expensive. Production of unwanted surpluses safeguards

neither the income nor the future of farmers themselves.”

Margaret Thatcher

Budget and surplus system needed to be corrected

Drastic revision to the price support system or the impositionof a quota with a retention of the price

“Quota less damaging to the future of the Irish dairy sectorthan the necessary price reduction” Seamus Sheehy

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Milk Quota vehemently opposed

Imposed in 1984

Production over quota notpossible without super-levy

The Quota Era

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Price Developments in the 30 year period

3 phases1: price increased in late 1980s2: Static 1990s to mid 2000s (decoupled paym’ts made)3: upward but volatile in the last 10 years

Cost Developments in the 30 year period

Significant Inflation since the early 2000s

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Profit Developments in the 30 year period

Profit volatileCent per litre basis – the trend is downwardsNo obvious efficiency gains

Farm Consolidation in the 30 year period

Farm numbers fell by 80%Herd size tripled

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Quota Trade

Increases in scale facilitated income growth

Output per cow & per hectare increased by 50%

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Income growth averaged 9% per year

Income supported by subsidies

Subsidies offered protection from volatility in recent years

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Development over 30 years

Income growth only possible through scale

But came at a high cost

How we comparedinternationally

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Ireland was not unique

Average herd size today

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Debt levels per cow today

How did we compare internationally?

Numerous competitiveness and productivity studies Productivity growth was poor

Cash costs of production persistently one of the lowest in Europe andbeyond

But total costs of production were high

Competitiveness and productivity position was hampered by Relatively low output per hectare (and high land prices)

Relatively low output per labour unit (and high labour prices)

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The counterfactual

What would our dairy sector look like today if quotas were notimposed?

Look to New Zealand

Milk output almost tripled and farm numbers declined by just 25%

But Ireland is not New Zealand Land mobility: population density, access, attachment and price

Policy support for other agricultural sectors (inflates returns to resources)

Labour mobility: alternative farming models

Cost of environmental compliance

Development over 30 year period

Late 1980s and early 1990s Milk price continued to increase and production costs were static

Quota system was working

Mid 1990s to early 2000s Milk price was static production costs starting to grow

Price cost squeeze – “frustration with the quota system”

Mid 2000s to date Improvements on world markets – EU couldn’t exploit them

Costs of production increasing rapidly

Input and output prices - volatile

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Conclusions on the milk quota era

Quota served its purpose in the initial years Milk price remained high and production costs were static

From mid 1990s frustration grew Price cost squeeze began to develop

Significant investment in quota viewed as “dead money”

From the mid 2000s clear that world market was booming Improvements on world markets – EU couldn’t exploit them

Production costs increasing rapidly & volatility in input and output prices

Many Member States not filling their quota

Transfer of quotas between Member States sought

Time for the quota to go…

Lessons learned

First opportunity for expansion

Not quite

Farm output increased 5-fold in 30 years

Concern about rapid expansion and investment

Recent expansion more costly than future

Lessons learned

Significant expansion in the late 1970s leading to the debt crisis

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