Europe has stepped too far away from market involvement

Government should introduce Volatility Management Measures

A functioning Dairy Futures Market is required

Tuesday, 29^th September 2015 – Addressing the National Dairy Forum established by Agriculture Minister Simon Coveney T.D., ICOS –  the umbrella body for dairy co-operatives in Ireland – said the Forum provides the opportunity for an honest and robust debate on the future of the Irish dairy industry and how it can fulfil its economic, social and environmental potential.  ICOS President, Martin Keane and ICOS Dairy Committee Chairman, Jerry Long attended.

The key ongoing challenge facing dairy co-ops and their suppliers and members is market volatility, and all parties need to commit to developing structures to mitigate its worst effects.

We are now in the 4^th significant market downturn since the EU reduced support levels in the mid 2000’s, and we still have a lot to do in terms of helping farmers to cope with damaging market fluctuations.

Recently, we have seen some tentative signs of recovery in prices. However, 2016 could be another challenging year. The current process of balancing supply and demand is, by its nature, one of attrition.  Low prices cause difficulties at farmer level –  reducing production. High prices cause difficulty at consumer level, and reducing demand.

Short term priorities

ICOS is firmly of the view that, by the time the next downturn arrives, we need to be in a position whereby farmers can have locked into a milk price position. To do this, we need a combination of the following measures:

• More focussed EU support tools
• A functioning European Dairy Futures Market
• Greater availability and uptake of fixed price schemes
• A national income deferral scheme

The experience this year, whereby €500m has been allocated to support measures in the dairy and pig sectors, while welcome, demonstrates Europe’s unwillingness to intervene in markets.

While ICOS agrees with the position of retaining the market focus of European dairy, and we are also extremely conscious of the budget backdrop, particularly in the context of the human suffering associated with the migrant crisis, we feel that Europe has stepped too far away from market involvement.

This year’s dairy market free-fall (due to a combination of the periodic supply demand imbalances, the Russian ban, illogical Chinese buying patterns,  and a dysfunctional New Zealand auction process), required a strong statement from Europe.

While free markets and supply and demand are reasonable principles, authorities should reserve the right to intervene to correct market failure. The current suite of supports, including the intervention threshold should be strategically examined and deployed at a level to protect Europe’s production base, and ability to trade on local and world markets.

Dairy Futures Market

Europe needs to commit to the development of a functioning dairy futures market, to allow farmers, or co-ops on their behalf, to hedge their position in the market. It should be possible for farmers to either lock-in or hedge a milk price in the expected mid-range of volatility, for a least a portion of their supply, depending on their circumstances or risk appetite.

For this to happen a number of steps need to be taken:

1. The Commission needs to incrementally develop the European Milk Market Observatory as a price and volume reporting tool, aiming to match the USDA, as a key building block to the establishment of a futures market
2. Ireland needs to develop an Irish dairy market index, particularly to reflect the market realities for a small exporting dairy nation
3. The EU and the Irish authorities need to support a programme of education and promotion, to increase farmers’ understanding of hedging and risk management

Much work has been done over the past 4-5 years in developing fixed price offerings to dairy farmers. Particularly in the past 12 to 18 months, more and more farmers have been offered the opportunity to lock in a milk price, on the basis of back to back contracts with customers. This work needs to continue, although the development of such offerings is complicated, and depends on finding the “sweet-spot” in markets, whereby both producers and customers are prepared to lock-in at the same price.

Following last year’s Review of Agri Taxation, ICOS recognises that last year’s budget was very progressive for farming, particularly in the area of land mobility. That said, we believe that an opportunity was missed to provide for measures to help farmers to manage volatility.

Extraordinary measures necessary

The challenges facing the dairy sector – as we deal with expansion and investment – are such that we must take extraordinary measures to deal with them. ICOS encourages the Government to introduce volatility management measures such as an income deferral scheme. The Government needs to work creatively, either via the Block Exemption or De Minimis rules to overcome State Aid concerns. Ireland has the opportunity to take a lead in this regard, and ICOS believes that European authorities and other Member States would be receptive.

Income support

With respect to the €13.7 million to be provided in temporary exceptional aid to Irish Milk and Pigmeat producers this year; ICOS warmly welcomes suggestions that the Government will provide co-financing.

The resultant fund, while modest, will provide some liquidity to hard pressed farmers. It represents, however, only about 3% of the revenue loss suffered by farmers this year, and in total will be less than a quarter of the support afforded to farmers by their co-ops.

ICOS estimates that the level of co-op support for dairy farmers this year may total €100 million.

While co-ops have been happy to support their members, and indeed that is the core strength of the co-op model, that money may have been of more long term benefit to farmers if it had been available to spend on innovation, technology and routes to market.

Medium term priorities

• The Climate Change challenge will need to be resourced at national level, to ensure that the merits of our grass based, carbon efficient production model are recognised and that we can satisfy our international commitments without hindering our ability to produce and sell our sustainable dairy products worldwide.
• The funds provided for trade promotion under the EU package need to be used wisely and leveraged against existing efforts to ensure maximum effect in target regions.
• The current level of collaboration within the sector needs to be recognised and encouraged. Particularly as we manage our processing capacity through investment and supply expansion, the benefits of good commercial relationships across the sector can be seen.

ICOS works hard to encourage co-operation and collaboration and the recent agreement around an orderly transfer of non-contracted milk suppliers who wish to switch milk purchaser, demonstrates the positive relationships that exist and should be built upon.

ICOS represents co-operatives and organisations in Ireland – including the Irish dairy processing co-operatives and livestock marts – whose associated businesses have a combined turnover in the region of €14 billion, with some 150,000 individual members, employing 12,000 people in Ireland, and a further 24,000 people overseas.

Information:

TJ Flanagan, Dairy Policy Executive , ICOS  Mobile: +353 87 9471526  Email: t.flanagan@icos.ie

Tim Kinsella, MKC Communications, Mobile: +353 86 813 7512  Email:  tim@mkc.ie