The pressure on the incomes of dairy farmers shows co-ops rely too much on farmers to bear too much of the risk attached to price volatility.
This is unsustainable. Short term, co-ops need to continue to find ways of supporting prices and farmers, while longer term they need to develop more options for farmers to hedge their incomes.
The dairy market downturn is lasting longer than expected, and is stretching to breaking point the cashflow and confidence of many farmers who expanded in response to industry encouragement.
Farmers feel they are asked to take too much of the risk. Emergency market support decisions recently made in Brussels will hopefully stabilise prices.
Meanwhile, farmers point out that their co-ops must have a plan for them beyond encouraging them to produce to fill processing capacity regardless of milk price.
The milk price is what is left after all costs are paid for
Co-ops budget ahead for all of their operating costs, but do not provide ahead for the milk price.
Even allowing for the support of the last number of months, what is available to pay for milk is what is left after those other costs have been covered. Farmers do not think this is fair, nor is it a sustainable basis on which to build the future of our sector.
In many co-ops, farmers have been asked to sign a milk supply agreement which commits them to supplying all their milk to their co-op for a number of years.
While it does also guarantee the farmer an outlet for his produce, no agreement commits the co-op to any level of price for any volume of milk.
A better long-term strategy: giving farmers an opportunity to cover costs
Some milk supply agreements require farmers to forecast production two to three years ahead.
The agreement would be fairer if the co-op sent back its own forecasts of what market opportunities exist, and offered a price at least covering production costs for that volume.
It’s up to each individual farmer then to decide how they might manage the rest of their output.
This is not external supply control, which we have already demonstrated cannot work to secure sustainable prices for farmers whose milk is traded on global markets.
However, it is about changing the message from the co-op to the farmer from ‘produce all you can regardless’ to ‘produce what you know you will be economically paid for’.
How do we do that?
While it is nigh on impossible to accurately predict commodity markets, it is possible for the sector to come together to manage the risk of volatility, and this is what our conference on Wednesday in the Heritage Hotel, Killenard, Co Laois, will be about.
Already, a number of co-ops, many with the assistance of Ornua, have found ways to offer farmers fixed-price contracts based on back-to-back arrangements with customers, or on high-value brands, or on an element of futures market trading.
With goodwill and co-operation, it is possible for the sector to develop more hedging tools which would actually allow co-ops to offer farmers volumes at specific prices, even for relatively short periods of time.
At our conference, a US farmer speaker experienced in utilising a number of risk management tools as yet unknown in Europe will help us inspire the sector to greater innovation in this area.
Prices will get better over coming months as supply and demand find a better balance, aided by increased availability of EU market support measures. However, low returns will be an issue again, and without a long-term strategy to deal with those low ebbs, the sector cannot thrive.
An important part of this strategy will involve elements at the edge of the sector: a tax regime allowing farmers to better smooth their incomes between good and bad years, better priced and more flexible short and long term financial products.
However, the main responsibility for reviewing and rethinking the Irish dairy sector’s plan for the future is with the industry itself. Irish dairying can be a heavy-weight in a fast growing global dairy trade, and dairy farming in Ireland can be a prosperous career.
However, this will only happen if the exposure of farmers to market risk is reduced.
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