Banks love teachers and nurses - could they love fixed milk price contracts too?
Fixed milk price contracts offer farmers the chance to be loved by banks in the face of milk price volatility, a leading dairy researcher has said.
Cork Institute of Technology (CIT) Professor Declan O’Connor told FarmIreland.ie that fixed milk price schemes can offer a hedge against volatility but that farmers should never hedge 100pc.
“It’s very difficult when milk price is 39c/L to say you’ll put money away, farmers will probably spend it but with a fixed milk contract a cent a litre when prices are low may be worth more than a cent when prices are high,” he said.
“Banks love these schemes too. There’s a reason banks love teachers and nurses because they love a guaranteed income so it’s the same for fixed milk price schemes.”
He advised that more education is needed around the schemes as there is still confusion amongst farmers who do not want to risk getting in to a contract in case they can’t take advantage of a period of sustained high milk price.
“The uptake of fixed milk price schemes has been good and Irish processors have really led the way on them but there is still some misunderstanding there. It doesn’t pay you to worry about what the lad next door to you is getting, at least fixed price schemes offer certainty.”
Volatility is also a cause of frustration for industry when buying ingredients and causing some companies to reduce portion size or switch to dairy alternatives in order to produce the product at a cheaper rate.
“Industry is really pushing for an increase in fixed milk price schemes because dairy is very volatile and often seen as the problem child when you compare it to the likes of the price of sugar and cocoa,” he explained.
“If you are producing infant formula you face the same problem as the farmer when it comes to volatility because you can’t plan ahead.
"If you’re working in industry and you go in to your managing director with the numbers and show them that butter is costing 25pc more than last year, they will be asking questions of you and why the price has gone up so much and it looks like you don’t know how to do your job but this is the reality of the situation.
“This could lead to companies reducing portion sizes or substituting products with non dairy ingredients which are cheaper.
Mr O’Connor pointed out that the Single Farm Payment, extended credit, the Milk Flex scheme and income averaging are all tools that should be developed on further to help farmers combat volatility.
“Farmers must also be consulted on how they best feel volatility could be reduced as they are the people at the heart of the issue.”
While some critics have recommended a cull in cow numbers to reduce over-supply in order to ease volatility, Mr O’Connor feels this would be “detrimental to the industry”.
“From an animal welfare point of view a cull would be detrimental. Consumers are very conscious about animal welfare so from an ethical point of view this would not be accepted.”
Mr O’Connor added that reform of the CAP scheme in mid 2000s which saw milk prices become are some of the other main reasons why volatility has increased dramatically in the last decade.
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