The last 12 months have seen Irish farmgate prices fall by almost 50%. It is a development that has taken most dairy farmers by surprise.

All of this begs the question: how did we get into this situation? And, more importantly, how will this scenario unfold over the coming months?

Recent farm survey results indicate that it costs 25c to produce a litre of milk in the Republic of Ireland. This takes account of all variable and fixed costs, but excludes EU support payments. The comparable figure for Northern Ireland is 25p (34.72c).

EU dairy trends

Where the EU is concerned, dairy consultant Mark Voorbergen, a speaker at the recent Teagasc National Dairy Conference, assumes that cash flows will dry up once milk prices fall below the 30c threshold. Thereafter, producers will be forced to actively reduce costs and then milk output.

According to Voorbergen, EU milk output has continued to grow in 2015 on the back of the financial reserves built up on farms during 2102, 2013 and 2014. An additional factor gravitating farmers in the direction of producing more milk was the abolition of EU dairy quotas on March 31 of this year and the opportunity this presented farmers to produce additional milk without the fear of superlevy.

International dairy trends

Recent falls in the Fonterra Global Dairy Trade auction reflect the ongoing weakness of international dairy markets, which has seen both butter and skimmed milk powder intervened.

All Irish dairy processers believe that international milk markets have, or are about to, bottom out. The current intervention support mechanisms, covering butter and skimmed milk powder, support a farmgate milk price of 21c/L: this is 4c/L below the Irish cost of production figure.

There is also a three month, or so, time lag, between dairy market changes being reflected at farm level. And this is why the banks are now predicting that the farmgate milk prices on-offer to Irish milk producers will not cover their full costs of production during the first and – possibly – second quarters of 2016.

Russia and China

Voorbergen believes that the current strength of EU milk output is the key influencing factor, driving down international dairy prices. The other market drivers are the weak import drivers in both China and Russia.

He regards the likelihood of Russia relaxing its current ban on EU food imports as remote. Meanwhile, China is still drawing down from the exceptional stocks of imported milk powder imports, built up in 2013 and 2014. These stocks were significantly enhanced by supplies of local powder, reflecting China’s commitment to enhance the scope of its indigenous dairy sector.

But it’s not all gloom and doom from a markets perspective. For example, US butter prices remain at historic highs on the strength of very good Thanksgiving holiday demand, while the cheese market is steady. Benchmark butter prices in the US reached $6328/ton during the first fortnight of November: this is twice the prevailing world price.

Ireland performing well

There is also evidence to confirm that Irish dairy farmers have been shielded, to some extent, form the ravages of international dairy market changes that have taken effect over the past year or so.

For example, Purchase Price Index has fluctuated by a factor of 10% over the past 12 months. This compares extremely well with the 66% and 55% price swings recorded by the Fonterra and Dutch dairy auctions respectively over the same period.

Ornua Managing Director Joe Collins is quick to point out that the Irish dairy sector has benefitted from the current weak Euro. He also points out that the development of keynote brands, such as Kerrygold are adding value to Ireland’s dairy output and diversifying the country’s export drive.

Despite the current market difficulties, the longer term prospects for milk remain extremely positive.  Analysts point out that the world’s population is set to grow by 50% over the next five decades.

Most of this growth will take place in Africa and South Asia. And while dairy consumption in these regions is not traditionally high, even a small increase at individual level will result in a very significant demand boost in a global context.

Dairy volatility

But market volatility is a factor that has led to the current downturn in milk prices. And it is a challenge that will continue to confront dairy producers and processers during the period ahead.

According to AHDB Dairy in the UK, the milk sector’s response to this must include a detailed analysis of futures markets and hedging. This will be required to gauge what, if anything, is feasible to be of benefit to milk producers.

But this is not as straight forward in dairy as in grain markets because of the perishable nature of milk.

EU dairy aid package

Ireland’s Minister for Agriculture Simon Coveney has confirmed that dairy farmers will receive their EU dairy aid package before the end of the year. It is envisaged that the payments will be made on a flat rate basis with each of the 18,000 dairy farmers in the country receiving approximately €1,350.

There will be an additional €800 top-up for young dairy farmers. Milk producers in Northern Ireland have already received their aid packages. Each payment was based on the recipient farmer’s milk output during the 2014/15 quota year.

To be precise, producers received a contribution of 0.226p/L (€0.322/L) with payments per farm ranging from £600 (€850) to £2750 (€4,000). This approach reflected the view that the greater a farm’s output, the higher the level of compensation that should be offered.

First quarter of 2016

Meanwhile Irish dairy farmers – north and south – must get through the first three to four months of 2016. This is the most expensive time of the year, particularly in the Republic of Ireland, as it coincides with the most intensive meal feeding period on dairy farms.

Co. Armagh-based Dairy Consultant Jason McMinn is very aware of this reality.

He confirms that average milk production costs in Ireland have fallen by 4.25c/L since 2013. For the most part, this reduction can be accounted for by falls in oil and feed prices.

And, given current farmgate price pressures producers must, obviously, make best use of the forages and other feeds they make on their own units.