The downturn in global dairy prices appears likely to be with us for some time. The Dairy Forum must focus the energies of banks, co-ops, state agencies, and also farm organisations, to work together to support farmers through the current downturn, writes Sean O’Leary, Dairy Chairman.
Dairy markets are weak because global milk output, especially from Europe and the US, continues to grow, leading to the build-up of stock overhangs. At the same time, global demand is depressed by the continued Russian ban, lower buying activity from China, and lower oil revenues.
Low prices are unsustainable
Pure economics dictate that low prices lead to low or negative profitability on farms, and that while a weather event can reduce production quickly, low prices will always reduce production, in time.
First, however, farmers continue producing to generate badly needed cash flow. This cannot be sustained for very long, because the cost of producing may be higher than the price received, and because the processing capacity may be insufficient, for example in the case of Friesland Campina last month. So, the current low prices will turn around for sure, the only question not even the expert analysts can really answer, is how long it is going to take.
Call back the Dairy Forum now
I have made it clear, first to Minister for Agriculture Simon Coveney last month, and this week to the Department of Agriculture General Secretary, that we urgently need a short-term strategy involving all stakeholders, especially co-ops, banks and Teagasc, and that we also need to learn from this to develop longer term risk management tools to help farmers cope in future.
The Dairy Forum established last autumn by Minister Coveney provides the environment to focus every stakeholder on what they need to do, and to co-ordinate delivery of the required actions.
The Forum must be recalled before we have a new Minister for Agriculture, as it could take some time for a government to be formed. Once it has been recalled, every stakeholder must come to the table with what they can contribute to support dairy farmers through the current downturn.
What the parties can offer
I believe it is totally realistic to expect that a little effort from every party can contribute to helping farmers find their way through this year’s difficult months.
Co-ops have, through the second half of 2015, supported milk prices to differing degrees, utilising income streams from other businesses, or other resources. Ornua has played a part in this, as its PPI, which reflects higher brand returns as well as commodities traded, returns more to co-ops than EU commodity prices alone. While this is both recognised and strongly appreciated by farmers, it is essential that this support of prices would continue, ideally frontloaded to the expensive early months of 2016.
Co-ops and Ornua have also worked together to bring forward fixed-price contracts, allowing farmers to hedge the price for a small portion of their milk. This positive step must be further developed so that farmers in all co-ops have that option, and may be able to choose to hedge more of their milk.
Many co-ops have also provided favourable merchant credit, postponing repayments to peak months – this can be very helpful, and all co-ops should examine what they can offer in this area.
Banks have very publicly declared their support for the dairy sector. However, farmers’ experience makes them sceptical of banks’ willingness to support them through prolonged low income months without costly renegotiation fees.
Banks must match their marketing message with financial offerings: they must provide farmers with flexible short-term cash flow funding options and long-term, internationally competitive funding that allows farmers to take repayment holidays without additional cost.
Twenty-six percent of the European funds available through the Strategic Banking Corporation of Ireland (SBCI) currently go to agriculture. This funding must be made available to farmers more flexibly through more than the main banks, at lower costs, and for a greater variety of purposes. Our government must also be more pro-active in securing European Investment Bank (EIB) funding for the farming sector, to reduce the cost of finance to farmers.
The government and the Financial Regulator should also vet alternative financial providers, such as investment funds, to increase competition in the Irish financial market, and to protect farmers from potential exploitation.
Teagasc and other state agencies
State agencies such as Teagasc can play a vital part in supporting farmers with practical financial, budgeting and sound husbandry advice.
Some co-ops already operate joint programmes with Teagasc, which, among other things, offer assistance with on-farm budgeting. This type of very practical support needs to be made available to all the dairy farmers who need it. Co-ops can readily identify those in need, and they must all co-operate with Teagasc to ensure those farmers get the support they require.
Teagasc must also provide practical support with cost cutting strategies which allow farmers to regain control of their cash flow without harming the long term sustainability of their farm and herd.
After our very active General Election lobbying, the new government must progress the proposal put forward by IFA on taxation of agricultural incomes allowing farmers to put away funds in good years to bring back into their taxable income in years of low incomes. The ICOS 5-5-5 refinement on this concept must help keep the pressure on the new Ministers for Finance and Agriculture to deliver real progress on this in the 2017 budget.
We need a more proactive approach by government to prove the market failure which results in costlier finance availability for Irish farmers, to allow them access low cost finance through the EIB.
The incoming Minister for Agriculture and his officials must also critically examine CAP in the context of volatile dairy prices. The “safety net” provided by the intervention scheme, whose level is unchanged since 2008, must be fundamentally reviewed, market support schemes such as APS must be made more flexible, and new instruments such as margin insurance schemes, and milk price hedging, must be facilitated among other things by reconsidering the detailed rules underpinning permitted State Aids.
What can IFA do?
IFA can help, not only with the short-term issues, but with learning to develop long-term strategies to help them manage volatile incomes.
We have met with and lobbied almost all co-ops in the last six weeks and have raised all of the above issues with them, urging them to hold milk prices and continue supporting them, especially for the first few months when cash flow is most problematic.
We are meeting the other stakeholders, and have clearly demanded the recalling of the Dairy Forum to bring them all around the table.
We are also aiming to provide opportunities for more information and debate for co-op board members, the main decision makers in the sector, on the methodologies which could be developed by Ornua and our co-ops, and made available to help farmers manage their volatile incomes into the long term.
With this in mind, we are organising a conference on practical risk management for dairy farmers on May 4th, to be addressed by US and other international speakers.