The world-wide trend, underpinned by WTO and bilateral Free Trade Agreements
(FTAs), is towards trade liberalisation. As a consequence, like for other sectors of
their economy, countries should contemplate bringing the level of competitiveness of
their dairy sector to international standards sooner rather than later. Raising farm
competitiveness, however, is very likely to be easier for countries whose farmers
receive little or no farm support and are efficient dairy producers. In other words,
the ability of the bulk dairy farmers to cope with a more liberal trade environment is
closely related to their current dependency on public support.
With this in mind, the main purposes of this study were (1) to analyse the farm
economics of typical farms in Germany, chosen as a high support country, Vietnam
and Thailand, representing countries providing intermediate levels of support, and
New Zealand (no support) under their current policy framework; (2) to estimate the
levels of support captured by typical dairy farms in these countries; and (3) to assess
the farm economics of milk production once the policy distortions are eliminated.
More accurate estimations of public support to dairy farmers and the sources of this
support would assist in identifying potential opportunities for dairy improvement,
particularly through policy action, and in assessing the vulnerability of different farms
to direct competition in a more closely interconnected world market. To this end,
this study explores a PAM-based alternative to the OECD ‘Producer Support Estimate’.
Methodology
The methodology applied for the economic analysis was developed by the
International Farm Comparison Network (IFCN) and utilises the concept of ‘typical’
farms. IFCN identifies dominant farm ‘types’ through regional dairy experts taking
into consideration (a) agro-ecology and location, (b) farm size in terms of herd size
and (c) the production systems that make important contributions to milk production
in the selected region/ country. For this study, the IFCN database for 2004 was
utilized and farms from Germany, Vietnam, Thailand and New Zealand were selected
(3, 2, 2, and 3 farms respectively) for comparison. More information about these
farms is available in the 2004 IFCN dairy report.
The Policy Analysis Matrix (PAM) approach was used to evaluate the competitiveness
of the selected dairy farms under their current policy framework and under an open
market scenario for each country. Lastly, the PAM approach served to cross-check the
‘producer support estimate’ as monitored by the OECD.
Results
Comparison of Dairy Farm Economics
Comparison of the economic results at farm level, using private prices, shows that the
Thai and Vietnamese dairy farmers achieve very lucrative levels of ‘entrepreneurial
profit’ while the German dairy farmers make considerable losses and the New Zealand
dairy farmers manage to almost break even.