Sit tight, looming storm may be just a 'Bó Bubble'
Fear: Farmers worried about the future when milk quotas disappear
Published 06/08/2014 | 02:30
A sense of nervousness has crept into the dairy sector.
On the one hand are those who are unabashedly excited at the prospect of milk quotas finally ending in less than eight month's time. They will shake off the shackles and enjoy a long-waited-for sense of freedom to be able to produce as much milk as they want.
But in the past few weeks I have encountered a number of dairy farmers who expressed a fear of what will happen when quotas go.
I was a bit taken aback because these guys are doing what would generally be seen as doing a good job, running efficient, focussed, operations, with 70-100 cows, a few years either side of 40, making a decent living for their families.
Why I raise this now is because I wonder whether the deterioration of fortunes over the past number of months in three out of the four main enterprises in Irish agriculture - beef, tillage and sheep - will push more farmers down the dairying route and, if so, with what implications?
For many sheep and beef farmers, dairying is not an option but it could be a different story for tillage men. This year, it looks as though they are going to be victims of high yields from good crops globally and maybe some of those who were leaning towards dairying a few months ago could soon be taking firm steps in that direction.
But are we in danger of putting all our precious eggs into one basket?
Since we joined the EU, other sectors might have enjoyed some purple patches, but the two most consistently profitable farming have been beet and dairying, both regulated by quotas.
Dairying is by far the most profitable farm enterprise at present. But why is it profitable? Is it because there are quotas, which control supplies?
Its probably the industry rather than individual farmers who will be the main beneficiaries of the end of quotas. Of course, the down side is that if you didn't have access to quota you were efficiently shut out of production.
However, there are a lot of family farmers who are quite comfortable today, who have an adequate quota for the size or set-up of the farm but not the landbank or financial leverage to expand.
Land has become the new quota; and one thing that looks inevitable is that the dairy men will be the front runner in the land letting markets next spring. They are always strong but the beef and tillage sectors are certainly not at present
The country is awash with stories of a significant number of large-scale dairy operations being set up from scratch; and the banks seem to be interested in financing the bigger units. What took some people 20-30 years to build up, others are now trying to do within a shorter number of months.
Some are individuals, others groups and there seems to be a perception that you have to go in on a scale that was heretofore unknown in this country.
There are various figures floating about the level of jump that existing producers would have to take to increase their income. One is that an increase from 100 to 150 cows would make no difference.
Everyone's sums are different but the reality is that many dairy people may be better off to stay as they are for now, to sit tight and not panic; just try to keep doing what they do a little better and hope for the best, that they will be able to ride out the storm looming on the horizon. It may turn out to be a "Bó Bubble".
My intention is not to put people off dairying or indeed expansion, rather that they would feel that they are being pushed down a particular road because they feel they have no other choice if they want to survive.
But the more people who go dairying and the greater the scale, the more milk that will be produced, the stronger the processors hand will become.
The key to all this is, as always, price.
The model that Ireland usually looks to in terms of dairying is New Zealand and a recent paper by a Lincoln University academic Dr Nic Lees suggests the country may be on the edge of a new golden era in agriculture.
"The rapid urbanisation and economic growth in Asia has seen unprecedented growth in a middle class that is driving demand for our meat and dairy products," he said.
However, he is also fearful about the future. One issue is the danger of becoming dependent on China in the same way New Zealand was dependent on Britain for most of the 20th century.
But perhaps even more relevant for an individual farmer's point of view is what says about what the "severe" level of indebtedness in the dairy sector. "The New Zealand dairy sector is carrying 65pc of total agricultural debt of more than $50bn and one third of dairy farms are carrying two-thirds of this debt."
Dr Lees goes on to point out that these highly indebted farmers have less than 50pc equity and some have as low as 10pc. They are thus highly vulnerable to any increase in interest rates.
He goes on to pose the question about where New Zealand's long-term competitive advantage lies. He points out that productivity has been pushed up through higher stocking rates, improved genetics, fertiliser use etc. But the potential to maintain these gains has become limited, especially because of mounting public concern about the impact on the environment from intensive farming practices.
Another sobering note recently emitted from New Zealand dairy giant Fonterra, which has cut its price forecast for 2014/15 by 14pc. Meanwhile, good grass growth these past months here at home has resulted in a surge in milk supplies and there are already signs of a significant superlevy next spring. As for China, which is top of just about every country's marketing list, there was an item on RTE Radio 1's World Report about the burgeoning demand for dairy products, especially those imported. But it also pointed out how the state has, because of food security fears, established a €5bn fund for domestic processors to buy overseas dairies and farms.