Warning as dairy sector faces new turmoil

We are entering that time of the year when milk production on farms starts to accelerate towards its peak.

For primary producers and processors, this is the key period during which the year’s income is generated before output volumes decline during autumn when grass production fades.

Accordingly, everyone in the dairy sector has a razor-sharp focus on milk markets across the world, and are trying to figure out how farm gate prices will evolve over the coming months.

The data is mixed but suggests market returns continue to be very challenging.

The giant New Zealand dairy business Fonterra has published its analysis in recent weeks and summarises production flows as follows.

New Zealand flows are down 2% for the 12 months to January 2016, Australia is up 1%, the US is up 1%, and European production flows have risen by 2%.

Europe is the fastest growing milk producer globally at present.

Within the EU, Ireland has lifted volumes by 13%, while the Dutch have increased theirs by 7%, Poland by 3%, and the UK is up 2%.

These shifts in production are having an adverse impact on market prices.

Compared with March 2015, for example, skim milk powder prices in dollars are down 2.5%.

Butter prices are 2.8% lower, cheddar cheese is down 5.6%, and casein is 7% lower.

All of these are important products across the Irish processing sector and these prices are relative to a year which itself was weak.

A separate analysis by the Dutch financial company Rabobank also points to difficult markets, albeit while both production and consumption levels rise.

It points to growth in dairy markets, especially in emerging economies.

However, it notes that short-term production increases are outpacing that demand which, in turn, is negatively impacting market returns.

The final piece of this jigsaw for Irish producers is how exchange rates have moved over the last year.

In March 2015, one dollar and six cents bought you one euro. Today it takes one dollar and fourteen cents to buy a euro.

This means the global dairy market, which trades in dollars, is returning less in euro than a year ago before you factor in the change in product pricing.

This analysis, for me, points to further weakness in dairy market prices across Ireland during 2016 which is a conclusion that will not be welcomed.

Volume increases, which appear to be double-digit percentages in recent months, will help offset low prices to a degree.

For farmers and processors alike, this tough market environment yet again raises the debate about how best our dairy industry should be structured.

The inevitable volatility of bulk dairy markets worldwide requires an industry that is lean and efficient at both farm and processing levels.

It has been pointed out countless times that the average dairy farm size in Ireland remains too small to be properly competitive in the future.

Equally, there are too many independent co-operatives that duplicate overheads and dilute resources in an environment that is hyper competitive.

Lastly, this difficult market backdrop has another hard lesson.

It is about the need to keep indebtedness at both farm and factory level under control.

History shows us that real change in the Irish dairy sector only occurs at times of crisis.

While economists and analysts can waffle on about the necessity of radical change, it will only take place when key players in the sector are under extreme pressure.

Students of the Irish agri-food industry will find plenty of examples in the past of this pattern including farms being sold due to excessive borrowings and mergers being arranged among processors at short notice.

I suspect another phase of such change is inevitable if the market data now being produced remains negative for the remainder of 2016.

It will require leadership and vision to move the industry forward amid this turmoil.

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


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