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Economic Analysis of Policy Changes in the Dairy Sector

Donnellan, Trevor
; 
Fingelton, William
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Keywords
Agricultural policy, Milk production, Economic factors, Economic model
Date
2001-04-01
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REDP End of Project Reports
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eopr-4431.pdf
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http://hdl.handle.net/11019/1257
Citation
Donnellan, T., Fingelton, W., Economic Analysis of Policy Changes in the Dairy Sector, End of Project Reports, Teagasc, 2001.
Abstract
This study examines the effect of changes in agricultural policy and other important economic factors on the outlook for milk production in Ireland in future years. The analysis is conducted at an aggregate milk and dairy commodity level. A companion report provides similar detail on related farm level work. Following an initial period of development, the analysis summarised here took place over a period of three years. The potential effect of the European Commission’s proposed changes to the Common Agricultural Policy (CAP) under Agenda 2000 are examined, as is the eventual Agenda 2000 Agreement produced in Berlin in March of 1999. The implications for the dairy sector of differing future euro/dollar exchange rate paths are also analysed. A series of interlinked economic models capable of projecting key price and output variables were built for the main Irish agricultural commodities, including the dairy sector, and these in turn were linked with models for the EU and the World. It was thus possible to estimate the implications for the Irish dairy sector of supply, demand and policy changes at a world and EU level. It was found that the reform of the CAP in the dairy sector would lead to a reduction in the Irish milk price of 11 per cent relative to the outcome if the reforms were not introduced. However, increases in quota and the availability of compensation following from the Berlin Agreement should offset much of this decline. The effect of the future exchange rate between the euro and the US dollar was of significant importance. Other things being equal, a weaker euro made EU dairy exports more competitive outside of the EU, resulted in less pressure on the CAP budget and ultimately would produce more favourable milk prices than would be the case under a stronger euro. The analysis shows that a difference of 20 per cent in the euro/dollar exchange rate would result in a 7 per cent difference in milk price.
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