Saturday 1 October 2016

Milk prices set to fall as global pressure grows

30c/l is 'artificially' high says dairy board boss ahead of crucial milk price meetings

Martin Ryan and Darragh McCullough

Published 10/06/2015 | 02:30

The price paid for milk in 2014 was 'relatively high'
The price paid for milk in 2014 was 'relatively high'

DAIRY processors cannot continue paying "artificially" high prices of 30c/l for milk as international markets fall closer to 20c/l, according to Ornua chief executive Kevin Lane.

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His comments come ahead of a critical week when processors will be setting milk prices for the peak supply month of May.

While Glanbia have already guaranteed 30.5c/l for May, the Glanbia Ingredients Ireland (GII) board meets next Monday to decide how much their suppliers will be required to contribute to keep the price at this level.

The co-op committed up to €20m from shareholder funds to top up flagging milk prices this year following the spin out of €238m worth of shares in the Plc last month.

The top ups for March and April cost the co-op €6.6m, leaving enough to shore up May milk prices by close to 6.5c/l if required.

There are fears in the industry cuts may be on the way that would see prices fall over the summer at a time when many dairy farmers have invested heavily in their operations.

Fonterra's Global Dairy Trade (GDT) auction price fell another 4pc last week, bringing the overall index to a level not seen since the price crash in the first half of 2009. The index is currently 683, almost 2.5 times lower than the 2013 peak of 1,573.

"The current GDT is saying that milk is around 20c/l on a New Zealand equivalent," Mr Lane told the Guild of Agricultural Journalists in the headquarters of Ornua, formerly the Irish Dairy Board.

While he accepted that no dairy farmer anywhere in the world could survive such "ridiculously low" prices, he warned that current trough was likely to last for another six to 12 months, and that co-ops would need to drop their prices.

"I am very convinced that co-ops can't continue to pay 30c/l. Quite frankly I am amazed that the milk price has remained so strong for so long," he said, before warning processors that they needed to be very careful about "raiding" their balance sheets to keep milk prices "artificially" high.

Viable

"This game is not about who pays the best price - it's about who will be around in five years time and giving a viable return to farmers. If the market is returning 24c/l they can't continue paying 30c/l," he said.

He cited increased global output of 4pc against a 2.3pc drop in demand as the main factor behind the current slump.

However, the IFA said that co-ops should continue subsidising milk prices after making "exceptional profits" in 2014. It also claimed that global supplies were easing, pointing to a 1.7pc fall in Germany, and 2.5pc falls in France and Holland.

In addition, the IFA pointed to a €50/t rise in EU average butter prices last week, and a 30/t increase in French Agrimer SMP quotes.

However, Ornua's Mr Lane was also concerned about young entrants' "excitement and hysteria", which he feared would lead to over-borrowing and bankruptcy.

"There is still a lot of optimism and confidence that we will be able to get more than our fair share of the world markets because we have the added-value approach," he said. "Hopefully that means that we will see milk at 35-37c/l over the next decade, but we will also see it in the low to mid 20's."

While he stressed that he had no "crystal ball", he believed that a long-term milk price of around 30-32c/l was likely.

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