Dairy Farmers warned of boom and bust

With the abolition of the milk quota looming, Ireland’s dairy industry is set for some major changes.

John Cawley, owner and MD of The Finance Expert and a business advisor, warns that dairy farmers should be mindful of the changes. He’ll be giving a talk on the subject in Mitchelstown in association with Dairy Ireland on Thursday week (July 25th).

“I’ve been doing work with management of various organisations,” he told Agriland. “Focussing on agriculture, I benchmark everything against the ISO 31000 Standard and I start with its first principle: Is the business a good idea? Do the owners know what they want to get out of it? Do they have clear business objectives? That’s the first step.

“It takes you into where you’re going, why you’re going there, and if that’s the right road for you.

“Dairy Farmers are very specialist,” Cawley says, “they’re in a narrow but potentially lucrative discipline. As a country we’re milking at 25% of our capacity because of quotas, which is like milking out of one teat of the cow, this is about campaigning for the other three. What would milking to capacity do to your business model?

“If you take the methodology I’m applying – if you want to do something different post-quotas, you now need to know how to deal with that difference. Different circumstances pose a risk. And it can be a positive, a negative, or stay the same.

“The next question I’d ask is what their appetite for change is. Think of your risk appetite as green, amber, or red – going for it, sitting on the fence, or going to protection mode. What’s the attitude you’re going to take?”

“The next piece is figuring out what the risks are after quotas. What would the impact be? And what’s the likelihood of the impact. One risk is that milk prices drop. Rather than getting, for example, 30c a litre, imagine getting 20. Imagine what the impact of that hypothetical number would be.

“If it’s costing 24cent to make a litre of milk – grain, silage, rental, vet costs – if it costs that much and you’re making 30, you’re making six. If it drops to 20, you’re losing four.

“Then you have to consider what the likelihood is. To a certain extent it’s a guessing game. The tell-tale signs are that some companies are buying forward from their dairy suppliers and are guaranteeing fixed prices for a percentage of their milk. What’s the motivation? 1- Trying to tie in their suppliers for the future. 2 – Giving price support to their farmers in order to give them a soft landing. There’s a lot of talk about soft landings in this area.

“’Soft landing’ is a language we use to tell ourselves that it mightn’t be that bad,” warns Cawley. “It’s not based on anything! It’s just an opinion. Soft landing on milk prices is going to happen only if government control prices over a set period of time. Otherwise it’s just finger-crossing. If dairy farms across Europe kick up supply, rules of supply and demand will kick in.”

Cawley compares the potential dairy boom to Ireland’s recent property boom and bust.

“So many businesses have grown because money was thrown at them,” he says. “Someone giving you money shouldn’t be a licence to spend the money, especially if you can’t figure out how to make money out of it. Exhibit A would be property bought in Bulgaria for 45k when locals were buying them for 15. It doesn’t make good sense just because it’s cheaper than Irish property at the time.

“In summary the thrust of what I’ll say is that conceptually lifting quotas is a great idea. It’s worked in New Zealand. We know as a business concept it works and milk as a product is in high demand. Are you going to approach this new phase in a planned way or are you going to go with the flow? Those who plan have a much better chance of being survivors.”

For information on the event, visit Dairy Ireland’s website.

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