It will be little comfort to Irish dairy farmers to know that their global counterparts are feeling the same, if not more, pain from the collapse in market prices.

In the last week, many Irish co-ops have further reduced their prices paid to farmers.

Each announcement of lower payments comes with a similar refrain: “weak markets”, “outlook remains challenging”, and “no sign of a near-term improvement in demand”.

Ornua’s PPI for July dropped further, with the reduction blamed on “weak demand throughout the month.”

This is all a big change from earlier this year when prices were rapidly falling, but the consensus suggested that there would be a short-sharp correction before there was a recovery in the second half of the year.

Now that we’re in that second half, both the outlook and prices have got considerably worse.

Looking back on the logic behind the expectation of improving prices, it was based on two factors. Firstly, the lower prices that were already in play in the early months of this year would cause a reduction in production.

That reduced production would help balance global supply and demand, putting a floor under prices.

Secondly, there was an expectation that global demand – particularly from China – would recover as their country’s economy recovered from its property-related downturn.

Perfect storm

Unfortunately, neither the drop in supply nor the improvement in China’s economy have come to pass.

On the supply side, we can see that production actually increased slightly in Europe, New Zealand and the US in the first six months of this year, compared to the same period in 2022 (see Figures 1 and 2).

This means that, if anything, the supply-demand imbalance has grown in the first half of the year – the opposite of what was expected.

On the demand side, the situation in China has deteriorated further as 2023 has progressed. Rather than having a short retrenchment of the economy, China’s growth seems to have gone into reverse.

Latest indications show that consumer prices have fallen, with July’s inflation figure at minus 0.3% – which points to a severe drop in consumer spending.

Adding to the market dislocation are China’s own ambitions to grow its dairy sector. Official data from the National Bureau of Statistics in Beijing said that domestic milk production rose 8.5% in the first quarter of this year.

The US Department of Agriculture suggests that China’s output increase for 2023 may be closer to 4%. Even using that lower number, that would give an annual increase of 1.6m tonnes, or about a sixth of Ireland’s annual production.

Relentless squeeze

The problem of falling milk prices has been made worse by the continued high input costs for dairy farmers.

While feed, fuel and fertiliser prices have fallen back considerably from the highs of 2022, they are still a long way from returning to their long-term averages.

In the last few weeks, the price of diesel has taken another move higher and there is no relief in sight, as a mixture of Irish Government policy and OPEC production curtailments mean fuel costs will remain high well into the second half of the year.

In the wake of the Russian invasion of Ukraine, we all learned the connection between the price of gas and the price and availability of fertiliser.

While the peak spreading season is well behind us by now, the recent jumps in the price of gas on international markets mean that the price of fertiliser is likely to remain high for the medium term.

With the war in Ukraine not expected to end anytime soon, the market for gas will remain tight, with traders pushing prices higher on any signs of fresh supply restrictions.

The benchmark European contract jumped almost 50% last week on fears that a union strike at a refinery in Australia would reduce global supply of liquefied natural gas (LNG).

While such short-term spikes may pass, they do mean the overall cost of gas is higher than it otherwise would be.

Ukraine also continues to dominate the feed situation, with Russia’s attacks on both sea and river export routes for the country’s production adding another layer of uncertainty for global benchmark prices.

Markets levels did spike on the attacks, but have since fallen back close to the lows of the year. Those lows, however, are around 20% higher than the longer-term level.

Balance sheet waiting game

Every dairy farmer in the world is facing the same mixture of high costs and low milk prices. The expectation in the earlier part of the year was that milk producers with the highest costs of production would reduce their milk output and costs by reducing feed, allowing the supply-demand picture to come back into equilibrium.

To understand why this hasn’t happened yet, we just have to look back to last year, where high milk prices allowed farmers around the world to make large profits.

This means that producers came into this downturn in, generally, a very healthy financial position. Farmers with strong balance sheets are able to tolerate trading losses for much longer than they would have without last year’s bumper profits.

This also means that dairy farmers around the world are basically engaged in the expensive game of chicken with each other, where everyone keeps producing, hoping the cost pressure gets too much for somebody else, somewhere else.

Eventually there will be ‘winners’, as enough production is shut down to push supply levels below where demand is, and milk prices will finally recover.


It is difficult to see where the milk price recovery can come from in the short to medium term. The main global demand driver, China, is both on the point of falling into a recession, and ramping up domestic production.

None of the major producers have started to reduce output.

When they announced their second reduction in forecast farmgate milk prices for the 2023/24 season in as many weeks, New Zealand’s Fonterra Co-operative Group said that demand is now not likely to grow until much later in 2024.

Even then, as CEO Miles Hurrell said, the pace of that demand increase is now likely to be more subdued than initially expected. Fonterra said it is “doing all it can to support its farmers” during this “challenging time”.

In Ireland, we have seen a round of milk price cuts in the July releases from processors, with nothing in any of the accompanying statements suggesting this month’s reductions will be the last.

For the co-ops, there is only so much they can do to help their suppliers. They did make profits in 2022, but they were generally modest, as they were quick to pass the higher prices on to their suppliers.

There is no war-chest among the processors to help farmers through this price slump, and any co-op that did try to help risks the viability of their own business.

With the peak of Irish milk supply for the year already well behind us, the thing to keep an eye on is how dairy production goes in the southern hemisphere as their output reaches its annual peak over the coming months.

If there is no major fallback there, then next year could be significantly more difficult for Irish dairy farmers.