ICOS is extremely concerned at the prospect of ongoing dairy market volatility in 2016. As we start the New Year, dairy markets remain in a difficult position, with the short term outlook challenging. The reality is that we are now in the fourth significant downturn since the reduction of EU market support measures in the 2004-06 period, with very weak markets in 2006, 2009, 2012 and again in 2015. While the long term prospects for dairy markets are positive due to a growing global population, in the short to medium term at least, volatility will remain a constant feature.

Before the next downturn (this will happen as night will follow day as minor changes in the supply-demand balance can have significant consequences), it is incumbent on all stakeholders to put in place the necessary tools so as to help dairy farmers to manage income volatility. This is essential in order to underpin and protect the family farm production base involved in the Irish dairy sector.

The co-operative movement has been happy to assist their members in 2015, by supporting the milk price in the region of €100 million. In addition, milk processors have responded by offering fixed price schemes where possible, which allows farmers to de-risk by locking in a portion of their supply at a reasonable price. However, where processors are not in a position to physically lock in a back to back contract for a portion of their production, tools should be available to allow them to enter a financial hedge. Over recent years, ICOS have put a lot of effort into supporting a futures market with Ireland specifically in mind. That said, we are still quite away from its development and all stakeholders need to re-double their efforts in order to establish a liquid functioning European futures market.

At Government level, the European Commission announced a comprehensive aid package in September 2015. This included direct aid to Irish dairy farmers to the tune of €13.7 million, matched 100% by national exchequer funding. This funding is welcome as it will provide much needed liquidity to hard pressed farmers. While also recognising that the EU amended their rules around private storage aid, it is questionable whether there is any long term strategy to deal with volatility at an EU level. Measures such as direct aid can only be a short term solution. The decision to support dairy farmers in this manner is also a clear signal that the EU is unwilling to provide an adequate floor for dairy prices.

As we enter into election season, stakeholders will need to focus on their wish-list for the next Programme for Government. The current Government has delivered significant benefits to the farming sector over successive budgets. However, ICOS believes that an opportunity has been missed in relation to income volatility. The extension of income averaging to 5 years will ensure that farmers aren’t forced into paying excessively high tax in any one year. However, it is important to note that income averaging can have negative consequences for a farmer during years when cash flow is impaired.

As such, ICOS strongly believes that the introduction of an income deferral tool, together with 5 year income averaging can provide a dairy farmer with a sustainable platform to manage his/her income during good and bad years.

This is an issue that ICOS will pursue vigorously in the weeks and months ahead.

By Eamonn Farrell

ICOS Agri & Food Policy Executive