Milk Production Strategies for Farmers in the EU Under New Policy Regulations

The recent reform of the agricultural policy in the EU provides totally new frame conditions for farmers. Main components of the reform are the decoupling of direct payments and particular for dairy farmers the reduction of intervention prices for milk products such as butter and SMP. The objective of this analysis is to develop strategies for dairy farmers considering the initial situation of four typical farm sizes at different productivity levels, debt-to-equity ratios and risk attitudes. The uncertainty of the price development for milk itself as well as for milk quotas will be covered using Monte Carlo simulations. Due to decreasing intervention prices profitability of milk production is endangered in most dairy farms and the values of assets will decrease. For most low to medium efficient dairy farms it was found, that selling the cow herd and the reference quantity immediately would yield highest values for net worth. If the current favourable situation for selling the reference quantity is missed, continual production would be better. For the remaining dairy farms it is most important to uncover all resources to improve efficiency by reducing production costs and increasing milk yields. These farmers can wait with further investments until milk quota prices have settled on the expected lower level. Only high efficient dairy farmers, normally with higher milk yields and the advantage of econo-mies of scale can get profit from further milk production. The micro economic analysis derived from the typical farms concludes that quota is not longer limiting factor in all regions as long as there is still surplus of milk in EU and prices for dairy products on world markets are relatively low