A new era in Irish dairying

Quotas and restrictions were removed but extreme price volatility is here to stay says IFA dairy chief

A new era in Irish dairying

2015 will go down in dairy history as the end of an era of quotas and restrictions, and the beginning of one of great opportunities, but also serious challenges, writes Catherine Lascurettes, IFA Dairy Executive.

In the last 10 years, dairy farmers have had to cope with fundamental changes in the Common Agriculture Policy, which replaced market support budgets and subsidies with direct farmer payments.

This resulted in a reduced use of intervention and export refunds in particular, and together with much increased international trade in dairy products, it affected very seriously the stability of milk prices available to European farmers.

European milk prices have been determined by events on the global market for several years now, but with market supports all but gone, farmers have been stuck with the restriction and costs of quotas.

The end of quotas came on 1st April 2015, leaving farmers at greater liberty to increase production if they wished, but also to manage their production more efficiently and sensibly.

Fast growing international dairy demand, especially from emerging countries where both population and affluent middle classes are growing in numbers, offers real opportunity for Irish producers, who can supply them with quality, sustainably produced milk and dairy ingredients. However, market conditions and prices are very volatile, reflecting weather shocks, geopolitical events, currencies, surpluses and deficits in various regions.

Farmers and industry have been preparing some time for this new era. Altogether, over €500m has been spent in the last 3 to 4 years by the dairy sector in extra processing and marketing capacity, in preparation for the opportunities post quota.

Farmers have also invested for the future, with close on €1.9b spent on farms since 2007, and another €1bn or so needed to deliver on the Food Harvest 2020 50% increase target.

Farmers have engaged fully with the dairy industry/Bord Bia Sustainable Dairy Assurance Scheme, which involves audits on each farm to measure quality and sustainability.

This significant investment by farmers in preparation, time and cost, must be fully utilised by industry to leverage new markets, added value products and stronger milk prices. It must also be deepened and communicated more broadly in the context of the climate change debate, to ensure we optimise and assert the real low emission credentials of our grass based sector.

Extreme price volatility is with us to stay, so Irish dairy farmers will face challenges on income and cash flow. It will be crucial that they optimise on-farm efficiency, and do not over-reach in their investment. They will also need support and expertise from industry, regulators, advisory services and banks to manage their way through this “new normality” of volatile prices and incomes.

The dairy processing sector needs to take stock after a period of major investment, and make sure that it optimises its internal efficiencies.

This must include not shying away from bold moves on consolidation where that would result in a better outcome for farmers. In the kind of relatively prolonged downturn we are seeing in 2015, our industry must ensure that milk prices do not fall into unsustainable territory on those occasions.

Our co-ops, in conjunction with Ornua, need to further develop instruments which farmers could use on a voluntary basis, to “hedge” or “fix” their milk price and/or margin for a percentage of their milk. Solutions such as the Glanbia index-linked fixed milk price contracts must become more readily available to more farmers. Alternative hedging methods derived from the European futures markets which are developing rapidly at the moment must also be explored.

We need the EU Commission and our Government to co-operate to ensure EU funded market support measures are restored to realistic “safety net” levels and through more flexible state aid rules, allow taxation options which can really help farmers avoid the worst impacts of income downturns.

Finally, our financial institutions must support the sector, with flexible and competitively priced investment products allowing farmers to tailor repayments to their varying levels of margins without renegotiation costs.

Irish dairy farmers have the appetite and real potential to grow their output to supply the growing global market with the quality, sustainable dairy products and ingredients they crave, delivering export revenue and job growth for the Irish economy.

The outlook is very positive, but also challenging – still, I am confident that prudent and efficient farmers will reap the full benefit of the new opportunities.