Farm Ireland
Independent.ie

Saturday 29 April 2017

Analysis: Has the dairy sector turned a corner on poor prices?

The fields are used for grazing
The fields are used for grazing
Margaret Donnelly

Margaret Donnelly

Dairy farmers have been hit by poor prices since the middle of last year, but recent market movements indicate that an upturn is taking place

When milk quotas were being removed from Europe, there was elation among the dairy sector. Quotas had been introduced in the early 1980s and were considered a stranglehold on the sector. For years, any dairy farmer looking to expand their business was forced to buy quota, which was a costly affair due to its limited availability.

Despite this, the Irish dairy sector has for years been the most profitable sector in Irish farming and the ending of milk quotas heralded a new dawn, one that was lauded by many as an era of 'white gold' as the demand for a western diet that includes dairy continued worldwide. However, when on April 1,2015 came and quotas were officially abolished all was not quite as expected on the western front.

Milk prices reached record highs in 2014 in response to increased demand from Asia for dairy in the preceding years and the dairy sector was riding the crest of a white wave. 

Irish dairy farmers were gearing up for the first opportunity in 30-odd years to take the brakes off production, but so too had other European farmers.

The volume of milk produced in Ireland after quotas increased by 18.5pc, although as a country we only account for 4pc of European milk production, and by just over 2pc across Europe as a whole.

However, the predicted continued growth in demand from Asia for dairy produce didn't materialise as China's economy shuddered and consumer confidence among the growing numbers of middle class parents was hit. While the demand for the considered better quality, non-Asian infant formula was still strong the growth predicted wasn't at the strength predicted.

Further, a political row between Europe and Russia hit dairy farmers in Europe as Russia stopped importing food, including dairy, in response to economic sanctions over Crimea and Ukraine.

The three factors combined to turn the dairy sector sour and thousands of EU dairy farmers went to the wall, unable to cope with such market volatility.

In the 20 years between 1986 and 2006, protected by milk quotas, dairy farmers in Ireland saw the price of milk never fluctuate much more than 2c/L up or down on an average milk price of 26c/L. However, Tom O'Dwyer, Head of Dairy Knowledge Transfer at Teagasc, said since 2006 the landscape has changed for dairy farmers in Ireland.

"Prior to 2006 the average price was good and there was very little volatility. But, since then, while the average price has been higher there has been greater volatiity. The price that dairy farmers have been receiving for milk has gone 6c/L below and above the average price."

Chinese demand

Now, it seems China is back in the market for dairy produce and Ireland has lots to sell. In the first nine months of this year China has imported almost 20pc more whole milk powder than it did in all of 2015. Non-domestically produced infant formula commands a premium in Asia among growing middle classes and Ireland is primed to capitalise on this market, producing 10pc all infant formula consumed across the world.

One outlook report has said Chinese demand for dairy products will jump by as much as 40pc by 2020 and almost 70pc by 2015.

New Zealand's Fonterra, the largest dairy processor in the world, has seen its Global Dairy Trade prices begin to creep back up.

At home, processors are predicting that milk prices could head towards 40c/L in 2017.

However, while the past 18 months have been tough for Irish dairy farmers, as they have struggled with poor prices, some think the downturn in the market has been a blessing in disguise, tempering the ambitions of many farmers with a cold serving of market volatility.

European Milk Board director Silvia Daberit said recently that milk prices have been so bad that many farmers had given up their businesses after trying to get along for quite a while with prices that did not even cover the cost of production.

That's the harsh reality of volatility in today's climate and one farmers should be slow to forget, regardless of how positive the analysts and forecasters say the future will be.

Online Editors