How have French dairy farms evolved since the early 2000s? How did this sector manage to pull through the 2009 dairy crisis both at the national and European level and how is it preparing for the end of milk quotas in 2015?
These are particularly important issues because the dairy sector’s future needs to be planned now, especially in Brussels, where on 24th
September a conference was held on the future of milk production after the end of quotas, in which momagri actively participated.
We recommend reading this particularly enlightening report by the Permanent Assembly of Chambers of Agriculture (APCA)1
chaired by Didier Caraes on the state of French dairy farms in the light of the changes made since the early 2000s.
The dairy industry survived the crisis of 2009 mainly due to good financial results, but how is it surviving the dismantling of quotas which have regulated farming activity since 1984?
Indeed, as pointed out by the APCA, the dairy industry is at a turning point. Even though dairy farms have considerable economic advantages (balanced business cycle management, capital growth with debt control, strong cash flow and high short and long term solvency), will they be strong enough to face erratic market fluctuations and ensure their competitiveness at an international level?
During their highly praised intervention on 24th
September in Brussels, momagri fully grasped the gravity and importance of this turning point. Because price volatility combined with the differential cost of production compared to the purchase price of milk will accelerate the disappearance of dairy farms if no strategic plan is set up to accompany the sector, including reinforcing crisis management instruments.
momagri Editorial Board
From the beginning of the 1990s until the crisis of 2009, dairy farms evolved in the stabilizing economy of milk quotas. During this period, dairy farms managed to grow their business and sustained their effort to continue investing by managing their debt. The dairy crisis of 2009 was brutal and intense. The resilience of dairy farms during this period is due partly to the successful accumulated economic performance of previous years. But what economic resources will dairy farms dispose of in coming years if the current regime of instability settles permanently?
Dairy farming is at a turning point, caused by the programmed elimination of the quota system that regulated dairy activity for almost thirty years. The intensity of the dairy crisis in 2009 raised serious concerns with a decrease in farm incomes by almost half between 2008 and 2009. If instability becomes structural what would happen to the financial health of dairy farms? Would they have the resources to cope with market volatility?
The stabilizing effect of quotas (1988-2009)
Before the troubled times of recent years, the dairy farm economy was stamped with the seal of stability. Dairy farm activity was contained in a system of continuous growth. Added value and income indicators remained stable. With regards short-term management, an increase in activity did not change the parameters: same levels of storage (mostly intermediate consumption), the same frequency in resorting to accounts receivable and accounts payable. This stability led to stable, well-defined, short term financial requirements.
For the activity’s long-term cycle, the same structural stability can be found. To meet the regulatory requirements of the Farming Pollution Management Program (PMPOA), dairy farms invested heavily. They borrowed from the banks to finance these investments and benefited from investment grants.
But the structure of their debt was not however destabilized. The debt rate of dairy farms has remained very similar to the French farm average.
In addition, the cost of debt (average interest rate of financial debts) has been structurally lower than the return on capital, which legitimized more borrowing.
On this point, the banks did not have to worry about the farmers’ ability for repayment: over the period, less than two years of income could settle all a farms financial debts.
The cash flow indicators were again very favourable: structurally stable and strong. Overall, the financial indicators for dairy farms remained positive for the long term during the early 1990s to the mid-2000s. There were some areas for improvement (balancing payment delays), but the sustainability of dairy farms did not appear to be threatened.
Dairy farms in turmoil (2006-2011)
The dairy crisis of 2009 had severe impacts on dairy farms where revenues fell by more than half between 2008 and 2009. The farms were able to alleviate the crisis by limiting their investments, negotiating shorter payment deadlines with their customers and reducing their stocks.
Farm bosses also reduced their share of private takings from the business.
This enabled them to generate cash flow. But it is still too soon to determine if dairy farms have been able to re-establish their favourable financial fundamentals of before the crisis (our series ended in 2011).
Average FADN data shows the financial health of dairy farms appears to be pretty good in the long term. The dairy crisis of 2008-2009 seems to have been absorbed.
But it should be noted that the instability of 2007-2011 came after a long period of economic stability provided by the quota policy. What would happen to the financial health of dairy farms if this stability were to be broken, if they were no longer able to generate profits for financial security over the years as has been the case so far? This will be the challenge for the coming years.
1 Follow this link to read the entire analysis (in french) http://www.chambres-agriculture.fr/fileadmin/user_upload/thematiques/Economie/Focus1307_dc.pdf