Volatility will eventually force out high cost milk producers
Right now, a drought in New Zealand might be the only thing that can rescue our dairy farmers from a difficult 2015 in prospect.
Some restrictions have been placed on water irrigating 16,000 hectares of farmland in South Canterbury, an important dairy area.
Fears that an El Nino weather pattern will increase water restrictions in New Zealand are helping to weaken the New Zealand dollar on currency exchanges, because its dairy industry is such an important part of the economy, and it depends on grass growth which could be affected by drought conditions.
The New Zealand dairy season ends in June, and last year’s was among the best on record, setting a new production record of more than 20 billion litres of milk.
But parts of the country are rapidly drying out now.
It was New Zealand’s worst drought in 30 years, which caused milk production to plunge in their 2012-2013 season, that triggered a buoyant global milk market for the past two years.
Few Irish dairy farmers will wish for hard times among their colleagues on the other side of the world to increase their 2015 earnings.
However, unforeseen weather events around the globe are part and parcel of the volatile global dairy market, and Irish farmers know that they have to strive to be competitive, in order to survive the volatility.
Our high cost milk producers struggle to operate profitably except in high milk price years. Unless they reduce costs and/or increase output, they will eventually be forced out of milk production.
The medium cost producer will also struggle with low milk prices, and may need risk management on milk price, along with reducing input costs.
But the low cost producer can cope with periods of low milk price relatively comfortably.
The high cost Irish milk producer can be derailed by any one of the many unpredictable global events ahead.
It could be the falling oil price, which reduces the ability of developing world economies to pay for Irish dairy produce.
It could be the highly favourable income-over-feed-cost ratio in the US, which incentivises farmers there to maintain strong production levels, even while milk prices fall here.
It could be President Putin of Russia deciding to extend his one-year trade embargo against EU foods, beyond the expected end date of August 2015.
An unforeseen weather event in New Zealand could come to the rescue of the high cost Irish milk producer.
But bad weather here at home could be just as likely to bring economic difficulty.
Right now, in most of the world’s big milk production areas, falling milk prices are approaching the cost of production on some farms, or falling behind.
The high cost producer faces losses, while the low cost producer is still in the black.
