Positioning Your Dairy Farm Business for a Profitable Future - A European Union Perspective


Positioning Your Dairy Farm Business for a Profitable Future - A European Union Perspective

Myles Rath

Faculty of Agriculture,
University College Dublin,
Belfield, Dublin 4, Ireland.
E-mail: mrath@agriculture.ucd.ie

Take Home Messages

The European Union has a very large dairy industry and is a major exporter of subsidized dairy products onto the world market.
The existence of producer quotas within the EU has prevented the expansion of milk output since 1984.
The costs incurred in milk production in the EU vary greatly between countries, but are much higher than those in New Zealand and are similar to those in North America.
Failure to control costs in a quota situation is a major reason for low dairy margins.
High milk yield per cow does not always lead to high margins in a quota situation and optimizing milk output from forage is one of the keys to profitable dairying.
Detailed blueprints for very efficient milk production from grass have been developed in Ireland and are widely used.
Heavy reliance on grazed grass for milk production seems to limit milk yield per cow due to limits on grass dry matter intake. Efficient grassland management is a very demanding skill and is very difficult to implement.

EU Dairy Policy

The European Union (EU) consists of fifteen countries comprising most of the major countries of "Western Europe" and is one of the world's largest economic and trading entities. Policy for almost all agricultural commodities, including dairy production, is established centrally at European level. The prices for most products are high in comparison with "world" prices. The mechanisms by which high milk prices are achieved within the EU include:

Intervention - butter and skim milk powder will be purchased by EU agencies at agreed (high) prices. This effectively sets the base price for milk and dairy products in the EU.
Export Subsidies - subsidies, usually quite large, are paid on all dairy products exported by the EU on the "world" markets to bridge the gap between the high internal EU price and the "world" price.
Milk Quotas - milk production is now tightly regulated by farmer quotas which were introduced in the mid 1980's and milk output is now effectively "frozen" at less than it was in 1983, which is the base year for milk quotas. Milk produced in excess of quota is subject to penal levies and is effectively confiscated.
Import Levies - dairy products from non-EU countries are effectively banned through the use of very large import levies except for a relatively small amount of primarily New Zealand dairy products.

The introduction of milk quotas over ten years ago has been central in underpinning dairying as one of the most profitable farm enterprises in the EU. Of major concern and a cause of continuing uncertainty to EU dairy farmers is what will happen in future World Trade Agreements. The EU exports more than ten percent of its dairy products and, along with New Zealand, has been one of the major exporters of dairy products onto the "world" market for many years. Under the final agreement of the GATT, Uruguay Round in 1994 the EU is committed to 1) a reduction in expenditure on export subsidies, 2) a reduction in the volume of subsidized exports, and 3) an increase in the importation of dairy products into the EU. Dairy farmers are worried about the impact these changes will have on their milk quotas, but are even more concerned about what may happen at the beginning of the next millennium when the next round of the World Trade Agreement is due to take place. Some consideration is being given to the possibility that EU dairying might be better served by abandoning producer quotas, accepting lower milk prices, and aggressively expanding milk production in the more suitable dairying areas. The competitiveness of dairying in the EU relative to the dairy enterprises in other "competitor" countries in the world is, therefore, of great importance to both EU and non-EU dairy farmers.

EU Dairying - Large and Very Diverse

The dairy industry in the EU is very large with 21 million dairy cows in 1994 in comparison with 1.2, 9.5, and 2.7 million dairy cows in Canada, the United States, and New Zealand, respectively (6). Austria, Finland, and Sweden joined the EU in 1995 bringing an additional 1.7 million dairy cows. Milk production in the EU was one and a half times that of the US and between ten and fifteen times larger than either Canada or New Zealand in 1994 (6). Therefore a 10% exportable surplus of dairy products in the EU is very substantial on the "world" market for dairy products. It is not meaningful to consider EU dairying as a single entity. Geographically it spreads from as far north as the Arctic Circle to as far south as Southern California and includes areas where it rains almost every second day during the growing season, as well as areas with serious and prolonged moisture deficits every year. Cows have access to good quality pasture for at least nine months of the year in the southwest of Ireland and of Great Britain, while the grazing season can be as little as half that (or even none at all) in other regions.

France and Germany each have approximately five million dairy cows while there are over seven million cows in the countries of Ireland, the United Kingdom, Belgium, the Netherlands, and Denmark which could all fit into Alberta and still leave room for the Rocky Mountains. Dairying is much less "intensive" in northern or southern Europe and most of the emphasis in the rest of this paper will be on dairying in the areas of temperate grasslands, especially Ireland, the UK, and the Netherlands.

Milk production in Ireland is very seasonal and is based on grazed grass during a long growing season, plus grass silage over the winter period, with a total level of concentrate feeds of approximately 600 kg per cow per year. The average milk yield is little over 4000 kg, but the better dairy farmers achieve milk yields of almost 6000 kg per cow on the same low input system. In the UK and the Netherlands the average milk yield is around 6000 kg. The level of concentrate feed usage is between 1500 and 2000 kg per cow and maize silage is an increasing part of the feeding programme. Grazed grass is also an important part of the feeding program, but for a shorter growing season than in Ireland. While dairying in Ireland is in some respects similar to New Zealand, the cost of milk production in Ireland and in the more favored areas for dairying in the EU will remain much higher than those in New Zealand and will, in the author's view, be much closer to the cost of milk production in North America due to the higher winter feeding costs and the much higher infrastructural costs associated with winter housing and pollution control.

Costs of Milk Production in the EU

Comparative costings of milk production in the EU are difficult to obtain because of a lack of uniformity in the farm accounting systems in use. Comparative costs and returns have been extracted from the Farm Accounts Data Network (FADN) of the European Commission by Fingleton (3). The following conclusions are derived on costs and returns (per 100 kg milk) for the 1992/93 production year for Germany, France, the Netherlands, Ireland, and the United Kingdom, using an exchange rate of $1.75 (Canadian) per ECU (European Currency Unit).

Milk price varied from as high as $58.7 in the Netherlands to as low as $47.8 in Ireland and $46.9 in the UK.
"Specific Costs", mainly feedstuffs and fertilizers varied from $14.4 in France to $12.3 in the UK.
"Farming Overheads" including machinery and building current costs, energy costs, and contractor charges varied from $12.4 in Germany to $7.6 in Ireland.
Depreciation ranged from $8.1 in Germany to $3.8 in Ireland.
"External Factor Costs" including wages paid, rent, and interest varied from $9.0 in the Netherlands to $4.7 in France.
"Total Input Costs" were $42.1 in Germany, $38.1 in the Netherlands, $37.9 in France, $31.1 in the UK, and $28.7 in Ireland.
"Net Margin" varied from $13.7 in Germany to $19.1 in Ireland to $20.7 in the Netherlands.

The net margin values do not include any imputed costs for family labor, land owned, or non-land capital. When such imputed values were included the "margins" in all countries were very low. The values quoted are for dairy herds of 50 to 99 cows.

Some of the physical factors from the records include 1) milk yield per cow, varied from 4678 in Ireland to 6794 kg in the Netherlands, 2) stocking rate (livestock units per hectare) varied from 1.6 in France to 2.7 in the Netherlands, and 3) labor productivity (tonnes of milk per labor unit) varied from 221 in France to 324 in the Netherlands. In considering the prices, input costs, and margins in milk production it is important to recognize the EU support prices for dairy products are set in ECU's and that the governments in member countries can sometimes manipulate the exchange rate between the ECU and the national currency which can have a major effect on the profitability of dairying in the individual member countries.

Factors Influencing Dairy Profitability

While dairy farming is on average profitable in all EU countries there is a wide range in profitability between dairy farmers within each country. The results of an analysis of Farm Business Accounts of large dairy herds (over 100 cows) in the United Kingdom (4) are given in Table 1.

The top farms made an average profit of $156,000 while the bottom farms made an average loss of $37,000. While the output per cow was lower on farms reporting a loss, the most important feature was their failure to control both variable and overhead costs. On the farms reporting a loss, concentrate feeds, forage costs, veterinary and medicine costs, office costs, and other variable costs were all higher, while among the overhead costs power and machine costs and finance charges in particular were higher. Since the introduction of milk quotas the inability to control costs has been one of the outstanding characteristics of low margin dairy farms.

There is a lot of emphasis on margins per litre of milk or margin per kg of milk fat in the EU (milk quotas are reduced if the milk fat content increases). An analysis of the results of 4000 dairy farms in the United Kingdom (5) is given in Table 2.

The data in Table 2 shows that higher milk yield per se does not always lead to high margins. Further analysis of the herds based on the subdivision of the 4000 farms into yield bands ranging from less than 5000 kg per cow to more than 7000 kg per cow revealed that the top 10% of herds in each yield band achieved similar margins over purchased feed per litre and per kg fat. In all yield bands the top performers produced approximately 3000 kg per cow from home grown forage. (Milk yield from forage is calculated by estimating how much milk would be produced from the concentrate feeds used and the balance is assumed to be produced from forage). Where high milk yields per cow are combined with efficient use of concentrates, margin per litre and per kg of fat can be maintained and margin per cow, margin per hectare, and the margin for the total herd will be increased.

Grass Based Milk Production in Ireland

Milk production is more heavily based on grass and grass silage in Ireland than in any other country in the EU. Detailed blueprints have been developed for seasonal milk production (2) and form the basis for profitable milk production in Ireland. Until recently, the optimum blueprint developed by the Agricultural Research Institute in Ireland involved compact block calving beginning in early January and produced 5700 kg of milk per cow with concentrate feed usage per cow of 620 kg at a stocking rate of 3.0 cows per hectare and gave rise to a gross margin per cow of $2300. In recent years this blueprint has been modified to a system involving somewhat later calving, coinciding with the start of the grazing season in March, a reduction in the concentrate feed usage to an almost unbelievably low figure of 80 kg per cow at a slightly lower stocking rate of 2.7 cows per hectare. The milk yield per cow has been reduced by 250 kg per cow, milk composition has improved, and gross margin per cow has increased to almost $2600 per cow. At farm level the average concentrate use has remained around 600 kg per cow and average milk yields per cow of 5500 kg at stocking rates of 2.5 cows per hectare are common. While 5000 kg per cow has been produced from forage, predominantly grazed grass, the more realistic figure for dairy farmers is 4000 kg per cow. While milk quotas remain in place, milk production systems based on the efficient use of grass grazed in situ giving milk yields of 5500 to 6000 kg per cow per year with low usage of concentrate feed will remain the basis of profitable milk production in Ireland. While conditions for grass based milk production are more favorable in Ireland than almost anywhere in the EU, the efficient use of grass and grass silage will be very important for efficient milk production in the UK, the Netherlands, northern France, Belgium, and Germany for the foreseeable future.

The management of grazed pastures for efficient milk production in Ireland has been summarized by Stakelum (8) and his conclusions are very similar to those outlined by Clarke at the 1995 Western Canadian Dairy Seminar (1). While grass is an inexpensive feed it can be very difficult to manage properly and it has, in this author's opinion, some nutritional limitations. Its biggest limitation is that the maximum dry matter intake of grass alone is in the region of 17 to 18 kg per day for a 600 kg dairy cow. If, in the interests of maintaining sward quality, some further restrictions on intake are imposed it is very difficult to achieve high milk yield per cow. This is the main reason for the low milk yields in Ireland and New Zealand.

In Ireland one of the main features of good pasture management is that a high grazing pressure is imposed early in the grazing season so that a deterioration in sward quality in the second half of the grazing season is prevented (8). Mechanical topping or clipping of pastures may help in maintaining sward quality, but it does not replace the requirement for very good pasture management on a continuing basis. The use of supplementary concentrate feeding while cows are grazing pasture has usually given very disappointing results because of a very high substitution of concentrate feed for grass dry matter. The use of conserved forages plus some concentrate feeding along with grazing good quality pasture is widespread in the Netherlands and will support much higher milk yields than are normal in Ireland. Such feeding systems reduce the opportunity to exploit grazed pastures as a very inexpensive feed for milk production, but they may be necessary if milk yields of 7000 to 8000 kg per cow are to be achieved while still using grazed grass as a significant part of the feeding programme for modern high genetic merit dairy cows. In a period of increasing competition in the market for dairy products world-wide, the exploitation of inexpensive sources of feed will probably become increasingly important to dairy farmers in most regions of the world. Efficient use of pasture will play an important role in this regard in the future.


1. Clark, E.A. 1995. Maintaining Forage Quality by Intensive Pasture Management. Advances in Dairy Techn. 7:135-146.
2. Dillon, P. and S. Crosse. 1994. Summer Milk Production - the Role of Grazed Grass. Irish Grassland and Animal Production Journal. 28:23-35.
3. Fingleton, W.A. 1995. Personal communication. Address: Dept. of Rural Economy, Teagaso, Sandymount Ave., Ballsbridge, Dublin 4, Ireland.
4. Genus (undated). Profits in Dairying - An analysis published by Genus Limited, Westmere Drive, Crewe, Cheshire CW1 1ZD, England.
5. Genus. 1995. Genus Milkminder Annual Report 1994-95. Published by Genus Limited, Westmere Drive, Crewe, Cheshire CW1 1ZD, England.
6. IDF. 1995. World Dairy Situation - 1995. bulletin of International Dairy Federation. No. 303/1995.
7. MMB. 1995. EU Dairy Facts and Figures 1994. Published by Milk Marketing Board, Thames Ditton, Surrey KT7 0EL, England.
8. Stakelum, G. 1993. Achieving High Performance from Dairy Cows on Grazed Pastures. Irish Grassland and Animal Production Journal. 27:9-18.