A year ago, COVID-19 was beginning to grip global markets. As much of the world went into lockdown, oil markets were first to react. This week last year, oil recorded the largest one-day fall in over 30 years. Despite going to just over $30 a barrel, the weeks ahead would see further downward pressure.
With the foodservice market boarded up overnight, dairy markets shuddered. Within days, pictures of US farmers emptying tankers of fresh milk on to farmland emerged. In Europe, there were calls for the European Commission to stand ready with market support measures such as an Aid to Private Storage (APS) scheme.
Twelve months on and while the fallout from COVID-19 continues, the global dairy market outlook is considerably more positive. So, what has changed? Short-term strong retail sales, combined with a COVID-19-induced resurgence in home baking and cooking is underpinning demand for butter, cheese and cream. Demand for powders is also strong, boosted in Europe by higher confectionary sales and globally by strong demand from north and southeast Asia.
At the same time there is evidence that production is being constrained. With around 80% of world milk produced from grain-fed diets, the recent spike in the commodity markets is having an impact on EU and US production. Ornua figures show that after 18 months of growth, EU production contracted at the start of the year. Supply in France and Germany was down 2-3% year-on-year while growth in the UK has slowed. In the US, growth rates have been well below what was forecast.
Markets have already responded to the positive supply and demand balance with Global Dairy Trade (GDT) auction prices up 35% since mid-November. Meanwhile, we see Fonterra, with preferential access to the China, returning a milk price on par with Irish co-ops.
This, combined with the announcement that the US is to suspend tariffs on EU butter imports, is fuelling expectations of a significant upward and sustained correction in the Irish milk price as co-ops boards meet in the days ahead.
As Jack Kennedy points out this week, the US tariff on EU butter was effectively a tax on Ireland, accounting for 90% of total EU butter exports to the US. Having passed the cost of the tariff on to the market, the test for Ornua will be striking a balance between protecting the added value and securing growth in the market. The challenge is made all the more complex by the presence of an Irish competitor discounting in the market.
Unlike beef production, increased regulations are being applied to the dairy industry globally
Returning to milk price outlook, there is strong justification for co-op boards to return a significant price increase to farmers and maintain strong market returns in the months ahead.
Looking beyond the short term, it is worth asking to what extent high prices will see markets correct and over what period? Farmers will be well aware that traditionally a sustained period of high global prices has fuelled increased production – the result of which pushes the supply and demand pendulum back in favour of the market.
However, unlike previously when land was converted in New Zealand and cow numbers increased in the EU and US, the capacity to quickly drive up production has changed. Why? Largely due to an increase in environmental regulations – in terms of gaseous emissions and water quality – and higher focus on welfare standards in the US. Combined, these regulations are seeing production plateau in New Zealand, the ability to increase cow numbers in Germany and France constrained and the future mushrooming of large intensive feedlot systems in the US restricted.
Unlike in beef production, the fact that increased regulations are being applied to the dairy industry globally offers the opportunity for the cost of compliance to be reflected in market prices by positively affecting the global supply and demand balance.
However, if Irish farmers are to capitalise, a distinction must be made between growing a relatively lowly stocked grass-based family farm compared to much higher input-dependent models – whether that input is intensive water irrigation-driven models like many US and New Zealand farms or feed inputs like many of the intensive feedlots systems as prevalent in the EU and the US.
The impact of failing to acknowledge this distinction is, as Jack Kennedy outlines, starting to have consequences. Considerations by the board of Glanbia to restrict peak milk production in the face of anti-livestock motivated planning objections to the development of a cheese manufacturing facility represents a serious blow to the entire dairy industry. The development of policy around the issue requires careful consideration, especially in relation to any move to discount milk price – the consequences of which could be felt by all farmers.
The disclosure by Grant Thornton this week that the beef industry spends 80% of its total revenue on raw material purchases is to be welcomed as an important first step on the road to transparency.
The update to the Beef Market Taskforce confirms that meat processing is a relatively low-margin business. Factories’ revenue from sales amounts to €2.9bn with the purchase of cattle their largest cost at €2.2bn.
It is a welcome and overdue insight for farmers on where some of the value is added to the animal but there is a long road ahead if we are to establish full transparency beyond the farm gate.
The major Irish factory groups all have complex ownership structures. If an ombudsman is to be able to untangle this structure while bringing in a level of transparency on wholesale pricing plus stock and sales levels, they will – as the IFA has highlighted – require far-reaching powers.
But if it can work in the US with some of the largest meat processors in the world, there is no reason it shouldn’t work in Ireland.
The Grant Thornton report also shows that Irish beef factories are achieving competitive prices in the market despite being off the pace currently. This suggests that the value of Irish beef is the best that it can be, which is a major concern. There is little comfort in the Irish composite price of €3.56/kg in 2020 compared with the export price of €3.56/kg when Teagasc indicates that farmers need €4.50/kg.
The figures once again expose the consequences of reducing direct CAP supports to the beef sector. Recent reforms have seen support to intensive producers reduced by the equivalent of €1 for every kilo of beef sold off the farm.
It is important that farmers accurately ascertain the value of any investment to their individual farm business.
In this week's edition, we report on the strong land rental market. There are a number of reasons why some individuals can justify paying rental prices above €300 per acre. Location, enterprise and impact on overall business are all factors. But for most economic viability at these prices will be challenged. Similarly this week, Declan Marren explains why he has decided to suspend purchasing calves for the Thrive demonstration farm. With prices running €40 to €50 per head above last year, he calculates that in order to generate a margin of €100 per head, a beef price of €4.35 to €4.55kg will be required.
In suckling, the importance of beef price and payments to profitability rightly receives a lot of attention. But animal performance and production costs are also important. The focus of our various technical programmes has been to demonstrate the impact of improved technical efficiency on profitability. Tonight (Thursday), our livestock team will hold a webinar detailing the results from our NI BETTER farm programme. Similar to our joint programme with Teagasc, the demonstration farms have achieved significant results inside the farm gate with gross margins increasing from £602 (€691) in 2016 to £1,003 (€1,153) in 2020. See this week's management notes.
Also this week, Matt Dempsey examines the positive attributes of meat and dairy. Unfortunately much of the research data he highlights is ignored in a dietary debate that is becoming increasingly polarised. There is strong nutritional evidence not just to defend but promote meat and dairy in the diet. It needs to be centre stage.