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02/04/2015
1
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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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