Last April 1st, the end of a three-decade milk production quota regime in the European Union was hailed by the Government as "a great day for the rural Ireland" with the potential for agriculture in Ireland to move forward into broad, sunlit uplands with the opening of new markets and the creation of thousands of jobs in the agri-food sector. Today farmers in Ireland and across Europe are demanding that the European Commission set a new  minimum price at which it would buy stocks of dairy products to help farmers.

A combination of falling demand from China, the Middle East and north Africa, restrictions on Russian imports of food from the EU, coupled with overproduction, has pushed prices well below the cost of production in some sectors.

 

Last month Fonterra Co-operative Group of New Zealand, which accounts for about one-third of the international trade in dairy products, said it would pay farmers NZ$3.85 (€2.32) per kilogram of milk solids in the season ending May 31st, 2016, which would be the lowest since at least 2006 and 27% less than Fonterra’s May 28th prediction of NZ$5.25 a kilogram.

The European Commission says that milk production rose 5% in the EU last year and Eurostat data show that Ireland had the largest year on year increase in percentage terms in milk deliveries to dairies, with May 2015 deliveries at 875m litres — an increase of 90mn litres (11.4%). The UK increased deliveries on the year by 29m litres (2.2%).

The June EU weighted average milk price stood at €29.99/100kg (32 cent per litre), down €0.55/100kg (1.8%) on the previous month. Compared with the previous year, the weighted average EU price for June was down €7.57/100kg (20.2%) — a dip on the year of 12.50cpl.

The price in Ireland was 28cpl in June and that is the price which the Irish Creamery Milk Suppliers Association (ICMSA) is demanding the European Commission to set as an intervention level.

The contrast between the spinning and exaggeration of Simon Coveney, Irish agriculture minister — which is the default mode of Irish ministers — and his former ministerial colleague, Phil Hogan, who has been EU agriculture commissioner since last November, is striking.

Earlier this year Coveney said an increase of 50% in Irish milk production by 2020 and the creation of 15,000 jobs was realistic.

Dairy farm numbers fell from 65,000 when milk quotas were introduced in 1984 to the current level of 18,000 and Coveney said in March when the quota regime ended "that now the shackles are off and the sector can start to realise its full potential."

Even with quotas, EU dairy exports have increased by 45% in volume and 95% in value in the last 5 years.

The minister said Ireland’s dairy production, at approximately 5.4bn litres in 2013, is roughly the same as that in 1984. In that same period, production in New Zealand, with a grass-based system similar to Ireland’s, has increased from 7.6bn litres to about 19bn litres.

New Zealand and Ireland have similar population levels and in 2014 the average farm dairy herd was 413, compared with about 60 in Ireland. The biggest Irish dairy farmer has about 850 cows.

New Zealand has 4.9m cows utilising 1.7m hectares while Teagasc, the Irish public agency, estimates that some 700,000 hectares will be devoted to 1.9m dairy cows by 2020.

The Food Harvest 2020 government report noted the vital role that grass can play in the an expanding Irish dairy industry: "The Irish dairy sector possesses a significant cost advantage in the form of an environmentally-sustainable, rain-fed, grass-based production system, which allows milk to be produced efficiently for much of the year."

In the longer term, a recent Department of Agriculture report noted that "the entry of the USA as potentially the main supplier on the world dairy market will greatly increase supply and competition in the marketplace. This is a serious threat because of the very favourable feed price to milk price ratio. The 3.9% increase in US milk supply in July 2014 is an early warning signal of very strong US expansion."

A US Dairy Export Council (USDEC) report identified eight likely challenges for Ireland to achieve a 50% increase in milk output by 2020:

  • Anticipated volatility in raw milk price levels post 2015, with fluctuating supply and demand levels which are affected by weather, fluctuating exchange rates and short term changes in demand.
  • Expected increases in the cost of borrowing. With borrowing costs currently at record lows, interest rates are likely to rise post 2015.
  • Access to new markets, notably China. Whereas China has a tariff-free agreement with New Zealand, it does not have one with the EU.
  • A high production price relative to Oceania. It is suggested that average Oceania raw milk production costs are about €26 for 100kg of milk, compared to around €29 in Ireland (Teagasc Outlook 2014 Economic Prospects for Agriculture). From this, it is deduced that the cost of production for incremental milk in Ireland needs to fall by up to 20%.
  • Access to labour.
  • High cost of buying land. The price of rented land has increased, as milk producers and tillage farmers compete for availability. This could mean that Ireland’s competitive edge based on cheap grass could quickly become eroded, as has happened in New Zealand.
  • Land availability. While a limited number of farmers may be able to buy small amounts of land to increase the size of their holdings, few will be able to buy substantial quantities. The likelihood is that the average farm size will increase over time, as some farmers exit production and lease land to other farmers.
  • Extreme weather conditions. Milk production was affected by bad weather in 2012 and also in 2009.

The USDEC says a 30% rise is more realistic.

Irish land prices among highest in world; Noonan tax cut boosts Dublin prices

Benchmarking Irish food & drinks industry in 2015 - Parts 1&2

Last month Commissioner Hogan opposed increasing EU intervention prices to help dairy farmers, warning that it “would give the wrong signal.”

“Indeed, in a situation where production quotas no longer exist, it is of paramount importance that farmers and economic operators follow market signals,” he said.

Hogan said the EU will produce 0.9% extra milk in 2015, and markets have to be found for it.

“There is a need to change our mindset, the goal is not to produce as much as we can, but as much as we can find a market for,” said the commissioner.

Simon Coveney, agriculture minister, should take note and developing new markets in faraway places is easier said than done.