Kieran Coughlan: Milk: Reduce or not to reduce, that is the question

For dairy farmers, today, Thursday the 15th, is the closing date for application to the first round of the EU milk supply reduction scheme.

Opting into the scheme is voluntary, and farmers who qualify under the terms of the scheme will be compensated by approximately 14c per litre for reducing milk production over a set three-month period.

The first period is October to December of this year.

Any reduction in output will be measured against their production in the same period in 2015.

The scheme works by paying a farmer for reducing production below their 2015 level, but only to a maximum reduction of 50%.

By way of example, if a farmer produces milk in 2015 at the levels of 35,000 litres, 25,000 litres, and 10,000 litres for October, November, and December 2015, respectively, then the farmer will only be compensated to the degree that production in 2016 is reduced below 70,000 litres for the three months of October, November, and December 2016, up to a maximum compensation level of 35,000 litres in this example.

For farmers who are milking the same number of cows, and producing much the same volume in 2016 and in 2015, the calculations are straightforward enough.

However, for farmers who have expanded cow numbers in 2016, opting into the scheme will mean some reduction in volume back down towards 2015 levels, which will not be compensated.

For example, a farmer who increased cow numbers in 2016 with the intention of producing 100,000 litres in October, November, and December 2016, the reduction in production from 100,000 to 70,000 litres will not be compensated to any degree.

Deciding whether to opt into the scheme or not is of course each individual supplier’s decision, but suppliers may be struggling to decide what’s the best decision for their business.

The reality is that there is no blanket answer.

As a starting point, farmers should look at what their expected supply for 2016 would be under normal circumstances, versus their 2015 production.

This will set the parameters for the amount of milk reduction required, firstly to get down to 2015 levels, and secondly the scope for how much milk is available for compensation.

Secondly each farmer should try to calculate what their cost of production will be for the months concerned.

At a current base milk price of 24c per litre, for example, and with compensation available of 14c, clearly, if your variable costs of production are more than 10c per litre, then the scheme offers the opportunity to earn more for doing less.

Viable costs include all fed costs above basic maintenance diet, parlour running costs, hygiene, and labour.

Where farmers are utilising significant volumes of concentrates, and supplementing silage to drive production, obviously their costs of production will be significantly higher that a farmer who is effectively cleaning out paddocks over the coming six to eight week period.

Grass silage costs approximately 2.0 to 2.5 times grazed grass per tonne of dry matter fed, according to Teagasc.

The maths for each supplier is different and can get complicated.

Other considerations that should be factored in are existing milk supply agreements, both in terms of the opportunity to supply volumes at a rate higher than the spot rate, and the risk of breaching overall volume and monthly supply parameters.

Interestingly, the EU’s milk reduction scheme is based on a reduction measured in kilograms of milk, with no apparent factoring in for fat or protein adjustments.

Farmers should consider whether once-a-day milking can offer an opportunity to reduce volumes, thereby availing of the compensation element, while boosting milk solids from going once-a-day can drive the price of milk supplied upwards.

The switch to once-a-day milking can result in an increase in somatic cell count rates which, if not kept under control, can result in significant penalties.

Once-a-day milking has added the financial benefits of reduced parlour usage, improved condition score for animals, as well as the opportunity for the farmer to get a well earned break.

One of the lessons learned from 2014 was that a blanket drying-off of cows too early resulted in over-fat cows late on in the calving season.

Should this reduction scheme be oversubscribed, compensation will be paid on a proportionally reduced volume per participant.

In the event of a supplier not reducing their production by their agreed amount, the level of compensation is tiered.

If this first three-month scheme is under-subscribed, there are plans for opening up further rolling three-month reduction periods, covering the months up to March, 2017.

But, for the moment, only applications for the first period are being accepted.

The scheme is only open to farmers who had supplied milk in July 2016.

Full details of the scheme are available from the Department of Agriculture website, with applications to be submitted to the farmer’s local processor.


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