The recent revelations that processing capacity issues will restrict the intake of milk from dairy farmers has turned the dairy world upside down in the space of a few days. Some commentators are viewing it as a signal that dairy expansion in this country is on its last lap.
As an agricultural consultant specialising in advising dairy farmers, I cannot recall a more tumultuous event since the abolition of EU milk quotas was announced.
Our phones have been hopping with calls concerned dairy farmer clients asking a myriad of questions pertinent to their own individual situations.
Those in the early stages of ambitious expansion plans are those with the greatest concerns.
You cannot take down and resell a recently constructed cubicle shed, milking parlour or slurry store. Most of these farm businesses have 15-year term loans drawn down for repayment on such dairy units, all based on increasing cow numbers up to the numbers outlined in farm business plans.
New entrants who have been weighing up the pros and cons of converting to, or entering, dairying have had their confidence shaken.
Life is all about risk and return. The early adapter new entrants to dairying are now up and running, but there are a number of risk-averse beef and arable farmers who were waiting to see how the early adapters got on before taking the plunge. I expect many of these will now shelve their conversion plans.
I worked as a dairying advisor in England in the early part of my career. One significant difference between there and Ireland is the first question you ask when you meet a farmer the first time;
In Ireland, the first question you ask a dairy farmer is ‘how many acres are there in the grazing block?’
In England, the first question is, ‘where do you sell your milk?’
This week, for the first time in my career in this country, the first question I asked an Irish farmer planning on getting into dairying was ‘where will you sell your milk?’
I had no answer to this question, because there is no point in this potential new entrant going any further with planning his new enterprise until a Milk Supply Contract (MSC) is secured with a processor.
When milk quotas were abolished, I remember some milk processors worrying about being able to fund capital investment in new stainless steel (processing plants). This problem was resolved by creating revolving funds and shareholders lending money to the processors to enable bank finance to flow.
Milk production expanded by over 50pc between 2011 and 2018, with minimal concern about processing capacity.
Yes, there are a lot more dairy cows in the country now, and the milk is flowing, but the growth rate in cow numbers has slowed significantly, so it is difficult to see how this has suddenly become such a major problem, planning issues aside.
Does it reflect a lack of ambition at board and management level in the various processors to invest in more processing capacity?
There are soundings about the profit margin being too low to construct new driers, but was it not always a low-margin business?
Taking the beef processing industry as an example, a low margin business has an advantage in that it acts as a barrier to new entities/investors getting into the sector.
So the low-margin nature of the business surely gives an added protection to the profit margins of the established milk processors and allows them to benefit from scale.
When you combine this with growing global demand for dairy products and the developed nature and competitive advantage of our dairy industry, it suggests we should continue to make hay while the sun is shining.
Yes, the Climate Action Bill will present a huge challenge to the industry with the recent announcement that Ireland will work towards carbon neutrality by 2050.
Instead of it being a roadblock to further expansion, I believe we can turn this carbon neutrality challenge into a competitive advantage by being the first country have a net-zero carbon dairy industry.
I don’t know how soon we can achieve such a status for the industry, but I am confident we have the people with the necessary drive, ambition and expertise to get there sooner rather than later. Let’s get on with it.
So, is dairy expansion on the last lap?
Absolutely not — in my opinion, the peak milk processing challenge is only a temporary blip in the Irish dairy industry’s journey.
Developing and implementing a plan to be net-zero carbon in the fastest possible time scale is the route to a sustainable future.