Dairy farmers running faster to stand still

The decade since the abolition of milk quotas has seen a huge rise in the amount of milk supplied from dairy farms on the one hand, and the tightening of margins for each litre of milk supplied on the other.

Looking at data from the annual Teagasc National Farm Survey going back as far as 2008, we can see that dairy farm incomes have generally trended higher (see Figure 1).

However, from looking at the chart, it would be very difficult to pick out the point where quotas were abolished.

The rise in farm incomes had been driven by higher output of milk, coupled with increased milk solids per litre of milk. This increase in production has been the sole driver of those incomes, as input costs have also risen, putting pressure on margins per litre of milk.

In the five years up to the abolition of quotas, dairy farm incomes (inclusive of direct payments) were, on average, worth approximately 16.5c/l of milk supplied. In the five years to 2023, they were also approximately 16.5c/l. This is despite the average price paid for milk increasing by more than 20% between the two periods.

The average margin per litre produced on dairy farms in the five years to 2014 was 55.8%, while the same figure for the five years to 2023 was 39%. In 2023, it fell to 20%, meaning that 80c of every €1 of dairy farm income was used to pay production costs. To put that another way, if dairy farmers were to achieve the average margins seen in 2014, they would need to be paid more than 70c/l today.

Without that significant rise in milk prices, the only way dairy farmers can remain viable is to continue the expansion of production faster than costs are rising.

Finances

Financially speaking, it can be defined as running faster and faster to stand still. This trend, coupled with the environmental constraints put on output per hectare, mean that almost inevitably, dairy farms will have to get bigger in order to survive.

When it comes to borrowings, approximately two-thirds of dairy farms had loans outstanding at the end of 2023, a level in line with the trend going back to 2014.

The average amount owed by farms with debt was €136,000. It is notable that the dairy farms with debt were also the ones with higher average earnings, implying that farms which borrowed used the money to improve output and efficiency.