Faced with falling milk prices, some dairy farmers in Luxembourg have proposed a drastic course of action which at first glance would appear to be at odds with everything they believe in.

Farmers in Luxembourg have suggested a “voluntary reduction” in their milk production in order to manage their costs but only if there is a necessary compensation package in place.

The reason why they may pursue this course of action is being driven by concerns that Irish farmers can relate to all too well.

Milk prices are falling across Europe and as research from Rabobank recently highlighted, “a little more milk and a little less demand” have resulted in weaker commodity prices in quarter one of this year.

European milk prices, according to the latest Rabobank research, are in the middle of a “large price correction”.

But what does this means for farmers, whether they are located in Ireland or Luxembourg?

According to Rabobank, lower milk prices and a tightening of farm level margins are looming on the horizon.

The Irish Business and Employers Confederation’s (Ibec’s) Dairy Industry Ireland (DII) – the industry group which represents the interests of Ireland’s primary and secondary dairy processors – claims that the sector contributes more than €16 billion “to every parish and community across the island” and supports in the region of 85,000 jobs.

Milk price cuts

DII has estimated that more than 11 billion litres of milk are supplied by around 20,000 family farms, with the vast majority of these farms heavily engaged with co-ops.

But many of these farm families are growing increasingly concerned following a recent round of cuts to farmgate milk prices by co-ops.

Farm organisations have heavily criticised the farmgate milk price cuts with the Irish Farmers’ Association (IFA) and the Irish Creamery Milk Suppliers’ Association (ICMSA) both warning that margins for dairy farmers will “be completely wiped out” if there is a further round of price cuts for March milk.

If prices fall again, one of the key challenges for dairy farmers, according to farm organisations, will be the “costs per litre” equation. They have stressed that without “sustainable” milk prices the balance will be tipped too far towards input costs which will erode the margins that farmers need to stay in business.

Economic modelling previously carried out for DII suggests that if there were to be any reduction in milk production it would have a significant knock-on effect for the wider Irish economy.

For example, if milk production were to fall in Ireland to 7.8 billion litres, this could potentially mean that a processor’s annual revenue could fall by 6%.

This reduction in production could in turn, according to DII, translate to a drop of potentially €195 million in payments to farmers.

According to the modelling carried out for DII, the impact of the reduction in milk production could potentially, in this particular scenario, take €70 million in wages out of the Irish economy and put a further 3,094 jobs under serious threat.

Dairy farmers

The European Milk Board (EMB), which lobbies for milk producers in Europe, believes a “surplus of volumes on the market, falling producer prices and a far too low producer income” are key challenges for dairy farmers, not just in Ireland, but across Europe at this time.

EMB president Kjartan Poulsen said dairy producers across Europe are witnessing a drop in prices which is “threatening their farms”.

Poulsen believes the sector needs “strong, horizontal producer organisations that each negotiate with dairies”.

According to the EMB dairy farmers also need to increase their “impact and negotiating power”.

It has warned that several EMB member organisations have already organised protests in their home countries, including Lithuania and Germany, to highlight the crisis in the dairy sector.

It is now calling on the European Commission to “analyse trends on the market and take appropriate measures” – one of which the EMB has said could include “a reduction in volumes”.