Has there ever been a time when the outlook for dairy is as good as it is now? Leaving aside the risk of the cut in the nitrates derogation, there is a fantastic future for anyone producing milk in the world.

Global demand remains stable and while China may not be importing milk to the same degree that it was, other countries in south-east Asia continue to increase their imports.

The economic problems in China have taught us that although reduced demand inflicts some pain, it’s not carnage.

It is really on the supply side that the main opportunities are. Rabobank is predicting a 6.7% reduction in milk volumes from Europe over the next decade with most of that reduction coming from the dairy heartland of north-west Europe.

There is no change to Irish milk supply in the Rabobank analysis.

The best case scenario in New Zealand is that milk supplies will stay static, even though cow numbers are expected to fall.

In the US, the economics of farming at scale and a shortage of water in many regions are set to be the main driver of static supply growth, as well as increased environmental regulations, particularly in more liberal states like California.

Look at the EU with a population of about 450m people, the majority of whom are middle class with sophisticated palettes, tastes and plenty of buying power. This is the best market in the world for dairy. At present, the EU is a net exporter of dairy products on to the world market. This export segment is at lower margins and more exposed to commodity cycles.

If supply declines in Europe, dairy exports will fall and a greater share of the milk produced will go to higher value products. This will result in higher returns for dairy processors, but it obviously has to be weighed up against lower plant throughout and lost efficiency because of less milk being processed.

However, market dynamics suggest that lower supply and higher demand leads to higher prices. Fundamentally, the outlook for the dairy producer has to be positive.

For an Irish dairy producer the fundamentals are even more positive. While the cost of production has increased significantly, Irish dairy farmers are still low cost relative to our EU counterparts. Being a low cost producer with unbridled access to the highest value dairy market in the world is the best place to be.

Constraints

It is obviously not all rosy in the fields of Irish dairy farms. The mood among farmers is low after nine months of wet weather. Margins have diminished as the commodity cycle worked against them in 2023 when milk prices fell sharply, but input costs stayed high.

There is a great future in dairying in Ireland if the derogation is retained

Milk prices have stabilised and input costs have fallen, but the wet weather has meant lower output s and more inputs. Hopes that 2024 was going to lead to a recovery in profitability have been washed away.

The debate around the future of the nitrates derogation is also an existential threat. The sustainable and profitable model of growing grass and grazing it with dairy cows doesn’t work if farmers are prohibited from keeping the required amount of cows to graze that grass.

The quick fix used in other countries that lost the derogation – exporting slurry off the farm – won’t work in Ireland.

This is because rather than being inside for most of the year, Irish cows are outside grazing for most of the year, where the manure produced goes directly back to the soil and is utilised to grow grass and clover swards.

Imported concentrates

Everyone agrees that cows are better off outside, but one of the consequences of losing the derogation could be that cows are housed full-time and fed more imported concentrates. This would increase costs, increase ammonia and greenhouse gas emissions and reduce the unique characteristics of Irish dairy as exemplified by Kerrygold butter.

The big dairy co-ops such as Tirlan, Dairygold and Carbery all have over 70% of their suppliers in derogation, so the loss of the derogation is a massive threat to their milk pool. Farmers and co-op executives are utterly frustrated by the limbo created by the derogation renewal process. As an instrument of EU policy, it is far more successful at creating uncertainty for farms and businesses than it is at improving water quality.

This uncertainty is draining the confidence out of the sector and needs to be urgently addressed by the incoming European Commission. The industry is asking for existing stocking rates to be maintained until at least 2030, and for additional and effective water quality improvement measures to be implemented alongside this extension.

Structures Another challenge facing the sector is labour. In affluent societies it is harder to attract people to work in jobs that require physical labour. This affects farms in two ways: it is more difficult to recruit farm workers, and potential successors are attracted to other sectors outside of farming. Farm labour shortages in France have been primarily blamed for the 4.7% decline in milk supply between 2020 and 2023.

However, due to the relative small size of Irish dairy farms and the family farm structure, Ireland should be more resilient to the labour issue than other EU countries.

While the structure of farms is a strength in terms of labour, it’s also a weakness when it comes to the derogation because any reduction in the derogation could make thousands of small farms unviable. The difference between milking 60 cows and having to reduce to 40 cows is night and day.

It’s not as if dairy farmers are going to suddenly get a part-time or full-time job off-farm to supplement their income while they milk less cows.

The cows will go, they will work off-farm and switch to dry stock, tillage, renewables, or lease out the farm. The cumulative impact of this on the Irish economy has not been measured by the Irish government or the EU.

The irony of the situation is that there is a great future in dairy in Ireland if the derogation is retained. As the Tirlán CEO Jim Bergin recently said, every tonne of casein exported from Ireland saves 15t of CO2e due to the lower carbon footprint of Irish milk relative to the global average.

Ireland Inc can improve water quality if given time, but the world won’t solve climate change by increasing the carbon footprint of food production. It can only go one of two ways and the clock is ticking on that decision.