Only efficient EU dairy farmers could survive at world prices

The efficiency of the European Union dairy industry in the world market is at the core of current arguments over reform of EU dairy policy.
It is, of course, accepted that if the EU ceased subsidising exports, world prices could be expected to rise, with the consequence that the effective world price would be higher than current levels. But it remains to be seen whether prices would rise enough to maintain any but the most efficient EU producers and processors.
Undoubtedly, high wages and variable costs inflated by years of high, artificially supported prices are the major obstacles to the EU dairy industry becoming globally competitive. At current production costs, it is unlikely that even the most competitive EU producers could rival the major world dairy exporters without subsidy.
According to a study of 100-cow farms in major dairying countries by the Federal Agricultural Research Centre’s Institute of Farm Economics, there are substantial differences in the cost of milk production within the EU. But even the costs of the best are currently two and a half times greater than the most efficient non-EU exporting countries.
The study suggests that if quota costs are left out of the calculation, 100-cow farms on the EU mainland would need a milk price of approximately 0.3 ECU (4% fat, no VAT) to cover all economic costs (ie including an adequate return to managerial labour). The best 100-cow farms in the UK, Ireland, and the USA could produce profitably at milk prices of around 0.25 ECU. But in New Zealand, milk can be produced for less than 0.1 ECU. The break-even point in other low cost countries, with the exception of Hungary, falls below 0.15 ECU.
In the longer run it is beneficial climate and production conditions which give the most competitive exporting countries their advantage. The average New Zealand farmer, for example, produces twice as much milk per hour as his German colleague. The main reason for this is the efficient exploitation of climatic advantages (no housing, year-round grazing) in New Zealand.
Within the EU, however, it is labour productivity which gives the most efficient producers their advantage. In the Netherlands and Denmark, labour productivity is considerably higher than in Germany. This can partly be explained by specialisation, on the most efficient EU dairy farms, cow husbandry and field work are separate operations.
These considerations suggest that, in the case of a comprehensive liberalisation of international trade, the world milk price would not exceed 0.2 ECU/kg in the long run. If an addi-tional 0.03 ECU/kg milk is included for the transport of dairy products to Europe, the relevant price at which EU dairy farmers would have to compete in a liberalised world market would be no more than 0.23 ECU/kg milk. This calculation suggests that only the very best farms would survive, and EU milk supply could be expected to decrease substantially.