Dairy markets remain depressed right now.
Prices have fallen in the last four successive rounds of the Global Dairy Trade (GDT) auction, the now widely recognised benchmark for international dairy market prices.
Following an upturn in GDT prices earlier in the year which caused some people to dismiss forecasts of a steep reduction in prices in 2015, the cumulative fall in prices in recent weeks is close to 30%, completely reversing those gains made in dairy commodity prices earlier in the year.
Back in November 2014, Teagasc indicated that it was likely that a recovery in dairy commodity prices would not occur before the peak season for Irish milk deliveries in 2015, and that Irish dairy processors would face serious difficulty holding peak season milk prices in a depressed dairy market.
At that time, Teagasc economists indicated that the fall in milk prices would leave average dairy net margin in 2015 at just 2 cent per litre in Ireland.
This was based on a forecast of an average national milk price of 27 cent per litre in 2015.
To date in 2015, the outcome has not been quite as bleak, but this owes more to macro-economic factors, specifically exchange rates, than to supply and demand conditions in the international dairy market.
In an Irish context, the only thing limiting the negative impact of falling international dairy prices has been the weakening of the euro against sterling, the US dollar and the Chinese yuan.
The depreciation in the euro following the ECB’s announcement of quantitative easing has been quicker and larger than many commentators would have factored in six months ago.
On the plus side, this means that trade in Irish dairy products in these international currencies is worth more to Irish processors in euro than it would otherwise have been.
The negative is that the weak euro has the opposite effect on the price of imported inputs, tending to push up the euro price of feed and fertiliser.
Fuel prices, while lower due to the fall in oil prices, are gradually creeping back upwards, in part also due to the weak euro.
Reflecting on these currency fluctuations, right now, an average Irish milk price for 2015 of 28 or 29 cents looks achievable, but dairy market developments in recent weeks suggest that we have not yet quite hit the bottom in terms of prices this year.
Having undertaken considerable investment, milk processors in Ireland are understandably concerned that this difficult period in international dairy markets does not knock farmer confidence in dairy expansion.
Processors may therefore continue to prop up the price of milk through the peak delivery months.
However, a commitment to hold prices could end up costing quite a bit of money, especially if the recent slide in international dairy prices is not arrested.
Overall, at this stage, an average net margin in 2015 of 3 to 4 cent per litre may be achievable for Irish milk production.
It should be kept in mind that there is a wide spread around that average, given the variation in efficiency across the dairy farm population in Ireland.
Even at an average net margin of 4 cent per litre, more than one third of dairy farmers (those with lowest costs) would still have a net margin averaging 8 cent per litre in 2015.
The flip side is that about 20% of dairy farms (those with highest costs) could still end up in a negative net margin situation for 2015.
What does all this mean?
Well it demonstrates that the best way to insulate against the effect of low milk prices is to address costs inside the farm gate.
This means that there is an ongoing need to drive for efficiencies within the farm, particularly for those at the upper end of the cost distribution.
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