Managing volatility key to dairy sector expansion

Investments by the Irish Dairy Board demonstrate routes to market for our expanded production are well developed
Managing volatility key to dairy sector expansion

The outlook for the Irish dairy sector is very positive, with farmers looking to the removal of quotas as their first real opportunity to fulfil their potential as efficient grass-fed dairy producers.

The Food Harvest 2020 strategy clearly identified the measures needed to be put in place for the dairy industry to meet the 50% expansion target.

Thanks to Teagasc and others, Irish farmers have developed their skills in grassland management and grass utilisation to such an extent that many leave New Zealand farmers in their wake. The genetic potential of the national herd has increased significantly over the past decade with the adoption of the Economic Breeding Index and the enhancement of economically important traits. The health status of the national herd has been brought into focus with the Animal Health Ireland.

At processing level, the enormous investment that has taken place since 2007 has moved Irish product significantly up the value chain. In total, around €500m will have been spent on processing capacity and value-added in the few years leading up to quota elimination.

The Irish dairy sector is now strongly focussed on real markets, with the fat portion of milk production (butter and cheese) targeted at strong internal EU consumer markets. Our protein production is increasingly targeted towards infant formula ingredients and consumers in high-growth economies.

Recent investments by the Irish Dairy Board in the Middle East, in Europe and in the UK, as well as bilateral relations between processors and infant formula partners, all demonstrate routes to market for our expanded production are well developed.

The one issue we still haven’t fully addressed is volatility management. Many farmers were badly hit by low prices in 2009 and 2012, not helped by wet summers. The one factor which helped many farmers to survive was that fact they weren’t heavily borrowed. Given that the expected increase in milk production will involve expenditure of at least €1bn, it is expected a large proportion will be borrowed.

The question is whether heavily-borrowed producers will be able to survive prolonged periods of poor prices. The industry is working to develop options to allow farmers to better manage the price volatility.

In the context of the review of agri-taxation being undertaken by Revenue, it’s important that consideration is given to the development of voluntary schemes, whereby farmers can put aside a portion of their income in good years, and to draw it down and to pay tax on it in years when prices are low. In Australia, where such a scheme operates, most banks offer special accounts which comply with tax requirements.

In Ireland, the schemes could be operated by co-ops, which could use the funds to cut their own borrowing requirements. ICOS is pursuing this option with Revenue.

Some farmers, particularly those with strong cash flow and low borrowing levels, may be better off riding the market rollercoaster. Those, however, with high borrowings, should consider adopting one of the risk management options which will become available.

— TJ Flanagan is dairy policy executive of the Irish Co-operative Organisation Society

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