24 August 2012

4 minute read

Europe

“This will make it possible for co-ops to do what farmers need in the face of falling incomes, soaring production costs and lousy summer weather; increase milk prices back to profitable levels over the coming months.”

Mr Kiersey said: “Having held their July milk prices, there are 5 very good reasons why co-op boards now need to start looking in earnest at ways to increase producer milk prices back to profitable levels as soon as possible."

The massive hike in input prices

The revised Teagasc 2012 income outlook published last month showed that dairy farmers could lose 30 per cent of their income this year, due to a combination of price cuts (up to 6c/l since late spring), a 10 per cent increase in fixed costs and a 25 per cent increase in feed costs arising from price hikes and increased usage. This means that 2012 dairy margins could fall substantially below those for 2010.

The weather-related pressures on feed costs now and for the winter

Feed ingredient price hikes have combined with weather related increases in bought in feed usage to erode farm incomes, with many cows now back indoors. A July Teagasc survey showed that over 56 per cent of dairy farmers have been eating into their winter silage stores, while nearly 40 per cent will have inadequate quantities (to say nothing of quality) of winter fodder harvested during the worst summer in 30 years. Farmers will face a bleak winter unless milk price increases help rebalance on-farm profitability.

The real recovery in dairy markets This is not just about supporting farmers in difficult weather and cost circumstances, however. Facts are that markets have bottomed out at the end of May, and international commodity prices are rising in the face of rapidly falling milk supply growth – and this will enable co-ops to pay higher milk prices. In the last three months, European spot quotes for SMP have increased by 25 per cent, butter by 15 per cent, whole milk powder by 10% and whey powder by 26 per cent. The SMP/butter combination now returns gross (before processing costs) around 34c/l, 6c/litre more than it did at the end of May, and whole milk powder returns 4c/l more at around 33c/l.

Globally, the Fonterra average auction price, has increased by 3.5 per cent and 7.8 per cent this month. On 15th August, all product prices rose massively, including butteroil (+14 per cent), cheddar (+8.8 per cent), milk protein concentrate (+15.4 per cent), SMP (+7.3 per cent) and WMP (+seven per cent). Fears of relative scarcity for coming months linked to the US drought has led to a fundamental change in buyers’ sentiment, who are now willing to pay more to secure product.

The impact of the weak Euro on our export revenue

The Euro crisis has had one positive: its impact on the competitiveness of our exports. In the last year alone, the Euro has weakened by 13 per cent against the US$, and by nine per cent against Sterling.

On butter/SMP exported to world markets in US$, this is the equivalent of a 3.7c/l increase in gross returns, while on cheddar cheese, the Sterling value is now worth 3.4c/l more.

The need to sustain farmer confidence pre-2015 to plan for post- 2015 developments

All co-ops’ post 2015 development plans both rely heavily on financial contributions by farmers, and/or delivery of extra milk to fill capacity and generate extra sales revenue. However, farmers will only expand and be able to make financial contributions where necessary if they have confidence in their future, and this confidence is entirely determined by their profitability. To secure the post 2015 plans, co-ops must prioritise farmer profitability pre-2015.

“There is no doubt that co-ops have supported milk prices in the face of weakening markets in the first half of 2012. This was absolutely crucial in light of the savage impact on farmers’ incomes of unprecedented weather and cost developments. However, markets are now recovering to levels which will make it possible for co-ops to revise upwards their producer milk prices. While Irish export prices may take a little time to catch up with European spot quotes, the trends are clear and solid. It is vital that co-ops start budgeting and planning now for the earliest possible milk price increases,” Mr Kiersey concluded.