Forward contracting 20% of milk would have seen farmers better off by 1c/l

A report on the tools for managing income volatility on dairy farms has found that forward milk pricing in 2016 would have left farmers better off by 1c/l.

Barry Cassidy

25 September 2018

Forward contracting 20% of milk would have seen farmers better off by 1c/l

The overall objective of fixed milk price schemes was to reduce volatility rather than “beat the market”. \ Philip Doyle

If Irish dairy farmers had forward contracted 20% of their milk in 2016 they would have been better off by over 1c/l, a Teagasc report has found. The research into tools to manage income volatility acknowledged the exact figure would change year to year but that the overall objective of fixed milk price schemes was to reduce volatility rather than “beat the market”.

If Irish dairy farmers had forward contracted 20% of their milk in 2016 they would have been better off by over 1c/l, a Teagasc report has found.

The research into tools to manage income volatility acknowledged the exact figure would change year to year but that the overall objective of fixed milk price schemes was to reduce volatility rather than “beat the market”.

Volatility

Dairy farmers are facing greater volatility than ever before. Between the 1990s and 2006, milk price ranged from 24c/l to 29c/l. From 2006 onwards, this range has increased to a low of 21c/l and a high of 38c/l.

Dairy farmers are now seeing annual changes in milk price greater than 30%.

The report recommended dairy farmers had access to a suite of voluntary risk management tools and they be educated in how these tools could be used in an overall strategy

This volatility has led to an increase in risk management tools such as forward milk pricing.

The report also found that farmers who used these tools were younger and produced more milk per cow than farmers who did not adopt such tools.

Income averaging

Income averaging for tax purposes was also examined as part of the research and it was found it had limited appeal as a risk management tool. This was due to the fact the scheme eligibility rules meant 55% of all dairy farmers were excluded as there was non-farm employment in the household.

Direct payments

The report found many farmers were using their direct payments as a buffer against price volatility. It warned this buffer was likely to be less effective in the future as Pillar I payments were likely to be decreased in future CAP payments, thus reducing the buffer.

The expansion of many herds following quota abolition also meant direct payments were likely to make up a smaller proportion of total farm income.

The report recommended dairy farmers had access to a suite of voluntary risk management tools and they be educated in how these tools could be used in an overall strategy. It said that without a higher rate of take-up, farmers would face a greater challenge in managing farm income volatility.

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