Volatility a big issue for dairy farmers
Volatility can affect sales, such as occurred in 2009. Over recent years, the volatility in milk price has been up to 50%.
The average price across the country was 22.36 cent per litre. This compares to an average price in 2011 of 33.11 cent per litre. Prices dipped again in 2012, having now recovered to a relatively high level of 34 cent per litre.
For a mid-sized dairy farm with 70 cows, producing 350,000 litres of milk, the swing in milk prices between 2009 and 2011 would have resulted in a variation of income of more than €37,000, with gross milk sales being €78,260 in 2009, and €115,885 in 2011.
This variation in income has a massive impact on farm profitability, with the Teagasc National Farm Survey showing average family farm net profits of just €22,504 on full-time dairy farms.
The 2009 survey also showed how most dairy farmers actually lost money from milking cows in that year, and were left with a modest farm profit after receiving their single farm payment.
On the ground, the impact of the 2009 collapse in prices was a hangover of co-op and merchant debt, maxed-out overdraft debt, and in many instances, a failure to clear the usual harvest credit lines.
For those worst affected, the debt hangover lasted well into 2012.
The volatility experienced in grass growth and in prices of feed and fertiliser has impacted on farm costs. Teagasc research confirmed a 19% drop in grass growth in 2012 compared to the average growth in the previous four years.
This volatility in fodder production, together with higher costs, has dragged family farm incomes lower again, with a 20% drop in income expected for 2012 in comparison to 2011.
Managing this volatility in sales prices, fodder production and costs is key to ensuring individual family farms don’t get smothered in a downturn.
There are a number of strategies to manage this volatility at farm, producer and governmental level.
Individual farmers must take up some share of the responsibility, by ensuring they have surplus fodder on hand; extra pit silage, stored properly, can last for several years.
Typically, farmers spend money when they have it, but in an era of higher volatility, this strategy isn’t strong enough to cope with events causing higher costs or losses of income in really poor years.
From a cash-flow point of view, a farmer should put aside some savings in a good year.
To manage income volatility, farmers could consider whether signing up to a long-term milk supply contract with their milk processor will give them the stability they need.
At processor level, there is a responsibility to return a fair price to farmers, based on the prevailing markets. However, processors should ensure in turn that their market returns have a level of stability. For this reason, milk price payments based on a longer term average market return would be more sustainable for their milk producers.
This can be done by setting aside profits in a good year into a revolving fund, engaging in their own long-term product supply contracts, or by protecting milk prices through the use of hedging.
Most of us are familiar with the term “hedging your bets”, and milk processors can protect their future returns through the use of hedging.
At governmental level, the risks posed by volatility can be managed by supporting an environment which allows Irish farmers to average out and manage their income better.
From a tax perspective, the current system of income averaging and income recognition rules on the 13th month milk payment actually work against farmers trying to stabilise or average their income.
The Australian and New Zealand tax systems, where volatility has been prevalent in their more free-market system, supports farmers to save in a good year.
New tax rules are needed, not to give extra exemptions to farmers, but to allow them to manage their income, to ride out the massive variations in farm income from year to year.
