Quota-free dairy sector faces many challenges

Last week, I had an interesting debate with a group of progressive dairy farmers.

That meeting raised a series of issues about how producers and processors approach the ‘great expansion’ being talked about once milk quotas expire in 2015.

We discussed a number of knowns and unknowns around what could happen after 2015, that should have a bearing on how processors and primary producers alike prepare for the future.

The knowns include:

* Milk volume will inevitably rise as the systems and farmland are in place to boost output above 5bn litres per annum;

* Global demand for dairy products will rise as the development of a new middle class in emerging economies together with a shift towards a western diet lifts demand for cheese, butter and other dairy based products;

* Ireland has a comparative advantage because of its excellent grass growing abilities and abundant supplies of water;

* The processing sector will at least double in size and could grow four-fold in the next 20 years if it matches the growth exhibited by New Zealand which has always been quota free.

So far, so good, but now we turn to the altogether trickier ‘unknowns’. The actual outturns on these variables are central to any assumptions about profitable growth. They include:

* The price of raw milk post 2015 cannot be guaranteed by anyone and is utterly dependent on supply and demand, both of which will undoubtedly be volatile. Supply will swing around without quotas as prices move. Demand will rely on economic factors in parts of the world where growth rates and foreign exchange rates can move viciously;

* The cost of money post 2015 is not known. It is at record lows worldwide at present, as central banks continue to adopt an emergency stance towards the financial sector. On the law of averages, I cannot see how the rock bottom interest rates of the past four years will last for the next 20 years unless economic armageddon is upon us. That means the cost of money will rise which has implications for debt;

* Access to new markets is a key input to forecasting demand and that has some unpredictability around it. China, for example, has a tariff free agreement with New Zealand but not with the EU. Opening that market is core to growing Irish dairy output;

* We don’t know what our competing dairy nations will do post 2015. Can New Zealand hike output again? Will the US leverage its scale to hustle in to export markets? Can central Europe develop a competitive feed-based dairy sector?

nWe cannot say what level of profitability will accrue at farm or factory level once 2015 passes.

So, how should we prepare? My approach would be to:

* Remember 2009 when milk prices caved in and threatened many dairy enterprises. Having debt burdens that can absorb such fast moving prices is a key for the future;

* Note the high levels of farm debt in Holland, Denmark, and New Zealand and be very careful about following that path.

* Shape a plan that facilitates scale, modest levels of debt and seasonal but high quality output of bulk dairy produce to weather the inevitable challenges ahead.

Its costs about €26 to produce 100kg of milk in Oceania, which includes New Zealand. It costs around €35 in Ireland.

If we want to truly compete on global markets after 2015, that cost of production for incremental milk has to fall by up to 20% or we won’t have a long term ability to thrive. That’s a tough message for the uber optimists that are opining about Irish milk currently. Fortunately, the farmers I met last week are a much more pragmatic bunch.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal


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