Tuesday 27 September 2016

Finding a fix for milk price volatility

The Teagasc Greenfield dairy farm in Kilkenny is taking a three-pronged approach to dealing with turbulence in the milk markets

Published 25/05/2016 | 02:30

Over 1,000 farmers attended Teagasc Greenfield farm open day in Kilkenny. Photo: Roger Jones.
Over 1,000 farmers attended Teagasc Greenfield farm open day in Kilkenny. Photo: Roger Jones.

Fixed price milk schemes have proved a valuable tool in helping the large-scale Teagasc Greenfield enterprise to negotiate through the latest milk price downturn.

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The dairy project is nearly halfway through its 15 year plan, which saw the three shareholders - Glanbia, Phelan family and Agricultural Trust - invest in the €750,000 conversion of the former tillage farm to a dairy enterprise.

Volatility management has raised its head for dairy farmers in 2015 and 2016. But it is something the Greenfield farm has been coping with since the outset as it was a high cost farm, explained Teagasc's Dr Laurence Shalloo about the enterprise currently milking 334 cows on the outskirts of Kilkenny.

"We are a very high cost farm with a lot of fixed costs. We've a full land lease, full labour and full bank commitments to make," he said, adding the cost of production in 2015 was 37c/l.

On the farm the team has three strategies to manage volatility - reduce the breakeven price, fix milk price where possible, and put away cash in a good year.

However, he said many of these needed to be planned in advance. "Our net receipts are actually up because we fixed price," Dr Shalloo explained to the 1,000 farmers attending the opening day.

Since 2011, bar one year, they opted to fix around a quarter of their milk through the Glanbia fixed milk price schemes.

In 2011, fixing cost the farm €4,000. They gained €5,000 or 0.3c/l in 2012, while it cost the farm around €12,000 in 2013 and again it cost €3,000 in 2014. However, from 2015 they began gain substantially, with 1c/l gained to the tune of €15,000, and the farm is projecting a gain of around 1.8-1.85c/l for 2016.

"The fixed price schemes were designed to fix price and stabilise income and it has done that," he said. "Imagine what 1.8c/l is worth to us in a year like 2016."

How much farmers should look to fix? Dr Shalloo says the decision should be based on the level of drawings, cost structure and level of debt.

Performance

"In terms of our past performance, we probably should have had more milk fixed based on the performance of the schemes to date as they have been that positive in terms of the overall returns," he said.

"Now is not the time to be going into these schemes, the time to be going into them is when you have the choice," he said.

"There was loads of opportunities up to now and they will come again and we need to be ready to go in. Lakelands have just launched a scheme in the last few days, Dairygold had a scheme in the spring and only 70pc of farmers opted for it.

"We can't just stand back and blame the processor around milk price when we don't go for the schemes when they are there."

On managing cash, they have been putting away money in good years with a 'sink fund' now in place of around €125,000 to deal with volatility and poor milk price years.

In December, the team set a budget for 2016 of a base milk price of 24c/l plus VAT, with fat and protein at 3.3pc and 3.6pc. "We will probably pull that a little bit," said Dr Shalloo, with costs expected to grow slightly this year with more feed needed to top up grass. A deficit of just under €10,000 is projected for 2016.

The volume of litres has gone up from 1.3 million to 1.5 million litres which has reduced the costs per litre from 40.5c/l in 2011 to 37c/l total costs last year.

He pointed out the breakeven price dipped down to 23.8c/l last year with good grass growth, with 2016 budgeted on a break-even price of around 24.8 or 24.9c/l.

"It requires financial discipline and it won't just happen if you don't have a plan," he said.

"We all remember 2009 it was a pretty severe time on farms from a weather and a milk price point of view.

"Hopefully 2016 won't be like that but we should never forget these years of the downturn and we should put ourselves in a position that we can deal with it when it happens again," added Dr Shalloo.

Looking after the next generation

Dairy farming must be an attractive career for the next generation, said Teagasc’s Paidi Kelly. Delivering a work-life balance is key to ensuring that the young people remain on farms, he stressed.

“Already a year into post milk quotas we are short labour on dairy farms and there are a lot more cows to be milked on farms in the future,” said Mr Kelly, urging farmers to evaluate this spring’s work practices now and plan for 2017.

“We need young people to actually choose dairy farming as a career.”

However, he warned the 65-hours per week average working week will not attract the next generation.

The Greenfield farm has two full-time staff including manager Tom Lyng and assistant manager Eoghan Finneran, relief help and a student.

It is labour efficient working on about 14.5 hours per cow per year, compared to the national average of 30 hours per cow per year.

Tom Lyng highlighted some of the measures that ease the workload. These included good accessibility, easy cow flow into the parlour and heifers all contract reared. In addition, they ensure easy calving sires are used. Jobs such as fertiliser spreading, silage cutting and winter feeding are contracted out.

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