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Sector model developed at MTT indicates that the best time for investment on dairy farms is now.

The model provides an excellent tool for policy analysis.
 
 


Dynamic sector model offers a look at the future of farming

MTT has developed a dynamic sector model for describing the regional impacts of different policy alternatives on Finnish agriculture up to 2010. The sector model provides researchers and decision-makers with an important tool for policy analysis. It can also be applied in multidisciplinary research: the model enables evaluation of the impact of changes in subsidy policy on the field nutrient balance, for example, or the economic impact of environmental policy measures.

The underlying principle of the sector model is the idea that agricultural policy has an impact on the different spheres of production through arable land use. Apart from crop production, animal husbandry is also bound up with arable land; for example a piggery enterprise can be construed as further processing of grain, and milk production as further processing of grassland. In the long term, producer prices and subsidy policy will have a considerable effect on relative profitability of different agricultural production lines, and on land use in different parts of Finland.

The sector model is rendered more dynamic by the fact that it also takes account of consumer trends and foreign trade, which guide production at the macro level. Consumer trends in foods change slowly, but for example in milk products their effects are considerable: changes in consumption over the past few years have, for instance, opened the door to cheese imports.


Change is already under way

The dynamic sector model does not assume the current state of affairs is balanced, but instead starts with the assumption that there are already several elements of change. Adaptation to policy changes is slow as a result of the biological dependencies of agriculture and the long investment cycle, about 10-30 years. However, in the long run production will gradually be located in areas in which it has the highest relative profitability.

A key factor influencing progress is the diffusion of technology, i.e. the introduction of new technologies, which will typically start at a slow pace and pick up later on if experiences of the new method or equipment are good. The sector model takes into account the fact that the process of technological change is especially vulnerable to external disturbing influences specifically at the stage of rapid growth.


Milk production in Finland may decrease considerably

Agenda 2000 may reduce milk production in Finland by 100-300 million kilos from the present level unless dairy farms make considerable investments in the near future.

The profitability of production was low throughout the 1990s. With the post-war baby-boom generation soon retiring, there is an urgent need for major investment in efficient production solutions in order for milk production to be attractive to young entrepreneurs.

According to the dynamic sector model, the reduction of 15% in the price of milk agreed on in Agenda 2000 will cause a drop in investment after 2005, which in turn may result in a cut of about 100 million kilos in milk production over the next ten years. If the interim review to be conducted in 2003 agrees on a price cut of 20%, the investment funds available on Finnish dairy farms would be considerably reduced and production curbed by nearly 300 million kilos by 2010.


Now is the correct time to invest

The prices of milk increased distinctly during 2001, which provided an incentive for dairy farms to invest more in new production systems than during the past few years. In view of technological progress and competitiveness in the dairy sector, the price rise came at an opportune time. The increased investment may lead to accelerated structural change in the sector.

Learning and fully utilizing a new production technology on the farm takes time, and thus the change-over to more effective production methods should preferably be carried out before 2005. This would allow full advantage to be gained from the new systems before the price cuts. Hence, the best time for a dairy farm to invest is now.

For further information please contact Heikki Lehtonen