Eye to eye on volatility issue
Most people realise that the Ireland would be an infinitely more attractive location for the world’s big producers of infant formula and other dairy products if they knew they could fix a price per litre at the outset of each year.
They would also be more likely to bring their considerable resources here if they knew they could rely upon a guaranteed annual volume of milk, safe in the knowledge that they wouldn’t have to barter over price on a daily basis with dairy farmers’ representative groups.
As evidenced from the stories featuring below and on P3, those guiding the dairy sector are clearly in favour of Irish farmers adopting measures that would underpin a guaranteed price per litre, and provide a basis upon which businesses, their investors and their shareholders could all forward plan their year.
What might surprise some people is that, theoretically at least, many farmers are already on the same page. As one farmer who was in CIT told me: “Why would we be opposed to a measure that will ensure we get a good night’s sleep?”
The only obstacle facing the adoption of a commercially funded mechanism to manage milk price volatility is that some people had been hoping that the EU might yet take a more benign view of the benefits it could gain from the dairy sector, and consequently underpin its own anti-volatility mechanism.
However, even before the advent of the EU-wide economic crisis, that option was already extremely unlikely. That message was very clearly restated at CIT on Monday by Agriculture Minister Simon Coveney (see story, below).
The fact is that when the era of dairy quota restrictions comes to an end in 2015, Ireland’s dairy sector is best placed — by a considerable distance — to take advantage of the opportunity to expand. We have the grass-fed cattle and the milk supply that the big dairy companies so dearly want.
That said, without them, you’d have to wonder just how much cheese the country is capable of exporting.
Will big multinational food companies, such as those from the US and China, come here without a guaranteed supply at a fixed price? That is a burning question answered on Monday by John Lancaster, commodity risk lead analyst with FC Stone, one of the US-based companies most likely to provide a milk price hedging service to Irish dairy farmers in the future.
Mr Lancaster recalled the how the US volatility management model evolved: “In the USA, a reduction in price support resulted in increased volatility, so farmers started to hedge their milk price – this meant they missed the highs and lows of the market and had a much better level of financial stability.”
He then listed the advantages of price stability, most notably the scope for forward planning that this gave to both US food companies and US dairy farmers.
He added: “The majority of farmers across Europe forward sell their grains – the concept isn’t incredibly difficult, but how you structure it becomes a bit more difficult. We see it being through the co-ops and the milk processors offering a fixed price to the farmers. It needs to come from both sides.”
Mr Lancaster uttered these words on Monday, but just not it CIT. His partner Charlie Hyland was in CIT. Mr Lancaster was speaking at the Dairy UK conference in England. Clearly Ireland is not the only option for US food and financial companies looking at post-2015 Europe.
The big question about hedging milk prices is not what Ireland thinks about volatility measures, but what investors think about them. Clearly they want that stability as a basis for doing business.
At a cost of 2-3cpl, the question for Irish dairy farmers would seem to be whether 90% of one thing is worth more or less than 100% of something else entirely.
