Major report seeks market supports to stem ‘devastating’ milk price cuts

Irish dairy farmers may face significant milk price reductions of between 10% and 20%, unless “vital” EU market measures are implemented, a major new report has revealed.

The report warns that this scenario would have devastating impacts on farmer profitability and the wider rural economy.

The report, ‘The Potential Impact of Covid-19 on the Irish Dairy Industry’ was commissioned by Dairy Industry Ireland (DII) and conducted by business advisory firm EY, has been submitted to government and the European Commission for their consideration.

Key report findings

Of the key findings the detailed report finds that, as a matter of urgency, measures to support the dairy market in the short and medium term are needed to protect farming, dairy processing and the overall rural economy.

Currently the sector supports approximately 46,000 people in direct and indirect employment across Ireland.

Findings of the report:
  • The dairy sector is one of the largest indigenous contributors to the Irish economy, and was anticipated, pre COVID-19, to be worth €11.3 billion in 2020;
  • Output from the industry could fall by as much as €2.3 billion in value as a result of falling demand and potential losses in processing capacity due to COVID-19;
  • A 10% to 20% fall in milk price due to a fall in demand and market pressures would result in a reduction in annual payments to farmers of up to €840 million;
  • Additional working capital of up to €550 million could be required by the industry to cater for increased stockholding and other requirements;
  • The industry is forecasting milk production of 8.3 billion litres in 2020;
  • Processing capacity is tight over the peak milk production season. Infection among just a small number of circa. 150 key workers in the industry could lead to major processing disruption. Priority testing is required to allow key technical employees to return to work as quickly as possible;
  • Irish milk processors have been proactive in their approach to putting in place measures to best minimise COVID-19 impacts. Key measures include: COVID-19 response teams established by all processors; specific actions to protect employee health; investment in remote working technology; and enhanced industry co-operation;
  • The overall economic impact of a 20% fall in revenue would be a €2.3 billion output reduction and a loss of more than 10,700 full-time equivalent jobs.

The spread of Covid-19 has had a dramatic impact on international dairy markets, the report notes.

In particular, the food-service sector has been adversely affected with restaurants, airlines and hotels shut across Europe.

Milk destined for food-service customers is now switching into other production areas such as powders and butter.

This has created a significant oversupply with a severely reduced market demand which, in turn, has depressed the price paid to farmers, the document says.

Supply chains have also been fundamentally disrupted with a critical shortage of shipping and logistical routes to markets currently substantially paralysed across the globe.

Commenting, DII director Conor Mulvihill, said: “The report highlights in stark terms the threat facing the Irish dairy processing industry as well as farmers and the rural economy without national and EU supports.”

Irish dairy ‘engine’

Continuing, the director acknowledged: “The Minister for Agriculture Michael Creed and his team have engaged in trojan work in seeking to activate EU supports to the industry, but this report clearly shows that far more needs to be done to protect the industry at national and EU level.

“Irish dairy is an engine of the rural and the national economy and it is vital that the necessary steps be taken quickly to enable the industry to be in a position to contribute to the national economic reboot when it occurs.”

The report – which found that the dairy sector was anticipated, pre Covid-19, to generate output of €11.3 billion in the Irish economy in 2020 – states that, in order to offset financial losses and supply chain issues, supports through Aids to Private Storage are urgently needed to “address the market imbalance”.

The report also recommended that the Government / EU could help limit the exposures of the companies by underwriting extensions to existing export credit insurance. This is now allowed under EU competition law.

Significant exposure

Irish dairy processors export 92% of all products produced with the EY report finding that Irish dairy has a significant exposure to global markets worst affected by Covid-19.

The report found that 76% of Irish dairy export volumes are exported to countries in the top 15 most affected Covid-19 countries.

Separately, the report highlights the need for an additional €550 million in working capital to assist processors deal with increases in stock and associated storage costs as a result of less product being exported.