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We all knew this was coming; we’ve talked about it for the past number of years. It was obvious to everyone that 39c per litre was probably too high a milk price to be sustainable. The logic is simple; the high price makes milk production profitable for everyone, even those with uncompetitive systems. The global milk tap has been turned on full for the past year or so, helped by freakishly kind weather conditions and cheap feed, and now we have a glut of product. It’s very unfortunate that this coincides with the elimination of quotas, but this is a global phenomenon, and the extra EU milk did not create the problem. Never-the-less buyer sentiment is very bearish right now, and the prospect of extra European milk next year gives them the confidence to sit back and watch producers suffer.

A lot of good work has been done in Ireland over the past number of years to try to deal with volatility. Some processors have developed back-to-back fixed-price contracts; the IDB have made such an offering available to farmers via their co-ops, ICOS devoted an entire National Conference to the topic last year, we have partnered with C.I.T. and F.C. Stone, the dairy Risk Management specialists to run seminars to explain and develop the concepts around financial risk management tools, the IDB are doing some very heavy lifting to develop tools which could make a dairy futures market work for Ireland. All this work, however, is difficult to sell to farmers when they are receiving 39c per litre. Too often the answer from farmers has been “give us the full price and let us manage the risk”.  The view might well be different next spring. By then, of course, if a processor was to go to the market to lock in a fixed price contract, the price on offer might be sobering.

Right now, as we face what could be a very difficult period in the markets, ICOS has two priorities. The first is to work with Minister Coveney as he tries to win political support in Brussels for measures to alleviate the current market difficulties. That will not be easy. The EU budget had no provision for the types of tools we would need to address the European or global supply imbalance. Given, however, that the global oversupply has been exacerbated by the Russian embargo, the EU must recognise that they have a responsibility to address, at least that part of the problem. Europe must  get the displaced product, 30,000 tonnes of butter and 270,000 tonnes of cheese (or the equivalent in Butter and SMP) off the market. It can either do this in terms of Export Refunded Exports to 3rd countries (although this would be resisted strongly by several Member States) or the stocks should be bought into intervention at a price level which signals to the markets that we have reached the bottom (25-26c per litre, as opposed to the current level of 20c).

The second, and possibly more important, priority is to prepare and help farmers through an impending cash flow crisis of enormous proportions. No-one can predict exactly where markets will be across next season; we can only look at current levels, combined with supply and demand dynamics, and observe buyer sentiment. On the basis of those indicators, combined with predictions from Rabobank and others, Irish dairy farmers could be facing milk price levels over 10c less than in 2014. That could amount to €600m of a reduction across the season. That cash-flow hit, combined with a certain super-levy bill of up to €100 million, will put enormous strain on many farmers. Many, over quota, farmers will receive no milk cheque until next summer, and those cheques will be well behind those received this year. Many of those same farmers used the strong cash flow in the past year or so to fund expansion. They’ll, therefore, have a large tax bill to pay next autumn. The picture isn’t a pretty one. Co-ops will, as always, carry a large part of the burden, but this is not the answer. They need cash to fund their operations. They need to be profitable to help farmers to benefit from premium markets. They mustn’t sacrifice their balance sheets, just when investment in marketing and innovation is most needed.

There is a responsibility on the banks to help farmers through this cash-flow problem. Remember, markets will recover, and milk prices will rise again, but price volatility will be a recurrent phenomenon and we must help suppliers to deal with it.