New Zealand dairy farmers are on course for a 29% milk price slump, which will take nearly 2% out of their economy, such is the importance of their dairy industry.
Their main milk buyer, Fonterra, has cut its forecast 2015 milk price payout by 14%, citing a decline in global dairy prices in the face of strong global production, a build-up of inventory in China and falling demand in emerging markets.
New Zealand farmers seem to be taking this unfavourable milk price forecast in their stride – perhaps because history shows that milk prices and farm profits are cyclical, and the New Zealanders, like farmers here in Ireland, are better prepared.
The milk price cut would take out €2.5bn of dairy sector income next year in New Zealand.
It lends credibility to a recent forecast by the International Farm Comparison Network (IFCN) global network of dairy researchers, companies and other stakeholders. IFCN expects a cyclical downturn in milk prices.
Their investigations show average global milk prices have varied from €17.85 to €29.75 per 100 kg, in the last eight years.
The more recent good times started in 2007 when a substantial shortage of milk world-wide took markets by surprise, leading to panic among buyers seeking enough dairy produce for their plants and customers.
An even longer period of dairying good times has prevailed since last April, with record global milk prices. But there were two major dairy farm crises, even in the past eight years.
In 2009, a slump was mainly driven by extremely low milk prices, whereas in 2012 it was driven much more by extremely high feed prices.
For the average dairy farmer internationally, feed prices have been even more volatile than milk prices.
The profit margin over compound feed costs has fluctuated plus or minus 50%, across a range of plus or minus €12.65 per 100 kg of milk.
That huge swing in profitability poses a substantial risk for farmers – especially those with high milk yield systems which require a lot of purchased feed.
Irish dairy farmers became only too aware of the effect of high feed prices in 2012, after a year of bad weather left them more reliant on purchased feed, due to shortage of the grass-based feeding that helps Irish farmers survive milkprice slumps relatively unscathed.
IFCN expects a cyclical downturn in milk prices, pointing out that good times for dairy farming result in a rise in production, producing a lot of extra milk which will almost automatically lead to lower milk prices.
However, the resulting slump is predicted to set the base for the next wave of good times. And Irish farmers who exploit our national comparative cost advantage for grass-based milk production will be well placed to weather the slump.
The strengths of Ireland’s grass-based production are evident even within the island, in a cross-border comparison.
There has been a 38% increase in milk output in Northern Ireland since 1996, with no change in cow numbers.
It was largely driven by a doubling in the level of concentrate fed, to 2,400 kg per cow, on average.
Teagasc researchers have calculated Northern Ireland dairy farmers are not generating any additional reward to cover the increased risk of their high yield farming system.
Instead, returns per hectare have remained similar north and south.
Even in the south, milk price volatility threatens the average dairy farmer.
But the top 10% of established dairy farms are highly profitable through thick and thin, thanks to high levels of grass utilisation, and low interest and depreciation costs.
Our top farmers know the best antidote to milk price nervousness is to build a resilient dairy farming system that delivers consistent profit even with volatile milk prices, as recommended by Teagasc — low cost, grass based, but highly productive, with high-EBI stock, and improved financial skills for profit-focused tactical management, without overcapitalising in development for expansion.
© Irish Examiner Ltd. All rights reserved