Epsilon Archive for Student Projects

Abstract

Denmark, Germany and Sweden are along with 24 other countries members of the European Union. Being part of the European Union also means being part of a European market. Within the union barriers for trade has been abolished in order to create more open market. This open market has also contributed towards a more globalized market for dairy products. What used to be a domestic market has become globalised with increasing trade among the members. The membership also includes a common agricultural policy (CAP) which regulates rules for animal welfare, the environment and subsidies. The common agricultural policy provides a framework for laws and legislation within the European Union. The idea of these common policies is to provide similar conditions for the market players irrespective of member country.

However, each member state applies the policies a bit differently but still within the framework which affect the conditions for the producers differently. In addition to the European framework each county has its own individual system of laws, taxation and reimbursements which affect the competitiveness. Subsidies and tax reductions given to dairy farmers can be viewed as cost reducers rather than ensuring a minimum income. The subsidies enable the farmers to maintain production even if the market price is lower than the variable costs. The effect from the subsidies then make the marginal cost lower which gives the farmers a competitive advantage in form of cost advantage.

The aim of this study is to investigate how subsidies and tax systems affects the competitiveness for dairy producers in Denmark, Germany and Sweden. To illustrate the effects of the different systems a case farm located in southwest Sweden has been used. The farm has 220 dairy cows and 205 hectares of agricultural land. The theory used to measure the effects from the three different systems has its basis from a dissertation by Ola Flaten (2001).

The results show that there are differences in the result for the case farm when the different rules are applied. The most profitable system when applied to the case farm is the German which generates a net farm income of 277 940 Euros. The second most profitable system when applied to the case farm is the Danish which generates a net farm income of 272 870 Euros. The Swedish system generates the lowest net farm income of 271 542 Euros.

In order to measure competitiveness the average cost per delivered ton milk has been used. The most competitive system when applied to the case farm is the Danish which has an average cost per delivered ton milk of 248,6 Euros. The second lowest average cost has the Swedish system which is 251,3 Euros per delivered ton milk. The highest average cost is generated by the German system which amounts to 256,3 Euros per delivered ton milk.