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Ian Potter: The Dairy Newsletter conference and competitive world prices

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At the recent Dairy Industry Newsletter conference, which had the title ‘Managing the Extremes of Dairy Market Volatility’, David Dobbin, the current but soon to retire chief executive of United Dairy Farmers, said farmers must be able to survive deep and extended milk price cycles and that this current down cycle is set to continue into 2017 if not 2018.

 

He also stated survivors will have either low costs of production, or deep pockets. Those with high debts and/or high costs of production won’t survive and this, unfortunately, means some of the most efficient who have ended up in the wrong place at the wrong time.

 

Speakers and some delegates were asked by me for their predictions and forecasts as to what the ‘average’ farmgate milk price is likely to be in the next five years and the answers ranged from 21-25ppl, with most in the 22 to 23p bracket. This is exactly the price I believe farmers need to budget on.

 

The European dairy industry has changed since the end of the 30-year quota regime, during which time farmers couldn’t respond to increased milk prices. Now, 28 member states can respond to milk price signals as quick as anyone in the world, and whether you like it or not the likes of the Netherlands and Ireland intend to fully exploit this opportunity. With quotas gone the only output control is the price. But that hasn’t worked during this downturn yet!

 

Jim Bergin, from Glanbia, which processes a third of Ireland’s milk, amplified the Irish (ROI) target to increase milk output by 50%. The example he used was that the average producer in ROI has about 60 cows. To expand, the typically mixed farms simply cut back beef numbers and put an extra six cows on a year for five years. At the end his milk output is up by more than 50%, especially so when combined with genetics and technological advancements. Consequently the 50% target is one they expect to exceed by 2020.

 

Across the world different dairy organisations and processors are keen to support and relieve a little of the pressure this crisis is putting on dairy farmers and their families at a time when they desperately need it. For example, Glanbia is supporting farmgate milk prices by €23 million (at a rate of 1 cent/litre). In Victoria, Australia, there is a $1.5 million (£750,000) support package in place, of which almost £500,000 is directed to counselling services for dairy farmers. My recent involvement in the Dairy Allied Industry forum was in the hope AHDB would acknowledge funding in this area is necessary and could help save families’ marriages and lives. This funding, alas, has not materialised and AHDB Dairy decided it wanted to focus on better returns, improved feed utilisation and producing the right milk for your contract – as is the case with its current series of workshops. It’s not the key message which came out of that meeting so far as the majority of the delegates present were concerned, including David Handley.

 

I know I can be accused of being a stuck record but some farmers have to read the tea leaves and decide whether they have a profitable future in this industry. Only recently I was interviewed by BBC Radio Cumbria along with an anonymous south Cumbrian farmer. He claimed his average milk cheque was just over £9000 a month and his ‘essential’ average bills were £14,000 a month, with another price cut confirmed for June. His position is simple to analyse because his milk cheque needs to increase by a whopping 50% just to break even and pay his essential bills. Whether he is on 18p or 21p his milk cheque will not go up by 50% in 2016 or 2017 to cover his outgoings on a monthly basis.

 

He is digging himself a very big hole and must make radical changes or he and his family will continue to haemorrhage cash and be extremely pressured. He, like many others, needs some independent guidance as to the right road to take. That’s the sort of help I hoped our organisations would champion. John Jordan, chief executive of Ornua (formerly The Irish Dairy Board), said: “Everyone has a duty to support dairy farmers in this crisis.” He is right.

 

Recently there has been discussion about member state compensation to farmers who reduce milk production. In my opinion it would be a nightmare to police and won’t have any impact on the huge financial hole many farmers face. In the UK, one group is even proposing getting 20ppl compensation for litres not produced! The problem here is while the EU has approved the measure, it is down to member states to provide the funds from national coffers and there is no hope of the UK coughing up so much as £1.

 

The consensus at the conference was the troughs are getting deeper and appear to be on a three-year cycle. Volatility is increasing and pre-2007 SMP prices varied by + or - 10%, but now it’s close to + or - 50%.

 

Futures markets might help. They aren’t for farmers but they give better early warning signals than some of the other rubbish farmers are presented with. It’s a topic I will return to at some later stage.

 

On the second day of the conference there was almost a beauty parade of big hitters giving their views on the industry and the direction of their processing businesses, pointing out neither processors or farmers are making money. All of the speakers with the exception of one, Andrew McInnes of Muller, referred to the financial pain their supplying farmers are experiencing.

 

However, while the three co-operative head honchos (David Dobbin, Jim Bergin, and Peter Giortz Carlsen of Arla) focused on inadequate returns to farmers, McInnes did catch my eye when he said his question to suppliers is ‘what are you doing differently?’. He said most give no answer. It’s likely to be the same for a significant number of dairy farmers who keep plodding on, burying their heads in the sand. They aren’t prepared to play their part and make any changes to become world competitive and profitable and will, in many cases, wither on the vine and lose more than money.

 

Ian Potter

Ian is a specialist entitlement broker and dairy industry commentator. Comments please to ianpotter@ipaquotas.co.uk

 

Click here to read this months digital edition of Dairy Farmer.

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