Background Paper
Dairy
Note: The views expressed in this background paper do not purport to reflect the views of the Minister or the Department of Agriculture, Food and the Marine
Dairy Analysis 2025
1. Background:
Food Harvest 2020
In 2010 the dairy industry set itself the ambitious target, under the Food Harvest 2020 Programme, of increasing milk production by 50% by 2020. This was to be achieved by increasing the 2008/2009 average annual milk production of 5bn litres to 7.5bn litres in 2020. While increases in production are still constrained by the existence of the milk quota regime, significant progress has already been made in the steps which are considered necessary to meet the target, and they include:
i. increased yield production per cow: The average annual milk yield per cow is currently at 5,000 litres/annum but advances in this figure are constrained by the milk quota regime; it is forecast that the average milk yield per cow (in 2007-2009) will increase by 15% by 2020 (from approx 4,600 litres/annum to 5,285 litres/annum);
ii. increased cow numbers: it has been estimated that an increase in dairy cow numbers of about 300-350k cows, in combination with the increase in milk yield per cow, will bring the required 2.5bn litre increase. To date almost 150k of the additional cow numbers are in the herd and a modest and very achievable 2% ‘year on year’ increase would reach the required c.330k increase by 2020;
iii. Research and development – Teagasc has made significant strides in bringing world class information to Irish dairy farmers, particularly in the areas of breeding and grassland management.
iv. There has been significant support from the State and investments by the industry in the sector, both at on-farm level and in processing capacity. This Department has supported Teagasc, Animal Health Ireland (AHI) and the Irish Cattle Breeding Federation (ICBF) over the last three years, in order to assist them in preparing the industry for the increased production.
To date 0.4bn of the required 2.5bn litre increase has already been achieved, by incremental increases in annual production since 2008, facilitated by small increases in quotas for Member States under the EU ‘soft landing’ process.
Milk Quota regime
Since the introduction of the EU milk quota regime in 1984, Ireland has experienced a significant reduction in dairy farm numbers, dropping from 68,000 in the early eighties to just under 18,000 in 2013. This reduction reflects the reality that current and historic milk production in Ireland is, and was, curtailed by the milk quota regime and is artificially low for a country with vast dairy potential. The quota regime has placed a ceiling on cow numbers and milk yield per cow, which will be lifted after quota abolition. By way of illustration, Ireland’s dairy output at the introduction of dairy quotas in 1984 was the same as NZ, at approx 4.7bn litres, and while in the interim our output has increased marginally to 5.5bn litres, NZ’s output has trebled to 15bn litres per annum. Before milk quotas were introduced, milk production in Ireland grew at an average of almost 6 per cent a year between 1975 and 1984, a pace that was one of the highest in the world.
This is the reason why the decision to abolish milk quotas with effect from 1st April 2015, which was made in the context of the CAP Health Check in 2008, was so strongly supported by Ireland.
Ireland was 0.6% over quota in the 2013/14 milk quota year incurring a €10m super levy fine. The country is currently 6.4% over quota at the end of August and indications are that the country will incur a super levy fine again this year.
On-farm production
Through a combination of Departmental supports and the work of Teagasc, AHI and ICBF, significant advances have been made over the last four year in improving efficiencies, education and training at farm level. In that time some 7,000 Irish dairy farmers (c.40%) have participated, to varying degrees, in knowledge transfer programmes, delivered through the medium of Discussion Groups. These programmes were aimed at encouraging efficiency gains on dairy farms through changing attitudes and improving technical, financial and scientific knowledge, as well as skill levels, at individual farm level. The hope is that this will enable dairy farmers to recognise the challenges and difficulties that lie ahead, which include price volatility, and have the tools to address them.
Teagasc has identified an ‘early Spring compact calving pattern’ as the most efficient system for Irish conditions in order to achieve the 50% increase. Assisted by encouragement, and advice from Teagasc, milk suppliers have brought forward their median calving date from March 9th in 2011 to March 3rd in 2013 and Teagasc is continuing to urge farmers to aim for a median calving date of the last week of February and to have 90% of their cows and heifers calved in a 6 week period.
Recent data indicates that milk producers have increased their net profits from 4.06 cents per litre (c/l) in 2009 to 16.59c/l in 2013, notwithstanding significant increases in their input costs (8.88 to 13.95 c/l) . These results were achieved through targeted efficiency measures such as improvements in herd EBI (€70 to €142), reproductive efficiency (optimal calving rate achieved increased from 51% to 78%) and milk solids output per cow (from 342 to 392). The focus on better breeding through usage of high merit bulls, adoption of new technologies and a detailed programme of measures to be implemented in 2014 has set these farmers up for a smooth transition to expanded production in the post quota period.
Milk processing efficiency
In comparison to the processing sector of our major competing dairy export countries (New Zealand, Netherlands, Denmark), Ireland’s dairy processing industry continues to be both fragmented and comprise many small scale processors. Back in 2003 the Prospectus Report – A Strategic Plan for the Irish Dairy Processing Sector – was published and it indicated, inter alia, ‘that six dairy co-operatives processed 80% of Ireland’s milk in 2001 and no significant rationalisation has occurred since then’. Unfortunately, the situation in 2013 has not changed much in that 82% of Ireland’s milk is processed by the top 6 dairy co-operatives.
Nevertheless, Enterprise Ireland (EI) has provided significant assistance in enabling the processing industry meet the challenges of increased volumes. While progress in rationalisation and consolidation has been disappointing, EI has provided significant support by way of capital grants to the major milk processors, thereby enabling them to undertake expansion plans that include capital investment in energy efficiency and greater use of green technologies. EI has also been working with small dairy companies to accelerate export growth, develop scalable business plans and build competence.
Of probably greater assistance to these major companies has been the efficient manner in which EI encouraged the major milk processors to adopt the Lean Business Principles, which enabled them to put in place realistic and professional business plans capable of attracting investment and financial support.
Earlier calls for the development of centralised processing facilities, in order to achieve more cost efficiency at processing level, have been thwarted by the success in recent years of the major milk purchasers in Ireland, prompted mainly by strong market prices. While there have been some recent consolidations (e.g. Newmarket Co-op into Kerry Creameries (Oct 2010); Donegal Creameries into Aurivo (Jan 2012); and Wexford Creameries into GII (Dec 2013) there is a requirement for further collaboration and rationalisation to develop significant scale, in order to reduce costs and achieve better market returns.
Demographics
1. There are almost 18k milk suppliers supplying to 90 registered milk purchasers
2. 82% of the milk produced is processed by the six major processors (Glanbia, Kerry, Dairygold, Lakeland, Aurivo and Arrabawn)
3. The top 6,000 milk producers account for 60% of the milk supplied
4. The age profile of the sector is 52% over 50 years of age; 48% under.
2. Sectoral goal – Food Harvest 2020
Increase the level of annual milk production from the 2007-2009 average of 5bn litres to 7.5bn litres in 2020. This increase should, in turn, enhance the primary output value of the sector by about €700 million with further downstream benefits in the form of increased dairy product values, export earnings and employment.
3. Specified actions planned
· Identify ways of encouraging greater numbers to participate in knowledge transfer programmes – particularly those who have not yet participated in such programmes
· Develop strategies to address price volatility within the dairy sector and provide the necessary financial planning to those dairy farmers, including new entrants, who are going to make significant expansion in milk production so that they can achieve a successful outcome
· Discuss with the processing industry ways of ensuring that all channels are open for information exchange after the ending of the milk quota regime
· Introduce and support a robust Farm Partnership regime to address land mobility, demographics and work/life balance issues. The most significant impediment to milk production expansion in the coming years is the continued failure of past schemes and measures to bring about increased land mobility, with particular emphasis on having adequate amounts of good land to form the milking platform
· Continue to support AHI in the critical role it plays within the industry, improving herd health by identifying and prioritising non-regulated disease conditions which impact negatively from both a financial and disease perspective on Irish livestock
· Continue to support ICBF in the critical role it plays within the industry, maintaining an up-to-date database of cattle breeding in order to enhance genetics within the sector
· Continue to support the role Teagasc plays within the industry, through its research work aimed at ensuring that dairy farmers have the best knowledge available in carrying out their milk production enterprise in the most efficient manner, with particular emphasis on sustainable and environmentally friendly practices
· Continue to encourage Teagasc to provide the necessary courses to ensure adequate numbers of farm managers are available to deal with the increased activity
· Engage with Teagasc and dairy processors in promoting the best grazing technologies on grassland farms
· Address infrastructural issues faced by dairy farmers, including arterial drainage
4. Sustainability: point of differentiation
A major feature of production in Ireland is the seasonality of milk supply, caused by farmers choosing the date of calving, so as to maximise the use of grazed grass in the cows’ diet and thereby produce milk as cost efficiently as possible. This efficient use of grass and the longer grazing period ensures that Ireland enjoys a comparative advantage in the production of milk within the EU. This advantage is essential in allowing Ireland establish a clear point of differentiation with its competitors in order to retain existing world markets and gain new markets.
That point of differentiation is the strong sustainability credentials which Ireland can credibly demonstrate through the Origin Green Programme and the more specific Dairy Sustainability and Quality Assurance Scheme. The former commits Irish food and drink producers to operating sustainably - in terms of greenhouse gas emissions, energy conservation, water management, biodiversity, community initiatives and health and nutrition, while the latter is an independently accredited scheme that offers further assurances as to the quality of Irish milk and the sustainability of our grass-based dairy production system.
Market Aspects - Long Term Global Projections
The OECD and FAO produce detailed projections for global and national dairy markets, the most recent of which looks at the ten-year period 2014-23. Analyses such as these are useful in examining the overall underlying trends for the sector, whilst always remaining cognisant of the evolving paradigm for dairy markets, where higher degrees of volatility over short term periods will be a factor. The analysis covers the developments expected in national milk production and world and national dairy product prices, production, food consumption and trade.
Key Points: Source: OECD/FAO Outlook 2014-2023
· World milk production is projected to increase by 180MT by 2023, compared to the base years examined (2011-2013), the majority of which (78%) is anticipated to come from developing countries.
· The average growth rate for the projection period is estimated at 1.9% which is below the 2.2% witnessed in the last decade. The slowdown in growth reflects growing shortages of water and suitable land in developing countries combined with a slow introduction of modern dairy production systems.
· Several dairy product prices reached new highs during 2013, and a continuation is expected in the shorter term, followed by firming nominal prices over the medium term. Real prices are projected to decline slightly in the next decade, albeit remaining considerably above pre 2007 levels.
· Per capita consumption of dairy products in developing countries is expected to increase by 1.2% to 1.9% p.a., with the expansion in demand reflecting robust income growth and further globalisation of diets.
· By contrast, per capita consumption in the developed world is projected to increase between 0.2% and 0.9% pa.
· A general expansion of trade in dairy products is expected over the coming decade. Strong growth is expected for whey, cheese and SMP at more than 2% p.a. Lower growth is expected for WMP, at 1.7% per annum, and especially butter, at 0.7% p.a. The bulk of this growth will be satisfied by expanded exports from the United States, the European Union, New Zealand, Australia and Argentina.
Prices
Milk and dairy product prices increased in 2013 due to regional production shortfalls and increasing feed costs. Additionally, major players on the world dairy market produced less milk than the previous year. A production response to these price signals during 2013 ensued. Additionally, during 2013, prices for feed grains became lower compared to the previous year. Coupled with an expected recovery of domestic milk production in China, and whilst noting that the long-term fundamentals of global dairy market are strong and intact, the likely outcome in the shorter term from a price perspective would be for a softening market for dairy and milk products. Over the medium-term, increasing incomes and globalisation of diets are expected to raise the demand for milk and dairy products in developing countries and an increasing import demand will support prices of dairy products during the next decade.