ICOS Initial Submission to 2020 Strategy Group.
Ireland’s Dairy Economy Post 2020.
Introduction
Ireland’s dairy sector can and should play a key role in driving export-led economic
growth over the next decade and beyond. As a locally owned, indigenous industry, with
export earnings of approximately €2 billion, and the potential to significantly increase
those earnings, the sector deserves to remain a key pillar of Ireland’s growth strategy.
The ending of milk quotas in 2015 will give the sector, for the first time in 31 years, an
opportunity to achieve real growth and scale efficiencies, while allowing individual
farmers to growth their own enterprises without the need for wasteful quota purchase.
In order for the sector to achieve its true potential, and to increase in scale, efficiency and
value added, ICOS believes that certain policy measures need to be implemented to allow
for consolidation at farm level, to minimise business costs, to promote innovation, and to
allow our producers to compete on a level playing pitch with leading international
competitors.
Production post quota.
Following consultations with member Co-ops, ICOS’ view is that while the potential
exists to increase milk supply by up to 50% over the next decade, an increase of about
20% is more likely. A recent analysis of Co-op supplier surveys carried out by ICOS,
weighted to reflect the current level of milk supply in co-op regions, suggested that a net
22% increase in milk supply will be delivered in the years immediately following the
ending of quotas. While individual co-op surveys showed a significant variance in growth
expectations, varying from modest decreases to increases of the order of 35%, it is
important to recognise that the timing of such surveys is crucial, as farmer sentiment has
been shown to vary significantly during periods of price volatility. Indeed, the prevailing
weather conditions at the time of such surveys are also a factor, as the difficult summer of
2009 was seen to depress sentiment.
Factors influencing Milk Production levels.
The increase indicated in the Co-op supplier surveys was largely based on production
from current resources, with efficiency increases, some investment in facilities, and a
diversion of resources from other enterprises. In order to deliver on this growth
expectation, or to increase it, a number of factors need to come into play;
o Product prices: Milk production in Ireland is quite price sensitive, with the
production decrease in 2009, partly as a result of poor market returns, coming as a
surprise to many observers. Current European dairy policy, set in the 2003
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Luxembourg Agreement, which diverted around 80% of the then dairy budget to
direct payments, leaving a low floor price support (the floor price is now set at
approximately 18c for Irish producers), has significantly weakened the Dairy
industry. Farmers and their Co-ops are faced with prices well below production
costs for long periods and a degree of volatility which results in uneconomic
production at the price trough, as well as market damaging price peaks during the
production trough. The Irish Government needs to engage with like minded
Member States to force a rethink of the minimalist approach currently in force
within the Commission. This process of re-examining the Community’s approach
to dairy policy will be particularly important in the lead-up to the CAP post 2013
debate, and in advance of the Commission’s expected paper later this year.
o On-farm production costs: Dairy farming, like other sectors in the economy, was
subject to enormous cost inflation over the recent decade. Like other sectors, it
lost ground to international competition and is now at a relative disadvantage.
This disadvantage needs to be addressed if the Sector is to be allowed to make a
significant contribution to the economy into the future. Currently costs such as
energy, labour, veterinary medicines, and feed are excessively high by
international standards, all as a result of national and EU policy.
o Access to land: Ireland, uniquely within dairy producing countries and regions has
very high land costs, both in terms of purchase and lease prices. There are some
cultural influences at play, as well as a residue of outside influences from the
recent property bubble, but there are also policy factors which exacerbate the
inertia and undermine consolidation efforts. Irish farm holdings and herd sizes are
small by comparison with the serious dairy exporting nations. In order to achieve
a degree of scale necessary for optimum efficiency, efforts need to be taken to
ensure that access to land is freed up to a degree. ICOS supports the aims of
Current Rural Development policy, particularly in sustaining smaller holdings in
vulnerable rural economies, but suggests that within the context of current
supports, consideration should be given to allowing the land involved in some
support schemes to make a contribution to the local commercial dairy economy.
Ideally, land which is in an RD scheme should also be available to commercial
production, to grow silage or maize crops, or to raise replacement heifers. It is
vital that the land resources of the state are not unnecessarily decommissioned
while young ambitious neighbouring farmers are hampered due to lack of land
availability.
o Lack of replacement stock. For the past number of years, partly due to weather as
well as husbandry and breeding practices, the dairy sector has struggled to
produce sufficient replacement stock to maintain herd size. There are many steps
which can be taken at farm level to overcome this difficulty, but state support will
be needed with some aspects. Animal health is vital to reducing the number of
replacement stock needed on farm, with conditions such as Mastitis being
responsible for a disproportionate level of stock loss. It is important that the
Department of Agriculture continues to retain a strong interest in Animal health,
and in supporting all initiatives, including those proposed by the industry, which
will contribute to maximising the health of the dairy herd. In addition, it is
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important that the recent success in achieving Brucellosis free status is not
undermined by reinfection, particularly from Northern Ireland.
Production competitiveness/ seasonality
Ireland’s grass based milk production system has been identified as a key cost advantage
which will allow our dairy producers to compete effectively with competitors within
Europe. While the recent difficult summers, particularly in heavy soil areas, have brought
into question the degree of this advantage, nevertheless, the efficiency of this production
system should be built upon, with appropriate research and extension services to develop
on-farm efficiencies. ICOS was very supportive of the Minister’s recent initiative in
providing funds to support farmer discussion groups to encourage peer support and
learning. Teagasc data suggests that differences of around 10c per litre in production
costs exist between some farmers, and in addition, co-operatives report similar levels of
milk price differences between top and bottom producers in terms of quality and
constituents. Clearly there is much to be done to improve farm incomes within the farm
gate. This is not to remove the responsibility on processors to develop their own
efficiencies.
However, recognition needs to be given to the significant costs at processor level
associated with our highly season production pattern. Putting in place capacity to process
our seasonal milk supply requires about a 60% larger plant capacity than in competitor
countries which have a flatter supply. In addition, despite ongoing cost reduction
initiatives at co-op level, some costs cannot be eliminated or reduced dramatically during
the trough period. Therefore, the cost of processing a highly seasonal milk supply, will,
by definition be higher, in terms of plant costs, operating expanses, and the cost of
financing the storage of seasonal production.
The sector needs to give serious consideration to whether the pricing signals given to
producers are sufficient to flatten the curve. Recent fertility difficulties at farm level have
exacerbated the supply curve to a point where farmers are currently losing out on
profitable production of milk solids in the early season. Appropriate seasonal pricing
structures, such as those which exist in competitor countries like the Netherlands and
Denmark, could encourage farmers to move the production season forward, thereby
easing the pressure on processing plants, while allowing farmers to maximise their own
profitability. The pricing structures in place in the abovementioned countries involve
deducting a small percentage from the peak milk price, and, in a very transparent way,
using the fund created to pay a premium for early and late season milk.
Investment in processing facilities.
Ireland’s processing capacity is currently running at or near capacity during the peak
production period. Recent investment, facilitated by Government grant aid, has added
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some additional capacity, but a portion of the processing infrastructure is ageing, with
reinvestment necessary. It is a function of our seasonal milk supply pattern that
processors need to provide capacity to handle peak supply, but which runs significantly
below capacity for long periods of the year.. This makes investment or reinvestment in
facilities relatively expensive. Unfortunately, the dairy processing sector in Ireland has
been loss making over the past two seasons, with accumulated losses in milk processing
of in over €200 million. The industry is currently undercapitalised, and not in a strong
position to fund the necessary expansion.
ICOS has proposed a new entrant/expanding supplier policy to address the funding
requirements of the sector, in the event of significant increase in milk supply. The policy
proposes the following;
1. Co-ops should immediately move to formalise their relationship with suppliers,
buy issuing Contracts, or Milk Supply Agreements, which outline the current
arrangement in terms of volume, and seasonality pattern. ICOS has suggested
that this Contract or Agreement form the basis for a quantification of the rights of
existing suppliers to processing capacity, and that the right be quantified in terms
of “peak day supply” or similar concept. Farmers can then continue to supply
milk up to this maximum daily amount, thereby potentially increasing absolute
volumes by improving their current seasonality profile
2. In the case of Processing co-ops with additional peak day capacity, this should be
allocated to suppliers in the following order of priority;
a. Existing supplier members
b. Non supplier members
c. Existing suppliers who are not shareholders
d. New suppliers who are not members
In order to supply additional milk to the processor (within existing capacity) all
the above categories of suppliers need to reach the Co-op Share Standard. This
means that they must hold, or commit to purchase, a volume of shares which
equated to the average number of shares per litre of milk held by all current
supplier members. Typically, this average shareholding would be of the order of
1c per litre supplied.
3. Where capacity is fully allocated and the installation of additional capacity is
necessitated, then those suppliers who wish to supply additional milk, above
current capacity, should contribute to the cost of expansion.
4. ICOS has suggested, by way of illustration, that additional capacity could cost of
the order of 30c per litre (based, partially on industry expectations of a 20%
increase in supply, or 1 billion litres per annum, and a suggestion, based on
previous investment, that such an expansion could cost up to €300 million). There
is general acceptance that current suppliers might be unwilling to fund a
dramatic investment in additional capacity from margin on existing volumes.
While there is some concern at creating excessive barriers to new entrants or
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expanding current producers, nevertheless the industry is undercapitalised and on
current low or negative margins would find it impossible to fund expansion purely
from retained earnings.
5. A supplier’s contribution, by way of shares or loan stock, can represent a portion
of the suggested 30c litre cost. If the supplier were asked to fund 50% of the cost
directly, this would equate with 15 cent per litre or 1.5 cent per litre over a tenyear period.
6. The current ownership of a milk processing asset within some processing
societies is complex, in the sense that the milk asset is part of a multipurpose
portfolio of assets owned by a combination of milk supplier shareholder members
and other shareholder members. Where this arises, recommendations should be
made that, while protecting the rights of all classes of shareholder, have at the
same time due regard for the future organisational needs of milk suppliers.
7. Typically Irish milk supplying co-op members hold shares in their co-op to the
value of about 1c per litre. In other jurisdictions in Europe and elsewhere, a
shareholding of the order of 6-8 cents per litre is more typical. If a share standard
were to be applied on the basis of current shareholdings, and expanding members
(within current co-op capacity) were asked to reach it, it ought not to represent
an unreasonable demand on suppliers.
The current efforts of ICOS to achieve a standard approach to new entrants and supply
expansion are aimed at achieving an orderly transition towards a quota free regime,
whereby spare capacity within the sector can be allocated fairly to current and intending
suppliers where possible, and additional capacity can be put in place without placing an
excessive burden on the current supplier base.
Implicit within ICOS’ proposals is the understanding that an important co-operative
principal is that members should have ownership in their co-operative corresponding
with their level of trade with the society. Accordingly, the link between ownership and use
should, where possible be recreated.
In addition to the above approach to funding the expansion of the industry, it is vitally
important that the State maintain as a priority support for investment in the sector because
of its importance to rural areas, its indigenous ownership, its export focus and earning
growth and development potential.
Processing competitiveness
ICOS has, over the past 1-2 years, being vigorously pursuing consolidation initiatives
with a view to maximising processing efficiency (as well as marketing and innovation).
These efforts have centred on the Milk Ireland concept. A national debate is underway on
the future shape of the Irish dairy industry. The industry itself is involved in a detailed
process of examination and verification of the potential benefits of consolidation. While
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ICOS is working to encourage and support this process, it is important to recognise that
any decision on consolidation must be made by the elected Board members of each cooperative, and they must do so on the basis of sound analysis, and also on the basis of
proven benefit for their own members. That process must be given the necessary time to
reach its conclusion.
As part of the national debate on the industry, it has been suggested by some observers
that the Irish dairy industry is inefficient, and that it delivers milk prices significantly
below comparable industries in Europe. This is not the case. When consideration is given
to the actual constituent level of Irish milk and the associated higher processing cost, as
well as high seasonality (with plants only working at c.60% of installed capacity), our
small local market for fresh products, and distance from our main markets, then Irish
milk prices compare extremely favourably with leading continental competitors, or
indeed exceed them.
Business Costs: In addressing the competitiveness of the sector relative to international
benchmarks, the issue of business costs cannot be ignored. Irish milk processors are
burdened with high costs for energy, labour, transport, compliance, insurance, and state
services. There is a responsibility on the government to address the cost lines which it has
responsibility for, including energy (high electricity prices are government policy),
transport (through illogical carbon taxing of food production), compliance and state
services, and to work with industry to address the serious labour cost inflation which
became imbedded in the Irish economy over the past decade.
Product portfolio
Ireland has, over the past number of years, reduced its dependence on butter manufacture.
In 2009 56% of Irish milk production was allocated to butter manufacture, down from
over 60% two years earlier. In the same time period, the proportion of the milk going to
cheese production has grown from 23% to 31%.Such developments are to be welcomed
and demonstrate the organic evolution of our product portfolio. Further transformation of
our product portfolio will be more difficult, as seasonality becomes limiting and a
combination of excess milk at peak and almost no milk off peak makes the pursuit of
fresh product markets very difficult. Nevertheless, the industry has consistently moved
the commodity products, such as SMP up the value chain, thorough alliances with infant
formula manufacturers etc.
Skills development: If Ireland’s dairy industry is to continue in its development it will
need significant investment in technology and skills development. The availability of
appropriately qualified and resourced staff is key to innovation, and new product
development. The strategic involvement of agencies like Enterprise Ireland with milk
processors is important to moving Irish dairy products up the value chain in pursuing
health initiatives. The state needs to continue such programmes, and should continue its
support of programmes to develop the skill levels of industry personnel.
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CAP post 2013
A changing Common Agriculture Policy post 2013 needs to remain strong and committed
to providing a stable framework to allow the development of agriculture production
through out the European Union. A future framework should continue with the two pillar
structure, allowing the CAP to play its vital economic role as well as optimising EU
agriculture’s contribution to rural areas. It is vital that a future policy reacts promptly and
effectively to market instability and price volatility, both of which will increase with
further liberalisation of the agriculture sector.
Without the appropriate support price threshold and market management instruments, the
dairy sector, both at farm and processor level, will be extremely vulnerable to increasing
troughs in the market. The use of intervention for butter and SMP during the dairy crisis
of 2008-2009 proved the effectiveness of the tool in providing a bottom in the market.
Indeed a robust policy of public stock maintenance and management would have helped
to reduce the market damaging price spike of 2007. Intervention needs to remain an
integral part of a future CAP to provide protection for the productive sector even to a
greater degree than is currently the case.
Export refunds will continue to be needed and must be retained in a future CAP. Europe
will periodically need to export surplus product into weaker world markets and refunds
must be available to allow this to happen. In addition new market tools should be
examined to address the changing market that dairy co-operatives must operate in. ICOS
welcomes the discussions in the European Commission’s High Level Expert Group on
Milk (HLG) in exploring further possibilities to manage market volatility. Current market
measures, based on a support level of c.18 per litre are not sufficient to provide stability.
There is strong pressure for direct payments across the EU to be harmonised and
distributed in a fair manner. Any redistribution, however, needs to take into account the
disparity in business and operating costs between member states, and the current historic
based level of SFP best reflects those costs. ICOS believes that payments should be
targeted to active farmers only, and that this should be defined within the original
purpose of direct payments under the 1992 McSharry reforms. These payments were
introduced as part compensation for price falls and also to compensate for the costs of
delivery on public goods such as animal welfare and environmental benefits. These
justifications remain today; therefore, direct payments need to retained and enhanced if
possible under the current calculation system.
World Trade Organisation (WTO) Negotiations
ICOS recognises the potential benefits to the completion of the Doha Development
Agenda (DDA) round of the WTO negotiations, however, the slow progress of the talks
make a deal in the near future difficult to achieve. A final deal would need to be fair,
balanced and provide parallel commitments from all WTO members. An agreement
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under the current EU offer, which is still on the table despite the stagnation of the talks, is
not acceptable. The current offer supports eliminating export refunds and an expansion of
Tariff Rate Quotas (TRQs). The EU’s offer would result in large volumes of dairy
imports to enter the EU market, destabilising an already vulnerable EU dairy market,
without providing significant market access opportunities for EU dairy exports. Until a
fair and balanced deal is obtained, these issues should not form a part of any future reorientation of the CAP.
Sustainability
Ireland’s model of grass based milk production conveys a number of advantages on the
dairy industry. Not least of these is the clean green image associated with our products. In
addition the grassland model conveys real sustainability on our industry. The sector as it
is currently configured is truly sustainable in terms of the environment and animal
welfare, as well as being socially and (we hope) economically sustainable. Many of our
competitors do not have these advantages. In many cases environmental and animal
welfare considerations are challenged due to herd size, or housing systems. In other
cases, where there has been excessive consolidation into large, highly indebted units, the
systems are socially and economically unsustainable.
The Irish government needs to embrace the Irish dairy sector as a model for sustainable
wealth creation and social development based extensively on indigenous resources, and
to afford it a high strategic priority. Recent developments such as the imposition of a
carbon tax on the sector are illogical. Dairy production, by its nature involves the use of
fuels in a number of processes, from silage making, feed manufacture, milk transport and
product transport. All these links are subject to Carbon taxation. This is an impediment to
many of the positive aspects of our production system and should be reversed.
In relation to greenhouse gas emissions from livestock, these have reduced considerably
over the past decade, with the reduction in numbers and increases in efficiency. The
application of Carbon taxes on livestock production would unfairly penalise producers,
particularly since the proportion of the national GHG emissions coming from Agriculture
has already reduced dramatically. The government should, however, support the
development and use of nutritional and other technologies which would increase feed
conversion efficiencies and further reduce GHG production.
Imminent changes in the EU Emissions Trading Scheme will pose additional costs on the
sector. It has already been proven that some product categories in dairy processing will
be at risk of Carbon leakage (i.e. at risk of being displaced by product from outside of the
community where the ETS does not apply). The government should seek to have this
logic applied to all processed dairy foods.
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