Letter from Europe: Denmark's dairy sector - debt-burdened but highly efficient

Tuesday, February 16, 2010

Milk yields and production efficiency put this country's dairy sector right up amongst the world elite. But high investment and low returns mean business risk is sky-high, too

by NORMAN DUNN

You could say that the majority of our dairy farmers have financial problems at the moment," admits Gitte Grønbaek.

Grønbaek, a director of the Danish Cattle Federation, goes on to explain that this is not only because of this year's average milk price. At the equivalent to C$0.46 per kilogram, this is admittedly low and a couple of cents below current break-even. The problems are more to do with the taxation system. In Denmark, every heir has to buy the farm at almost full market value when father retires. "The result is that capital debt in dairy farming averages around 70 per cent," says Gitte.

Now, debt's unfortunately nothing new, or even unusual, in farming. But, having just returned from speaking with milk producers in Denmark, I can tell you that this situation seems to have created very special dairymen indeed – farmers who've dedicated themselves to making their farms as efficient as possible despite negative income at the moment.

"Investment in expansion has hardly faltered," a manager with the state farm advisory service tells me. "But many are leaving the sector and this gives us one of the fastest-changing dairy farm infrastructures in the world."

In 1984, Denmark had 30,000 milk-producing farms with an average of 28 cows. By January of 2009, there were only 4,300 – and there'll be a good few hundred less by the time you read this. Mean dairy herd size in Denmark is now a shade over 130 cows.

The changes towards big herds are moving faster. Most new buildings going up house for between 200 and 300 milkers. There are plenty of byres or traditional cow sheds still left in Denmark, but these are disappearing fast. Over 70 per cent of all milk herds are now housed in free stall barns and new milking systems are almost exclusively either automatic, with a robot for every 60 cows, or big, high-throughput carousels.  

Gitte Grønbaek looks at things this way: "The accepted scenario is that global demand for dairy products is set to expand and that milk prices will rise again within the next few years. Denmark has a healthy dairy export industry, last year earning the equivalent of C$1.8 billion in overseas sales.

Our dairy industry is certainly ready to supply more demand with a very modern and well-equipped sector."

Danish Cattle Federation figures indicate that the current investment level is the equivalent of around $370 for every 100-kilograms of milk produced in a year.

That may be way behind the Dutch figure in this respect – $550 per 100 kilograms of milk – but compared with other countries, such as Germany, France and Britain (all around $210) and the United States at just $122, it shows a real commitment to future success.

Neither has investment faltered as milk prices have dropped. Quite the opposite, in fact. In 2004, net investment per cow, including livestock, buildings, equipment and land, was just under the equivalent of $1,500.

Last year, the calculation topped $3,800.

Investment in the latest equipment certainly seems to pay in Denmark through very efficient labour statistics for milk production. Dairy economists there reckon that, for every paid hour of labour, on the average 240 kilograms of milk is produced. The Danes are only bettered in this aspect by the low-cost systems in New Zealand (260 kilograms of milk per man hour) and Australia (250 kilograms).

These figures point to Danish cows as very high yielders. In fact, they're spectacularly high when you consider that the main forage is still grass silage in many cases. Average yield is 8,705 kilograms, which puts this county up among the North American world leaders in this respect. In Europe, the next best is the Netherlands, averaging 8,100 kilograms and then nothing appears on the chart until Britain shows up with 7,100 kilograms. 

With this level of investment in expertise as well as capital, it's not surprising that I met plenty of agri-sector players there who were worried about the present financial crisis and its effects. They're rarin' to go when demand picks-up, but they know just how unpredictable the market can be for farmers everywhere. The situation was summed up with a tasty slice of black humour during a meeting with Peter Hansen, chairman of Denmark's national farming exhibition Agromek. "We already think we see a light at the end of the tunnel. Let's just hopeit's not an express train coming towards us." BF

Norman Dunn writes about European agriculture from Germany.