Irish dairy processors and farmers should be watching what is happening in Britain. As Chris Walkland reports on page 19, hundreds of dairy farmers are set to find themselves out of contract in a market where few processors are recruiting suppliers. With figures at the Oxford Farming Conference showing production costs ranging from 27-39p/l (35-51c/l), the spot market offers little hope for survival, currently returning 15p/l (20c/l). Even the most efficient operators are facing hefty losses with the average contract milk price ranging from 23-27p/l (30-35c/l).

The latest crisis comes 20 years after deregulation of the British dairy industry, when the state’s Milk Marketing Board, which paid the same price to all farmers, was dismantled. Since then, direct producer ownership of processing operations has almost disappeared. Carrying the legacy costs from a once-regulated market, many were simply not fit to compete with streamlined and aggressive new players in the sector. Today, a large part of the processing industry is owned by milk traders and processors from outside of the country.

There is little doubt that, as control slipped from farmers, retailer influence gained traction as deregulation allowed them to sell milk as a loss leader. Today, some British retailers are selling four pints of milk for just 89p (51c/l). It’s a stark change from the premium product that underpinned the ex-farm price and a doorstep delivery service.

So what are the lessons? Firstly, it is clear that a liquid milk market requires some regulation. It cannot operate viably when exposed to market forces – a fact recognised in the US, where in California, the largest producing state, a minimum consumer price based on production and processing costs continues to be set by a commodity board.

With almost 60% of production from British dairy farms consumed as liquid milk, the industry has been heavily affected by deregulation. Some supermarkets have tried to address the problem by setting up contracts under which production costs are tracked and prices paid to producers are adjusted accordingly. Those contracts require level supplies year-round and prices paid are currently well above the general run. However, competition among the retailers is leading to pressure on their dairy product suppliers to reduce prices rapidly.

Farmers need to be clear about producing milk for year-round markets (fresh products and consumption as liquid) versus producing for dairy commodity markets. There has been a lack of leadership in the British sector. The high-input system with the focus on yield as opposed to solids has flourished, despite the fact that 40% of production is processed into commodities. This has been facilitated by the lack of independent research with the direction of the industry steered by those with a commercial agenda.

When comparing the British and Irish sectors, the critical role of Teagasc in shaping a profitable industry is clear. We must ensure its independence is protected.

In the Irish context, we should look at the abolition of quotas as a form of deregulation. Clearly we are entering into a more open market. Thankfully, our focus on the grass-based system allows us compete globally. However, as farmer-owned co-ops in Britain have learned, there is no room for complacency. No one wants to see the First Milk co-op scenario play out here. Competition among Irish processors for the milk pool has intensified in advance of quotas being abolished. That has been going on for years in NI and several processors have closed down, with big PLCs withdrawing and small co-ops unable to survive.

It will be those that can deliver a leading price to farmers through efficiencies and premiumisation that will grow their share of the milk pool. Every co-op board has a duty to ensure its business plan is robust to deliver for the membership. They must lead from the front.

For farmers, the lesson is that supply contracts offer a level of protection when producing a perishable product. We have seen in Britain how quickly the market can shift and the consequences for those exposed. Supply contracts for three to five years will play an important role as our market becomes more open. However, they won’t be worth the paper they’re written on if the management of the milk processing business is not up to scratch or if the company balance sheet becomes too weak.