The future of Norwegian milk Production. An investment analysis of dairy farms

Abstract

This master thesis examines the dairy industry in Norway. Since World War 2 the total number of farms and farmers has decreased. Even though the dairy sector is developing and becoming more efficient, the milk production has stagnated and led to an increase in import of dairy products. To maintain the political goals; spread settlement, preserving the cultural landscape and food security, the development in the milk production needs a positive change. To increase milk production it is several possible solutions. This thesis examines the possibility of higher profitability for existing farmers if they invest in one more dairy cattle and if the size or area of the farm matter for the result, with and without the agricultural settlement of 2014. This analysis is based on all farmers as profit maximizers, and the result must be interpreted with the fact that this is not the case for several farmers.

The agricultural settlement of 2014 are central because changes in roughage subsidies and removal of production limits benefits larger farms. The main reason the government made these changes, was to strengthen Norwegian agricultural products against foreign competition. By increasing the size of farms, the idea is to increase effectiveness and lower costs, to achieve less expensive Norwegian agricultural products.

The results indicate that larger farms achieve better net present value of investing in one more dairy cattle than smaller farms. Smaller farms lost some of their income after the changes in the settlement of 2014, and achieve better results in the net present value analysis when the changes from 2014 is excluded. The areas in the middle and northwest of Norway achieve best results, which indicates that the investment and increase in milk production is likely to be largest in these areas.