Value of milk quotas is set to plunge

Milk quotas will become cheap if not valueless, as a result of the Fischler mid-term review proposals, according to agricultural economist Professor Seamus Sheehy.

Speaking at a seminar on agricultural careers in UCD last week Professor Sheehy added that Ireland's official policy of being simultaneously pro-quota and pro-competitive was a contradiction that needs to be addressed and resolved.

"The new proposals may do Ireland a favour by liberating it from the present straight jacket imposed by the quota system," he said.

Professor Sheehy said that the Commission proposed to cut milk prices by 25 per cent over five years from 2004 and to prolong a "reformed dairy quota system until 2014/15 at the same time."

However no mention was made by them of the interaction between price levels and quotas.

"The value of quotas is proportional to the level of prices prevailing under the quota regime," he said.

"The current value of a freely-traded quota is the present value of its expected contribution to income over its lifetime. The proposed price reduction, if agreed will therefore devalue quotas.

"The extent of this devaluation should be of great interest to farmers and processors when deciding on the future of their businesses.

"The critical factor that will determine the degree of devaluation is the impact of the price reduction on the volume of output.

"Many farmers, mainly the smaller ones will opt to reduce production or to retire altogether from dairying, while others will expand."

Research lacking

"Unfortunately we do not have the research results to establish which is likely to be the outcome. We can point to the pent up supply on farms where cow culling is delayed and cows are dried off early to avoid exceeding available quotas or where whole milk is fed to calves rather than being dumped. Such supply would be readily forthcoming as quotas fade out.

"Also there are some farmers with surplus resources, such as labour, buildings and machinery, who could expand profitably even at the lower prices proposed.

"Other farmers are not so favourably endowed and, faced with rising costs and declining prices, will not be able to justify the investment involved even with free quotas."

Expanding the aggregate quota

"The Commission proposals also include the expansion of the aggregate quota by 2% in Ireland, Greece, Spain and Italy and in other EU countries by 3.2%. This proposal has been generally welcomed by those farmers who favour quota retention.

"Again they don't seem to be aware of the impact of price and production response on quota values.

"The larger the aggregate quota the less the value of the quota until eventually the quota becomes valueless. Indeed one could suspect that the Commission wishes to manipulate the milk price reduction and the increase in aggregate quota to surreptitiously get rid of quotas."

Competitiveness and quotas

"Quotas are criticised by economists and others because of their anti-competitiveness. They are a bureaucratic means of determining production in contrast to the ‘autonomy of the price' approach.

"An important by-product is a slowdown in the rate of restructuring, dramatically demonstrated in the Irish experience.

"The number of herds over 50 cows grew at 5.6% per annum in the decade preceding quotas, but have only grown by 0.4% per annum since then.

"The new proposals may therefore do Ireland a service. One thing is clear - our official policy of being simultaneously pro-quota and pro-competitiveness is a contradiction.

"Now is an appropriate time to sort out our confusion and giving the industry a chance of surviving in the ferociously competitive world now confronting us."