2015 is looking to be a poor year for dairy farmers, and there aren’t many tools available to help to cope with the predicted low prices. While the ICOS, the farm organisations, and the Minister are working hard to secure European support for more robust support measures, the lack of a budget provision for such supports is working against us. As has been illustrated here in the past, there are two problems facing dairy markets; the first being a supply demand mismatch, resulting in an estimated 3% of annual global production overhanging the market (that’s equivalent to another New Zealand appearing on the world dairy scene), and the second problem being the market distortion caused by about 30,000 tonnes of butter and 250,000 tonnes of cheese displaced by the Russian ban. To get rid of the product locked out of Russia would cost €200-€300million in export refunds, or close to €800million in intervention purchasing. That money isn’t in the Ag budget, and there doesn’t seem to be a willingness to fund it from general funds, despite the fact that over a billion euros of farmers, money will be paid in super-levy fines into the general budget next November.

Some processors have specific volumes of milk tied into fixed price contracts, and the farmers who locked into those schemes must feel mightily glad now. However, outside of those schemes, we currently do not have the tools to lock in prices. Media coverage in recent weeks, suggesting that Irish Co-ops had the opportunity to lock in milk prices at 39c per litre, was wildly inaccurate. The fact is that there was interest by some end users in locking in raw material prices on the Eurex dairy Futures market. The volume involved, however, was less than 2% of Irish production, and the mechanism, cash settled contracts on the basis of French/German/Dutch commodity prices, would have introduced an additional element of risk. It is hoped, that a Futures market, geared to hedging Irish milk prices will be operational over the next couple of years, but for now it’s still in development.

In the meantime, we need to generate a structure that can help farmers to cope with anticipated price drops. The dairy volatility cycle is reasonably well established at this stage, and experience suggests that every 3 years or so we have a period of low prices, usually lasting a full season. The Budget decision to extend the income averaging period to 5 years is helpful, but it’s not enough on its own. The fact that volatility is as damaging for customers as it is for producers, may work in our favour. There is increased interest from customers in fixed price contracts, but it’s not easy to agree a fair price. One thing that may have to change, however, is our industry’s fixation with this month’s milk price. Perhaps it’s time to sit down and devise a fresh approach to reporting milk prices; maybe on the basis of a rolling average, maybe including the full benefit a farmer gets from his co-op. This might create the space for the development of more stable milk pricing tools.