Global benchmarking reveals opportunities and threats

Published 31 March 15

In August 2014’s DairyLeader, in what was a very different dairy market, we provided a snapshot of views from around the world taken from the International Farm Comparison Network (IFCN) conference. With the IFCN annual report now published, AHDB lead farm economics analyst Mark Topliff highlights some comparative data which tells an interesting story – despite the change in milk markets.

As a member of the IFCN, DairyCo has access to data from 55 major milk-producing countries around the world, compared using a typical farm model approach and updated annually. The data is based on a selection of ‘typical’ farms that represent the most common types producing the highest share of milk within a region or country. It looks at milk production only – all cash and non-cash costs of the dairy enterprise and returns from milk and other income – but excludes youngstock and calves and costs associated with other dairy income than milk.

The global picture

In 2013 the average cost of milk production in the network was 27ppl of Energy Corrected Milk (ECM)[1]. This was a decrease of 0.4ppl ECM on costs in 2012[2] due to lower energy and feed prices. These lower costs and a record high milk price during the year led to 69% of dairy farms in the network achieving profitability in 2013 compared with 56% in 2012. This was especially the case in the Middle East, Africa, Central and Eastern European Countries (CEEC), South America and Asia. African countries dominate the lowest cost producers while the likes of Switzerland, Japan and Finland are the highest-cost producers in the network (see Figure 1).

 ICFN Graph

Figure 1: Cost of milk production in world regions (ppl ECM) - 2013

Source: IFCN

Trends in costs of production since the new millennium have also differed across the world’s regions. In North America, costs were largely stable until 2006. Since then, higher feed prices have largely contributed to the increased cost of production, with 2013 reported to have the highest costs over that whole period.

In Western Europe, the costs of milk production doubled initially. For example, costs in Germany increased continuously until 2007; the downturn in the economic climate then meant lower input prices for fuel, etc., leading to lower costs of production until 2011 when feed and land prices increased again. There was a similar picture in Spain, despite improved productivity.  

In all other world regions costs have more than doubled, especially since 2008 in China and India. In fact, the cost of milk production on Chinese dairy farms surpassed the level of 37ppl ECM in 2011; for a typical dairy farm this has meant an increase of over 260% since 2001. This was due to especially strong rising feed and labour costs but in addition, the Yuan has had a revaluation to the US dollar since 2006, making it more expensive against the US dollar. Fast-rising feed and land prices, together with a sharp increase in farm salaries, were experienced in India, leading to the significant rise in its cost of production.

 ICFN Graph2

Figure 2: Costs of milk production (cash and non-cash costs) versus milk price - 2013

Note: Horizontal axis labels indicate the typical farm countries and herd size

Source: IFCN

 

The UK’s relative position

For the purposes of the IFCN study, two ‘typical’ farms in the UK are represented. One is based in South West England and the other in North West England. The average cost of production of both these farms is around 31ppl ECM[3], which is above the IFCN estimated world average of 27ppl ECM in 2013.    

The UK is not comparing as favourably in global terms as it was a couple of years ago, in part due to exchange rate movements. But in Western Europe, the data from other typical farms show that the UK has reasonably low total costs of milk production. For Western Europe, only Ireland, Germany and France had typical farms with similar or lower levels of costs of production. However, there was a difference in the level of opportunity cost, with the farms from these other countries returning a higher value, meaning the opportunity cost of using the land for purposes other than dairy farming was lower. These opportunity costs include value of land owned, family labour and interest on equity. So as an example, the cash costs of production are lower in Ireland than the UK.

This is important from the point of view that the UK is the main export destination for Irish dairy exports, which puts them in direct competition with UK-produced Cheddar, the majority of which is sold into our domestic market. In fact, in 2013 80% of the UK’s cheddar imports came from Ireland. And as quotas end in 2015, Ireland’s dairy industry is proposing a 50% increase in milk solids production within five years.

So for the UK to continue to be viable as a producer of Cheddar in its own market as well as in opportunities abroad (exports accounted for just 19% of UK Cheddar production in 2013), being competitive with Ireland is very important. This can only be achieved by understanding the key drivers of costs of production and reducing them to a level where they are comparable with Ireland’s.

[1] Energy corrected milk (ECM) (kg) = (milk production (l/year)*1.033*(0.383*butterfat (%) + 0.242*protein (%) + 0.7832)/3.1138): allows comparison between milk types with different solid contents

[2] Year-on-year changes can also be affected by exchange rate movements

[3]  The UK figure provides an indication of the UK costs of production based on the IFCN definition of including costs associated with producing milk and excluding costs of rearing young stock and calves and costs associated with other dairy income than milk