Last year was a tough year for dairy farmers, although the scope to increase production and dilute fixed costs provided some protection from the collapse in milk price. Teagasc figures show production costs for the year to have fallen 7% to 20.9c/l. The result is the average dairy farmer is forecast to generate a net margin of €795/ha before own labour cost is included. Despite the challenges, the sector still outperformed the beef, sheep and tillage sectors by a considerable margin.

From a market perspective, 2016 was a year of two halves. The first half was shaped by increased production and lower prices. The pressure on margins in the second half of the year saw production drop across Europe and especially New Zealand. Lower prices and lower supply reignited demand, and this environment has led to the increased confidence for 2017.

At the Positive Farmers Conference in Cork on Wednesday, Ornua CEO Kevin Lane forecast a base price in the region of 30c/l excluding VAT. If delivered, this will leave efficient farmers with a better margin than 2016. With early season trades indicating fertiliser back in the region of €80/t, there should be scope to reduce production costs below the Teagasc 2016 figures – assuming favourable grass growing conditions.

However, the future is by no means certain. Sustained demand for increased volumes at higher prices is far from locked in. Yes, China is becoming increasingly active in the market, but the ability of many of the new markets developed in response to the Russian ban have yet to be tested at higher prices.

There is also the question of how quickly global production will respond to higher prices. Some Fonterra figures point to a 7% drop in New Zealand production but there is the growing belief that this figure is exaggerated and maybe reflects some drop in the processor’s share of the market rather than national production trends, thought to be closer to a 3% decline. At EU level, the picture on production levels and volume of product on the market is equally unclear. The European Commission will be a cautious seller, but nevertheless a seller, having purchased 350,000t of powder in 2016. It is perhaps worth questioning the extent to which intervention serves Irish and EU dairy farmers in the long run.

Meanwhile, on the production side, indications are that herd rebuilding is taking place at a faster pace than envisaged, particularly in the UK. The damage done to the sector in the wake of low prices appears to have been exaggerated.

All of this takes place against the backdrop of Brexit and political uncertainty in the US. The potential impact of Trump’s “produce local, buy local and consume local” policy on our second-largest export market for butter cannot be ignored. Along with market nationalisation, there is a risk of increased tariffs and non-tariff barriers that the US can use in a bid to disrupt market access. Of course, in the immediate future the recent increase in the strength of the dollar against the euro is a positive, provided market access is maintained.

Currency volatility is also a symptom of Brexit, but while a major issue for the Irish beef sector, the impact on dairy is less severe. In the UK, domestic dairy prices tend to adjust much quicker to currency fluctuations. Again, the longer-term aim is maintaining market access.

Ultimately, current demand is reflective of lower market prices. For it to be sustained, what farmers need to see is a period of global economic growth and rising oil prices – economic growth to drive demand and rising oil prices to push up production costs associated with intensive dairy systems and drive demand in oil producing regions.

At present, there are no indications that such a scenario is on the horizon. Until then, and despite the more positive tone to the market, there can be no let-up in dairy on costs and efficiencies both at farm and processing level.