This is a subscriber-only article
There is no guarantee that continuing to grow the national milk pool will yield a dividend for farmers.
This was one of the key messages to come from the Irish Farmers Journal Dairy Day last Thursday, in association with Bord Bia.
One of the starkest warnings came from Dutch farmer and former director of dairy processing giant FrieslandCampina Harm Holman.
He outlined how a doubling of the Dutch milk pool saw production costs, cow numbers, debt levels and workload all increase at farm level but without any increase in farm profitability.
Aligned to this increase in cow numbers have been serious environmental challenges, which are now effectively curtailing Dutch production.
With all this in mind, it is no surprise that FrieslandCampina recently warned its farmers against continuing to increase production.
Instead, the strategy to maximise farmer returns is focused on adding value to the co-op’s existing 10bn litre milk pool.
Differnce between Dutch and Irish model
There are stark differences between the Dutch and Irish model, both at farm and processing level.
On Irish farms, the focus on costs of production has been much more intense than in the Netherlands, mainly due to restrictions of quota and the sharp focus of research carried out within Teagasc Moorepark.
It is this focus on farm profitability that has allowed the sector fully exploit the opportunity that the abolition of quota presented.
In many instances, the growth in the national milk pool since the abolition of quotas has allowed farmers drive down production costs, mainly due to dilution of fixed costs.
However, we would be foolish to ignore lessons learned by our European and international competitors.
As we continue to grow dairy output, pressure is undoubtedly going to come on our low-cost grass-based model.
Some of this pressure will be as a result of structural changes in the production model as existing farmers move to second units.
The inclusion of full land rent and labour, combined with higher debt and the associated drop in production efficiencies when moving from an owner occupier unit, will push up costs of production by 6-10c/l.
More pressure
Meanwhile, pressure will naturally intensify on farmers, particularly in a high milk price year, to focus on output rather than margin.
Greg Gent, dairy farmer and former Fonterra director, has seen such a scenario play out in New Zealand. His advice to Irish farmers was clear: “The grass system is everything, move away from it at your peril.”
Looking beyond the farm gate, while our focus tends to be very much on the structure of our industry, perhaps it is the ideal juncture to step back and question the strategy.
Ultimately, the ideal structure is determined by the strategy. From the panel of nine co-op chairs at Dairy Day, it was clear that there is no national strategy for how additional milk will be processed in the future.
How to process additional milk
Some co-ops see opportunity in food service while others intend to shift towards ingredients and flavours.
It is a high-risk strategy for farmers to continue to grow output in the absence of a strategy as to how this milk is going to be marketed.
Adding value was certainly the buzz word among the co-op chairs in relation to additional milk coming on stream, but perhaps we should measure the likelihood of success against the level of additional value that has been extracted from the growth we have seen to date.
Ultimately, the success of any added-value strategy needs to be measured against the premium it passes back to farmers in the milk price.
If the strategy is to add value, then clearly this is where the structure of the industry will need to be reviewed.
Also at Dairy Day, Ornua CEO Kevin Lane warned of the challenges of trying to add value in the market where you have multiple processors competing with each other.
Such a scenario lends itself to the destruction of value, rather than its creation.
The first measure of how serious co-ops are regarding adding value should be the extent to which they are prepared to collaborate in the market.
Recent reports would suggest the industry is heading in the opposite direction. Of course, a strategy doesn’t always have to be about added value.
Cost base
Given Ireland’s cost base, there would be a legitimate argument to focus on becoming one of the most efficient commodity suppliers of dairy products.
Such a strategy would require consolidation to drive down processing efficiencies. While price volatility would be more prevalent, a low cost base would deliver business resilience.
Looking beyond the farm gate and the processing sector, another area that needs careful attention is the societal challenges associated with growth.
The New Zealand dairy industry was blind-sided on this issue. We need to ensure we bring society with us on the journey ahead.
Ultimately, there is a great opportunity to further grow the Irish dairy sector – but for it to deliver for farmers, we need to ensure the strategy and subsequently the structures are right.
It is critical that farmers ensure these building blocks are in place ahead of the next wave of expansion.
SHARING OPTIONS: