Irish margin biggest in Europe

UPFRONT: MARKET VIEW

Irish margin biggest in Europe

The Irish milk pool grew by approximately 30% between 2014 and 2017 and the margin on Irish dairy farms in that period averaged 8 Euro cents per kilo of milk, a margin twice that of other European Union (EU) countries. Sjoerd Hostee from Langs de Melkweg reports on a comparative analysis from the Munster Technological University and Teagasc.

Ireland is the land of grass-based dairy farming where farmers often work with a low milk price and low-cost price. This image exists of the country and it appears to be correct, as is also evident from the analysis “Irish Dairy post quota” presented by researchers from the Munster Technological University (MTU) in Cork and Teagasc in November 2020. They compared the results of Irish dairy farmers and Irish dairies with those of fellow farmers and dairy-processors in Denmark, the Netherlands, Germany, the United Kingdom and France. The comparison was made for the period 2014 to 2017, with reliable figures from Farm Accountancy Data Network (FADN). Other data sources have also been used where possible; this confirms that from 2014 to 2019, Ireland saw its milk pool grow by more than 40 percent. The average of the other countries was only 7 percent.

In the period up to and including 2017, the Irish milk pool had already grown 30 percent. With such an enormous drive for expansion, it is to be expected that costs will rise and the margin will come under pressure.

However, that hardly happened. Even in the years after 2015, when the European milk quota was dropped, the Irish scored a clearly higher margin per litre of milk than their colleagues in other countries. On average, this margin was 8 cents per kilo of milk in the period 2014-2017 with a cost of production of 24 cents (excluding own labour).

Dutch farmers recorded the highest cost of production (35 cents) after Denmark (38 cents).

LOTS OF CONVERTERS

The Irish realised their lower costs by constraining costs for, among other things, the purchase of feed, contract work, depreciation and interest. However, farmers do spend more on fertilisers per kilo of milk on the island.

The fact that the cost of production among the Irish, despite their enormously rapid increase in total milk production, did not increase after April 1, 2015 has to do with a few things. First of all, many arable farmers and beef farmers have switched to milking cows, because dairy farming in Ireland is more profitable.

Their land was converted into productive pasture grass for dairy cows and this greatly expanded the total dairy sector. In Sjoerd Hofstee. addition, the Irish say they have started to use their grass much more efficiently after the limitation of the milk quota was dropped.

And the average production of kilos of fat and protein also increased by almost 20 percent between 2014 and 2019, without increasing the costs for purchased feed.

The success of the high Irish margin, due to a low cost, is clearly achieved through their grass-based system.

GRASS-BASED SYSTEM

The success of the high Irish margin, due to a low cost, is clearly achieved through their “grass-based system”. The vast majority of cows mainly graze outside from early spring to late autumn and receive minimal additional food.

The relatively low milk production by European standards, which increased to 5,307 kilos per cow per year in 2019, is also a result of this.

This seasonal system, which means that the vast majority of cows are dried off in winter and reach their peak production in May and June, logically also has a lot of influence on the Irish dairy industry.

The average utilisation of the processing capacity in the Irish dairies is 62%, while in the other EU countries, which are included in this comparison, it is on average over 94%.

In 2019, Irish dairies processed about 8 billion kilos of milk supplied by Irish farmers. In addition, another 710 million kilos of milk was imported and processed in that year. In May, Irish milk production is at its peak and more than a billion kilos of Irish milk arrives at the factories. If this production were achieved every month, the Irish would produce nearly 13 billion kilos on an annual basis and the factories operating at 100% capacity based on milk supply from their own country.

COMMITMENT TO A FLAT MILK SUPPLY CURVE

If a seasonal milk supply is maintained, expanding the capacity requires considerably higher investments than with a flat milk curve. Around 2014, when Irish dairy farming started its growth spurt in production, there was already a lot of talk about efforts to flatten the milk supply curve.

Farmers should be actively encouraged to either divide the calving of the herd between the two times of the year (spring and autumn) or allow the cows to calve throughout the year. Better utilisation of the capacity of Irish dairies would them more competitive. At least, that was the hypothesis.

Various studies, included and further elaborated in this analysis, show that this does not work out that way. First of all, the switch to a system of 50% calving in the spring and 50% in the autumn.

On an average Irish farm, this results in a deterioration in the margin of an average of € 76 per cow. Split calving increases the average capacity of the dairies to an average over 69%, still far behind the average of 94% in other European countries and therefore hardly helps in the competitive battle.

The companies being more competitive would require a much stronger leveling off of the milk supply over the year, but the benefit to the dairies does not outweigh the margin level that it would be destroyed at farm level.

Abandoning the grass-based system costs Irish dairy farmers more than 5 cents in margin per kilo of milk.

Irish dairy farmers have shown a clear commitment to their free months around December and January when their cows are dried off in the current system.

These dairy farmers do not want to abandon their seasonal pattern at all. “In the interest of the Irish dairy sector as a whole, the best strategy for Irish dairies is therefore: stick to the current system,” analysts noted.

“High margin possibly partly due to low milk prices”

Why did you want to perform this analysis?

“Irish dairies have been dangling at the bottom of the LTO Milk Price Comparison for years. We wanted to find out why and demonstrate that farmers have to look beyond the level of the milk price alone. “

Which results and new insights have surprised you the most?

“First of all, we found out that setting up and maintaining a good milk price comparison is really very difficult. In addition, it is striking that our dairies are doing relatively well in the commodity trade. “

Doesn’t the enormous drive for expansion put pressure on land prices and financing?

“Because many beef farmers and arable farmers have converted their land to grassland, in order to be able to switch to dairy cattle, this pressure is relatively low. There is more competition when there is land for sale, but the increase in land prices is limited in most regions. Irish dairy farmers already had low funding levels in the quota era. Some increase is now visible, but that is also not that much.”

But such a rapid increase in milk supply cannot continue for a few more years, can it?

‘That’s right. It is estimated that our industry and markets can handle an average growth of 2.5% milk per year up to 2025.

The factories are demotivating the strong growth in supply nowadays. The rapid growth is over, but Irish dairy farming will continue to grow for a while. “

And that is despite, or thanks to, low milk prices?

“We say despite. But I know some people say it’s because of the low milk price. That Irish dairy farmers are not tempted to intensify due to low milk prices. I think there is certainly some truth in that. “