Opinion: How do we reduce the risk for dairy farmers?

By Dr. Declan O’Connor, Department of Mathematics, Cork Institute of Technology

We need to strengthen the dairy safety net.

At the moment, it’s impossible to accurately forecast the price Irish dairy farmers will receive for the milk they send to their processors. The price they will receive later this summer is even more uncertain.

Against this highly uncertain background risk-management tools take on added value and importance.

Those who have had the opportunity, and desire, to place some of their milk production into fixed-price contracts have managed some of their (price-related) risk. Farmers who have availed of the ‘MilkFlex’ scheme will also value its risk-management properties in these uncertain times.

‘Managing risk’

However, for many dairy farmers there are too few opportunities to manage their price risk and, ultimately, their income risk.

The EU Commission, and some policy makers, will point to direct payments as a key risk-management tool.

While it cannot be denied that, in years of crisis or poor market returns, these payments provide a valuable lifeline for many farmers, they contain an inherent flaw. The monies that Irish dairy farmers receive this year from these payments will be very similar to the amounts they received last year – an average one – and 2017 (a good year for dairy farm returns).

An ideal risk-management tool should act in a counter-cyclical manner. When prices or incomes drop substantially, these instruments should provide greater assistance. In essence, these tools should provide insurance against adverse conditions or outcomes.

To counteract this weakness, farmers should be allowed to place some of their direct payments into an interest-bearing, deposit-type account in good years – with a view to drawing down these monies in years of poor market returns or years in which we have crises.

This would allow farmers to smoothen out their incomes and tax liabilities over time. This, in turn, would allow more effective planning and reduce any risk of insolvency.

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The need for such a ‘farm deposit account’ has been highlighted in recent budget submissions by farmer representative bodies and by ICOS (Irish Co-operative Organisation Society). The use of a portion of direct payments to ‘seed’ such an account might help to counter any national arguments that such deposit accounts would bestow undue advantages to the farm sector.

It’s a proposal that could be implemented EU-wide. It’s one that could benefit all farmers. It would also allow those farmers who use it the true benefit of a risk-management tool.