The dairy industry faces “huge challenges” and concerns will surface if milk prices move closer to the “cost of production,” the chief executive of Dairygold has warned.
According to Conor Galvin, the dairy industry is currently going through a “period of significant uncertainty” and is operating in “volatile conditions”.
The Mitchelstown-headquartered Dairygold co-op, which this week reported a record turnover of €1.65 billion for 2022, paid a “historically” high milk price of 62.4c/L to farmers – based on the average constituents received, including bonuses, plus VAT – in 2022.
But Galvin has warned that much weaker market conditions in 2023 have already impacted on prices and that there has been a change in the “dynamic” between the markets and the cost of producing milk.
“It is a challenge and it’s a challenge because 2022 was a year of unprecedented market returns, we operate in the commodity environment and sometimes high prices have the effect of driving a different dynamic.
“Last year it was driven by the advantage of demand or supply and that has now changed. There’s certainly an increase in the supply of milk in the last six months – you can see that from major producing regions from the volumes being up but demands are challenged because of pricing,” he said.
The Dairygold chief executive said that current supply “is probably exceeding demand for a lot of products”.
“If you look at the flagship products versus the 2022 highs the commodity markets now are down more than 30% and that’s now starting to reflect on milk price and that is a challenge.
“I think it’s a challenge we have to face head on but the role of the co-op is to deliver the maximum value back to the milk supplier from what we can achieve in market returns,” Galvin added.
He said the co-op anticipates that 2023 will deliver a “positive milk margin” but he said this will be against a very different backdrop compared to the environment last year.
“We had unprecedented margins in 2022 because of the way that that that the markets delivered for dairy ingredients but I think it’s something we’ll have to keep under review for the year and make sure that you we’re maximizing value on the market and we’re also where possible managing the cost of inputs to our milk suppliers.
“We are in a situation where the cost of producing milk and also the cost of processing milk is higher than the five-year average and whether that’s in farm inputs or it’s in the energy that it costs to produce milk and process it, that will have to be taken into account in the price that we can then achieve for the litre of milk into the market,” Galvin warned.
Last month Dairygold followed other processors by confirming a cut in the February quoted milk price. It reduced the price by 6c/L to to 46c/L.
The co-op’s chief executive acknowledges that if milk prices were to cross a certain threshold in Ireland it could create a very difficult scenario for some farm families.
“I would be concerned if we get close to the cost of production and we’re looking at the Teagasc figures at the moment and the Teagasc figures would suggest the cost of production is somewhere between 35-36c/L which is significantly higher than it was two years ago.
“There’s a point below that which that none of us want to go because we want to make sure that our members have an income off their farms and we need to keep that number under review and make sure that we manage it where we can and in the meantime deliver the highest milk price possible so we can drive on farm margin,” Galvin added