Based upon recent US studies, the cost of funding such a hedging mechanism translates as 10%-15%, or between 2c and 3.5c per litre at current milk prices. However, to adopt this model would require Ireland to break away from Europe’s interventionist mind-set.
This is one of the key guiding views behind the Managing Price Volatility in the Irish Dairy Sector conference due to take place in Cork Institute of Technology on Monday.
CIT lecturer Declan O’Connor said: “Big companies cannot change their retail price for baby food every month in response to market volatility. Their customers expect a relative amount of price stability.
“This feeds back to food processors and producers. Potential US investors have a big question mark about just how progressive Ireland is on this issue.
“If you want to attract the big name international food companies into the country, they want strong guarantees on milk supply. This comes back to the volatility management mechanism. This is the system used in the US and it may fall to countries like Ireland to take the lead on this.”
Event organisers CIT, Teagasc, guest US firms FC Stone and Mead Johnson Nutrition, and sponsors AIB and Enterprise Ireland, all believe a move towards commercial hedge funds would optimise the Irish dairy sector’s inward investment potential. While Europe’s farmers generally share the view that the EU or ECB should underpin any price volatility control mechanism, the US model is funded through commercial banks and financial services firms such as FC Stone.
“Ireland has a lot more at stake here. Most other EU countries expect to produce around the same amount of milk after the quota era ends in 2015. Ireland wants to increase output by 50%,” Dr O’Connor said.
“We are already very reliant on exports. We are also prone to weather shocks, as we’ve seen in recent months. Another bad year like 2009 would set the industry back a long way.
“Some countries diversify to manage their risk, but Ireland is putting a lot of its eggs in one [dairy] basket for a good reason. We have a lot more to gain.”
At Monday’s conference, Andrew Novakovic of Cornell University will outline the US experience of volatility and what lessons may be learned from there.
Meanwhile, Charlie Hyland of FC Stone will give a financial industry perspective on dairy market price volatility. Other speakers will include Niamh Kelly of Kerry Group, Teagasc director Professor Gerry Boyle, and Agriculture Minister Simon Coveney.
Another speaker, Teagasc economist Trevor Donnellan, said: “The volatility issue is difficult enough to manage now, but after 2015 farmers will really need to create a more secure environment, and that is where the financial instruments come in. Some farmers may see this as just another middle man taking a few more bob out of their pockets.
“Yet these financial companies are the ones who will take the burden of the risk, and they have to be paid for that service. This is a new problem for the dairy sector, and it needs a new mind-set. Some people have been hoping for the past few years that this problem might go away by itself. It won’t.”