Dairy Industry Now Much Less Dependent on Basic Commodities – Kiersey

While some in industry are talking down the price of milk in light of somewhat weaker markets, IFA National Dairy Committee Chairman Kevin Kiersey says his recent visits to the main co-ops had made it clear to him that the Irish dairy industry was now far less dependent on basic commodities than it once was.
Many co-ops have developed, through the IDB or alone, strong contracts with regular customers for high value products, and these, he said, clearly provide more stable returns. Co-ops must reflect this with a measured response on milk prices over the peak period, to avoid denting farmers’ profitability and their confidence, thereby undermining farmers’ ability to deliver on crucial expansion.

“There is little doubt that strong supplies are outpacing demand, and international commodity prices have weakened. However, global demand remains robust, especially in high growth emerging countries, and the longer term outlook remains extremely buoyant for dairying. It is vital to sustain farmer confidence and avoid a boom/bust rhetoric which militates against sensible planning for expansion,” Mr Kiersey said.

“I am concerned that the opportunistic trade of relatively limited quantities of basic products through the Fonterra Global Dairy Trade auction is being used far beyond its true significance by both buyers of dairy products and buyers of milk to condition the market for lower prices,” he said.

“We should remember that Irish dairy co-ops do not trade through the Fonterra auction. Three weeks ago, the auction showed a 1.5% price increase, last week a 9.9% decrease, and it is likely that one of the next few will show another increase. So what are we to make of it? Simply this: that when you depend on spot or opportunistic trade for basic, undifferentiated commodities, prices will be volatile,” he said

“However, our industry clearly is no longer totally dependent on basic commodities. This time last year, when I was asking co-ops to pass back to farmers the improvements in rapidly rising commodity returns, I was told that they were tied to regular contracts for high spec products which could not by definition reflect the volatility of commodities on the way up. Indeed, farmers did not receive the peak returns. Surely, this logic also applies on the way down, otherwise, why bother developing higher value, contract based markets?” he added.

“Farmers’ confidence is tightly linked with their profitability, especially over peak months. Co-ops have had an opportunity over the last two years to rebuild their balance sheets. They have also made tremendous efforts to develop higher value products and stronger customer relationships, and this must be reflected in a very careful milk price policy over peak months,” he concluded.