At the moment it is probably no worse than it was two, five or certainly ten years ago.
Long-term, it is struggling to restructure itself to meet then change in retail and international markets.
Overall the dairy market has been predictably uncertain with prices rising and falling for milk whilst oil, wheat, nitrogen among the many inputs all changing due to supply, demand and currency.
Why are milk prices low now?
Currency, world supply and falling demand. In fact, although many commentators will refuse to acknowledge; oil is often a predictor for milk prices and when you look at how many input costs for milk production are dependent on oil then perhaps it should not be a surprise. China is probably not helping as its demand for everything starts to fall just as food production has picked up.
But most milk is fresh and from a supermarket so why does it matter what world markets are doing?
Just for once perhaps, this short-term milk price problem is not directly due to the supermarkets and the price they pay for their direct supply milk. In fact, they pay some of the best prices for their directly contracted milk supply. However, the cheese and other dairy products are affected by world prices and supermarkets won’t pay more than anyone else, they can’t. Supermarkets can’t even compete generally at the moment as food prices and oil prices make their annual results look poor. Worse, Russia is closed off as a market to European producers compounding the immediate problem.
The government can intervene and offer to fix a minimum milk price?
Government intervention would not be legal (well not without some EU support, new laws etc.) it would take too long to agree and would not fix the problem. Why? Because the problem is not as simple as the milk price paid to farmers. If you artificially raise the minimum price for milk you make the products that it would go into unsellable on the open market because they would be more expensive than Irish butter and cheese or world prices for powder etc. etc.
So what can be done?
Very little other than accept that things will have to change. Farmers will have to reduce their costs; that means get bigger, produce differently and that may mean for many that they will go back to low-cost grass fed systems that will mean only producing in the spring and summer and accepting the commodity market price for their milk. Whilst others will have to produce dead level supply for premium markets that will pay for the privilege; these will be the supermarkets and some food-service customers who contract directly.
What will it mean for the rest of us?
We will import more milk and dairy products, drink more UHT and powdered milk sometimes and eat more foreign dairy if we want it cheap. We will also see more farmers becoming processors and producing their own branded specialist milk products in order to be competitive and sustainable. Banks will not lend to many farmers or processors unless they can command a premium and demonstrate they own a piece of the market. That means products that are novel or offer a real point of difference and a brand that is defendable.
What about the other markets. Food service; coffee shops, hotels and restaurants?
The reduction in both milk prices to farmers and the cost of processing falling on the back of oil prices should result in a more competitive market place. Worth remembering, what goes down often goes back up.
John Taylerson FCIM, MBA,
15th January 2015