Irish dairy industry cannot expect farmers to carry 100% of market risk

Co-ops must halt any more price cuts - Dairy Chairman

Irish dairy industry cannot expect farmers to carry 100% of market risk
Tom Phelan Laois IFA Dairy Chairman

One year on from the end of milk quotas, and as farmers start putting cows in calf for next season, Laois IFA Dairy Chairman Tom Phelan says co-ops must call an immediate stop to any further milk price cuts.

Co-ops must help protect farmers from market risk as prolonged cash flow challenges make 2016 as difficult as 2009.

While tax-based solutions and greater flexibility in financial products must form part of the toolkit available to farmers, it is our industry which has the greatest responsibility towards its shareholder suppliers.

Since 2007, with lower EU market supports and massively increased global trade, dairy markets have become extremely volatile. 2009 was a very bad year for Irish dairy farmers as low prices and bad weather combined to stress incomes and morale.

While demand has not collapsed in 2015 as it did in 2009, the downturn is lasting longer than anyone expected, and as many farmers have invested heavily in response to industry encouragement, this is stretching their cash flow and confidence to breaking point.

Farmers rightly feel that they are expected to take way too much of the risk.

While emergency market support decisions are being made in Brussels, which will hopefully help stabilise prices and incomes, farmers are legitimately thinking that their co-ops must have a plan for them beyond encouraging them to produce away to fill processing capacity regardless of milk price.

The milk price is what is left after all costs are paid forCo-ops, just like all other businesses, budget ahead for all of their operating costs, but they do not make the same type of provision for the price they will pay farmers for their milk.

Even allowing for the level of support provided in the last number of months, what is available to pay for milk is what is left after those other costs have been covered.

Is this fair to farmers, and is this a sustainable basis on which to build the future of our sector? Farmers do not think so.

In many co-ops, farmers have been asked to sign a Milk Supply Agreement (MSA) which commits them to supplying all their milk to their co-op, often for a number of years.

While it does also guarantee the farmer an outlet for his produce, no MSA currently commits the co-op to any level of price for any volume of milk.

Farmers and processors have made major investments in the last five years, and in the face of a prolonged, challenging market slump, farmers are now asking for a better strategy than one that simply tells them: “keep producing, even at a loss, to utilise our processing capacity efficiently”.

The reality is that the future of the Irish dairy sector depends on a more sustainable approach.

A better long term strategy: one which gives farmers an opportunity to cover costs

Many MSAs require farmers to forecast production 2 to 3 years ahead.

The agreement would be fairer if the co-op sent back clearer forecasts of their own of what market opportunities exist, and ensure that for that volume, the milk price offered to the farmer at the very minimum covers his costs.

Up to each individual farmer then to decide how they might manage their own output over and above that volume.

This is not external supply control, which we have already demonstrated cannot work to secure sustainable prices for farmers whose milk is essentially traded on global markets. However, it is about changing the message from the co-op to the farmer from “produce all you can regardless” to “produce potentially only what you know you will be economically paid for”.

How do we do that?

If we’ve learned anything in the last decade, it is that not even very well connected market analysts know what dairy prices will be in two months’ time.

However, a number of co-ops, many with the assistance of Ornua, have found ways to offer farmers fixed price contracts based on back-to-back arrangements with customers, or on high value brands, or on an element of futures market trading.

With a bit of goodwill and co-operation, it is possible for the sector to develop more hedging tools which would actually allow to offer farmers volumes at specific prices, even for relatively short periods of time.

IFA is organising an industry conference in early May with US farmer speakers experienced in utilising a number of risk management tools as yet unknown in Europe to inspire Irish stakeholders to greater innovation in this area.

The crisis we are living through is part of a cycle. Prices will get better over coming months as supply and demand find a better balance, undoubtedly aided by increased availability of EU market support measures. But we will be back to low returns in a matter of a few years, and without a long term strategy to deal with those low ebbs, the sector cannot thrive.

An important part of this strategy will involve elements at the edge of the sector: a tax regime allowing farmers to better smooth their incomes between good and bad years, better priced and more flexible short and long term financial products.

But the main responsibility for reviewing and rethinking the Irish dairy sector’s plan for the future is with the industry itself, and it must start right away.

Irish dairying has real potential to be a long term heavy-weight in a fast growing global dairy trade, and to make dairy farming in Ireland a prosperous career. However, this will only happen if the market risk is shared more fairly than it is at present.

Tom Phelan

Laois IFA Dairy Chairman