Milk price rise but costs spiral on dairy farms

The facts of the input price increase at farm level were laid bare at the Teagasc National Dairy conferences this week in Cork and Mullingar. The cost of milk production has spiralled in recent years. Dairy farmers are fortunate international milk markets and farmgate prices have followed. While Teagasc chair Liam Herlihy opened the Cork conference suggesting he had never seen a more profitable year in dairy farming, when you crunch the numbers the marginal increase in profit is much smaller than some expect.

Milk price gets the limelight and makes all the headlines when it is high. The focus at farm level often then goes off cost management and typically costs of production increase. At the conference, Teagasc adviser Adrian O’Callaghan outlined what unfolded in 2022. He said Teagasc data shows the cost of keeping a milking cow in 2022 has risen from €1,656 to €2,218 per cow, a 33% increase. This is taking the actual costs for 2022, adjusting for item price increases, and projecting forward to the end of the year. If we include a charge for owned labour and land, that’s another €500 per cow.

The same will hold true for Northern Ireland where feed is a bigger cost and is up over 50% in 2022. The Teagasc adviser suggested costs in 2023 will increase further towards €2,300 per cow as inflation bites.

So how does this cost of €2,200 per cow (or €2,700 per cow when we include a value on own labour) compare when we look at the receipts for the average farm milking 100 cows producing 500,000 litres in 2022? Our milk league data shows the average farm will yield close to €2,820/cow in milk receipts (€282,000 for 100 cows). This is based on milk price at national average solids and an assumption on November and December milk price. In summary, it means the average cow left a margin of €600 in 2022 to pay for owned labour, tax and loan returns.

Milk price

If Teagasc is suggesting costs will increase further in line with inflation in 2023, can we assume the same milk price in 2023 that we had in 2022? Dairygold CEO Conor Galvin wouldn’t be drawn on 2023 milk prices in Cork. He said processing costs, like farm costs, had increased significantly but that demand for dairy is good.

Prices need to stay high or farmer margin will be significantly eroded given the cost inflation

at farm level

He said milk prices were still 10c/l ahead of long-term average milk prices and the industry should attempt to keep them there. When we look at the farm cost side, we can see that prices need to stay high or farmer margin will be significantly eroded given the cost inflation at farm level.

What we do know is market indications suggest milk price will soften in 2023. While farmgate milk price hasn’t fallen yet because of the lag effect and forward contracts, commodity markets have. However, a lot can happen before Irish farmers hit the spring flush of milk. New Zealand is at peak milk supply right now and is down 3%. China could come back into the market in a big way if COVID-19 restrictions were relaxed and demand could increase further.

Facts

But that’s all ahead of us. Let’s deal with the facts and what we can control. Costs at farm level have spiralled. On average, they are up 33%. This could be 50% if drought affected the farm. Any milk price drop will mean margins tighten further on high-cost farms.

Galvin outlined another plan by Dairygold to tackle water quality at farm level. A new team of Dairygold water quality advisers will be established and will visit farms individually.

The same way farmers are investing, the processing companies are investing. The intention is positive but costs and resource allocation need to be watched at processing level also.

We need to avoid duplication – we already have teams of people going up farm lanes on water quality. We have joint initiatives like the Agricultural Sustainability Support and Advisory Programme and water catchment programmes, visits from Teagasc and private advisers, inspections from the Department, local county councils, fisheries and environmental protection agencies to name a few.

While accepting water quality management and monitoring is warranted, we don’t need white vans following each other up farm lanes undoing any competitive positive environmental advantage Irish dairy farming inherently has.

This week, we follow up on last week’s final Food Vision Beef report that was sent to Minister McConalogue. Any agreed Food Vision report will involve sourcing money for an exit or reduction scheme that will suit some beef and dairy farmers.

But how much money and where will it come from? The €1,350/head “income foregone” figure mentioned in the beef report won’t be enough to entice suckler farmers to exit. A significant lift is needed for it to amount to a net compensation figure per cow for exiting suckling, especially if the land is of limited use to others. The Irish Farmers Journal hopes the farm organisation are having productive talks directly with the minister.

Climate Advisory Council chair Marie Donnelly suggested last Friday that other sectors such as transport and industry are not meeting targeted emissions reductions.

So the timing of any deal is crucial. Why? At one level you would expect there won’t be a suckler or dairy herd sold until the compensation deal is agreed, so normal reduction patterns will halt.

Secondly, other sectors will be clamouring for any funds still available, be it from the carbon tax pot or the Brexit Adjustment Reserve. Farming could be left behind.

Thirdly, as Donnelly pointed out, there is no benefit, environmentally or financially in delaying any change, because it will just get rolled into an even higher emissions reduction budget next time around.

Carbon leakage risks and incorrect methane measures have been included in both reports as clear warnings to Government.

Farmers can be tempted by tax-free premiums and promises of high returns but Gerald Potterton’s sobering experience on his forestry planting is a practical, timely reminder piece as many contemplate planting trees.

It also reminds us that there is a skill and a knowledge requirement that farmers need before attempting new enterprises, whether that is forestry or organics.

While it might look rosy on the outside and leaving aside any ideological beliefs of what’s right or wrong, there is a trade and a skill at the heart of farming whether that is growing oats, trees, sheep or cattle.

Our long-standing friend, expert, specialist, grower and Tillage Editor Andy Doyle is stepping back from the Irish Farmers Journal on 31 December 2022.

Andy joined the tillage industry in 1978 and subsequently joined the Irish Farmers Journal team in 1990. After 33 years of dedicated service and advice, Andy deserves a break.

I doubt if he will ever retire from the sector that he has dedicated his working life to, but, Margaret, his wider family and Naas hurling might see more of him from now on as he steps back.

We wish him the best in retirement and wish Siobhán Walsh the best also as she steps into the tillage editor role.

The report on the gathering of the Protein-i grouping certainly raised an eyebrow for me when I read the page.

On enquiring, I’m told Ireland probably has no business getting involved in growing crops for the large-scale sliced bread market. Our wheat lacks the quality, spec and competitive advantage. However, I’m told there is potential for making more brown bread alongside the excellent artisan biscuits and pizza bases our wheat is already used for.

Hopefully, the grouping can follow up and put one or two actions in place to innovate and add value to Irish wheat.