INEXPLICABLE MILK PRICES THAT DEFY LOGIC

This post first appeared online at http://www.thatsfarming.com on the 11th August 2017

In a press release this week the ICMSA expressed their disappointment that the Irish milk prices is only 14th in the EU milk price league. They said that there was no logical explanation for the continuing price gap.

There is no question that the ICMSA should be lobbying hard for a better farm-gate milk price. It is what they are there for. It is also sad that in a country where the co-operative ownership of the milk processing sector is held up as an industry strength, a major farmer-representation body feels it is necessary to take the processors to task for not transferring milk market price improvements through to the farmer. Are they suggesting that there is some skulduggery around? Or is the problem that the Irish dairy product mix is such that it can only support a sub-EU-average price?

One should also add that it was only a few days ago that Ireland was shown to have the lowest 2016 milk price of any major milk producer globally! Given the Irish industry’s global aspiration, that should be of much greater concern, not least as it showed a significant price differential between Fonterra and Ireland’s main cooperatives. With NZ, there is at least some milk-production system equivalence, even if NZ dairy farms are multiples bigger than those in Ireland.

An Italian milk processor topped the second league table. Just how different is their product mix? It is almost certainly consumer-product orientated and targeted at supplying consumers all year. They have a significant proportion of fresh products within their range and their longer-life products include Galati and designated-origin Parmigiano Reggiano. Hence, they operate what I would describe as the European model; dairy farming and milk processing that supplies 400 million plus EU consumers with mainly fresh dairy products. Of course, it means farmers are needed to supply milk all year and, typically, prices are set accordingly.

As a note to the above, one can ask why did the dairy price crash occur across Europe? A part of my own rational is that some European processors had begun to use the GDT ‘global’ price within their general milk contracts even though the GDT is more about longer-life dairy commodities. Thus, when that commodity price collapsed with China’s withdrawal from the milk powder markets and oil price falls affecting other significant markets, the pricing mechanisms created contagion from commodity markets to fresh/consumer product markets. Thus, over-supply of ‘low-cost’ milk aimed at the milk-powder market impacted the wider markets. It left unnecessary devastation across swathes of the EU dairy farming sector and the European Commission to pick up a large market stabilization bill.

Hence, to a degree, therein lies the explanation for EU milk market price differentials. Simply all milk is not equal. It is about much more than milk solids, it is about the final product and the price paid for it. A fair transmission of that price through the processing activity should then determine the farm-gate price offered and that, in turn must and should reflect the resources needed to supply that processor. Of course, if that mechanism does not work over the longer term, the processor will have no milk and the market no product. Therefore, if the price gap is due to differences between the Irish and European product mixes, is it a realistic expectation that milk prices should be equal?

In determining what is a fair farm-gate price, we should also look at supply-chain efficiency, its ownership, and the degree of control farmers need to ensure that a fair proportion of the retail price earned is passed back to the farmer. Dairy product supply-chain components cannot be looked at independently, which I fear they have in Ireland, as long-term success and whole-industry, economic sustainability can only be achieved if all parts of the supply-chain make financial sense to those who invest in them. An effective and efficient supply-chain should also impact upon the milk price.

I frequently read comments from Prof. Keith Woodford in New Zealand about how their seasonal milk production model is inhibiting their development of higher-value products. He, like myself, certainly believes that as markets like China evolve, rising consumer incomes will allow consumer demand to move away from the basics like milk powder and into higher-value products. They will often be fresher in nature and their production will stimulate the need for all-year milk supply. It is unfortunate that Ireland has come to the milk-powder party late, possibly too late, and has been investing in a product range that is the one that New Zealand is trying to leave behind.

To hear that there is still talk in Ireland of more driers to meet growing production [itself partly driven by farmers scaling up to try to compensate for low milk prices] is, to put it politely, surprising. It is this investment strategy that ICMSA should be challenging because if it and, frankly, the wider Irish milk model is not challenged they will be complaining about the farm-gate milk price in Ireland for very many years to come. And if so, their failure to comprehend current milk pricing and the signals that it is sending, will mean long-term consequences for their members that will not reflect either their hard work or their recent investments.

Hence, to provide this with a concise conclusion, the most important message to comprehend from the EU and global milk price gaps is that it is time for a serious Irish dairy-sector, strategic re-think.

 

 

 

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