Age of opportunity beckons for milk

Teddy Cashman is six months in the job of IFA national liquid milk chairman.

He represents specialist dairy farmers in a business regulated by the National Milk Agency which ensures the year round fresh supply of drinking milk to Irish consumers. They supply dairies which have undergone huge consolidation in recent years.

Now, Glanbia, Connacht Gold and Arrabawn are the main dairies, but 25% of the milk drank by southern consumers comes from Northern Ireland.

Like many other farmers, liquid milk producers say their profit margins are hit by static farm gate prices, and inability to recover rising production costs from the food chain.

Q. Manufacturing milk producers have great expansion opportunities in 2015. What is the outlook for liquid producers?

A. Some liquid milk producers will have the scope to expand their manufacturing milk production. However, with a static domestic market for liquid milk, it is very unlikely that they will have opportunities to increase their liquid milk supplies.

Post-2015, it will be even more important than it is now that the cost of supplying milk year-round is duly and sustainably remunerated, if producers are to remain with their specialist production system and guarantee fresh milk on supermarket shelves in December.

Q. Are liquid milk producers generally better established than manufacturing milk producers, and better able to withstand market setbacks?

A. While many liquid milk producing families go back a few generations in the business, they deal with completely different market realities.

Liquid milk suppliers have always had to withstand market setbacks when retailers and dairies engaged in cut-throat price and turf wars. In our experience, such fights for market share have often been shortlived, but have progressively eroded the farmers’ share of retail returns.

Q. The National Milk Agency regulates liquid milk supplies in Ireland. A review of State agencies has identified it for abolition or merger with Bord Bia. What is the worst case scenario for the liquid milk industry?

A. The National Milk Agency (NMA) is financed equally by farmers and dairies and does not cost the taxpayer anything. Abolishing the NMA would not achieve any savings for the Exchequer, and the Minister for Agriculture Simon Coveney has agreed that this is the case. There are no synergies to be achieved between the NMA and Bord Bia, as the two agencies have fundamentally different remits.

While the NMA would undoubtedly benefit from a review of its operation, its statutory basis is critical in securing year-round supplies of fresh quality milk for consumers. In its absence liquid milk producers would find it impossible to obtain fair and appropriate contractual arrangements with their dairies.

Q. Liquid milk producers in 2011 said they were losing up to 4c/litre. Does that mean the National Milk Agency was failing in its regulation of the industry?

A. The NMA oversees contractual arrangements between dairies and farmers, and as part of this role must assess the adequacy of compensation for producers’ costs. While it cannot impose particular price levels, it insists on fair contractual provisions which strengthen farmers’ hands in price negotiations. Liquid milk producers are losing up to 4c/l because their margins are being given away by dairies to retailers in destructive fights for market share.

Q. Why are specialist producers needed for year-round quality milk supplies?

A. Supplying fresh milk of the right quality, offering consumers the taste and shelf-life they expect year-round, requires freshly calved cows year round. In practice, this means specialist producers calving half their herd in spring, and the other half in autumn.

This production system involves significantly higher costs in facilities, labour, energy and feed, mostly incurred in the winter months, which is why producers are contracted and remunerated differently from spring milk producers.

Q. Do liquid milk producers accept that their price must be pegged to the average manufacturing price?

A. No, they do not. Liquid milk producers supply a very different market, which returns very steady margins at retail level all year-round, with none of the volatility and seasonality experienced in the global dairy markets.

Also, their costs of supplying high quality fresh milk all year round are around 30% greater than the cost of producing spring milk for manufacturing purposes.

However, with increasing pressures on retail and wholesale liquid milk margins precipitated by the current recession and increasing imports, liquid milk producers have been forced to live with pricing systems which are pegged to constituent-based manufacturing prices.

Q. If ability to expand without milk quota worries enabled Northern Ireland farmers to take about a quarter of the liquid milk market — can southern farmers win back share, after quotas go in 2015?

A. The post-2015 expansion will be seasonal, and mostly relevant to manufacturing milk. However, it is critical that consumers, retailers and dairies would all understand that, to have fresh quality milk on shelves in the dead of winter, we will still need dedicated specialist liquid milk suppliers after 2015.

If consumers and retailers value the contribution to the local economy of locally produced milk, there is no reason why Republic of Ireland farmers cannot win back market share on the domestic market.

Q. You said dairy consolidation has caused difficulties for some liquid milk producers. Where do these arise? Are Dairygold liquid milk suppliers happy with the Glanbia deal, taking the 28 million-litre CMP milk pool produced by about 130 farmers in Co Cork?

A. The consolidation in recent years of a number of dairies (Glanbia/Dairygold, Kerry/Glanbia/Arrabawn, Connacht Gold/Donegal Creameries, etc.) led the affected farmers to fear for their future standing as liquid milk suppliers in the consolidated entities.

The Dairygold/Glanbia deal provides certainty to the suppliers affected for a set period of time, and provides for renegotiation for the future. Can dairies undercutting each other for market share only get worse after milk quotas go?

Undercutting for market share has been a feature of the Irish liquid milk market from the very beginning. It has got significantly worse in the recession as retailers use milk as a loss leader to attract consumers into their stores, and seek to protect their margins at producers’ expense. This is unsustainable and it is crucial that retailers, dairies, and our Government who are planning to regulate the retail trade, recognise the need for equity in the distribution of margins in the food chain.

At today’s prices there is scope to give good value to the consumer, a more viable, higher share to the farmer, and sustainable, fair margins to dairies and retailers.


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