The fickleness of world markets – and especially agricultural commodities – has become clearly evident over the last number of days and weeks.

We have Irish grain farmers cutting wheat and barley in full knowledge that the profit margin they will reap is minimal to non-existent at current prices. We have Irish dairy farmers producing milk at or below the cost of production. Both sets of farmers will in the main stay in the game as they are in the business for the long haul. The investment required to get into both enterprises is significant.

It is important to understand that commodity cycles are a fact of life. We know it is how large agri-trading companies make money. When price falls far enough, supply declines, demand outpaces supply, prices rise and the cycle continues.

Most experts suggest that we are in the low trough of the grain price cycle and the only way is up. These low prices are driving US milk supply. Grain price this week is around $4/bushel. However, as farmers are only too aware, we are only ever one drought away in one of the major grain-producing nations from a change in market sentiment.

On the dairy side, the demand shocks are causing the ripples. First we had China seemingly purchasing beyond their needs in 2013. Then, when the Chinese buying power cooled off, the price of oil collapsed from $110 to $40 per barrel. Around the same time, the Russians closed off a potentially good market for Europeans for dairy commodities.

It seems like the perfect storm for commodities but these two words were how some described the 2009 dairy crisis. There are some significant differences this time around.

In 2009, the US milk price was less than $10 for Class III milk and US dairy farmers were subsidised to cull cows. Today, US price is not nearly as low – circa $18 (36c/l) – and there is no increased culling. The US also now has a margin protection programme where farmers can insure their margin over feed against drops in milk price. More than half of US farmers have signed up to this.

So in the past, when US milk price dropped, cows were culled, supply dropped and price increased. Is that likely to happen now in the US? Perhaps not. However, the dairy industry is expecting New Zealand to sharply reduce milk supply and this seems to be the trigger on the supply side.

Last week we had the chair and chief executive of Fonterra addressing New Zealand farmers, asking them to cut back on supply and stop feeding supplements because milk price was so low. I do expect less milk will be produced in New Zealand. So, if we surmise that the “perfect storm” is not a once-in-a-lifetime occurrence, what can we do about it? The best businesses in the global grain-trading industry have a 10-year vision on risk. They build models and hedge bets on various events and the better the model, the better the accuracy. Can small farm businesses do the same?

It’s all very well to know about supply and demand, and how large agri firms stay in business, but we simply must protect the margin for the primary producer or else everyone further up the chain is redundant. How that evolves will be crucial to the primary producer.

Maybe we need to rethink and further develop options like the fixed milk pricing schemes that were first available in Glanbia and subsequently started in Aurivo, Carbery and North Cork. Yes, they may not beat the market, and there is a cost, but if it is the difference in staying in business or not, then it’s cheap insurance.

When you see the US – which is not as exposed to the global dairy market – with its margin protection programme, it would make you wonder if the rules of supply and demand are about to be rewritten.

The Irish Department of Agriculture should initiate an industry think tank to review new developments and initiate options that protect the primary producer.

Dairying

Dealing with price volatility

For spring-calving dairy farmers having to deal with price volatility, one of the best things they could do is read the article on feeding meal this autumn by the Teagasc researchers on pages 34 to 36. They are suggesting that, given the milk price and meal price ratio, dairy farmers might be better off looking at other options instead of feeding meal to drive milk this autumn. Culling cows not in calf, extending autumn grass, reducing stocking rate and getting the last of the nitrogen out can all have far more impact than the marginal response to feeding extra meal. Do the sums for your own farm in light of current milk prices at less than 25c/l and feed in excess of €200 per tonne.