A new report by Teagasc and Cork Institute of Technology (CIT) shows that Irish dairy farmers receive the lowest milk prices in Europe, but have the highest profit margins thanks to the low costs of seasonal grass-based milk production.

The report, titled An Analysis of the Irish Dairy Sector Post Quota, shows that Irish milk prices have averaged 29.8c/litre since the lifting of milk quotas in 2015.

By comparison, dairy farmers in Germany, France, Denmark and the Netherlands have all received higher milk prices on average during the same period.

Dutch dairy farmers received the highest milk prices over the five-year period, with Friesland Campina paying out an average price of 35.2c/litre since 2015.

“Across the five year period studied, from 2014 to 2019, when milk prices are compared using the LTO (Monthly Milk Price comparison for milk), the Irish milk price was lowest of the EU countries considered, with the Dutch milk price the highest,” said Dr Declan O’Connor of CIT.

“An average difference over the period of 5.2c/litre was reported between the Irish and Dutch, with the other EU countries falling between these two. The Irish milk prices however followed the commodity market returns for skim milk powder and butter during this period,” he added.

Production costs

However, the low cost of production in Ireland means Irish dairy farmers are considerably more profitable than their European counterparts.

The report shows the average profit margin for Irish dairy farmers (excluding own labour costs) was a healthy 8c/litre. This is significantly ahead of profit margins in other countries.

Net profit margins stand at 4.6c/litre in the UK, 3.6c/litre in the Netherlands, 2.7c/litre in Germany, 2.5c/litre in France and just 1c/litre in Denmark.

“When the profitability of milk production was compared across the countries, even though the Irish farmers received the lowest milk price, their cost base was substantially lower, resulting in the highest profitability," said Laurence Shalloo of Teagasc.

Lower milk prices

The reason for lower milk prices in Ireland is twofold.

Firstly, the seasonal nature of milk production in Ireland means the cost of processing milk is higher than in a country where milk supply is fairly consistent year-round.

The utilisation of milk processing capacity is just 62% in Ireland, compared with over 90% in all other European countries.

The seasonal nature of Irish milk flow means most product gets processed into lower-margin dairy commodities such as butter, cheese and milk powder.

Secondly, the significant investment in extra processing capacity in the Irish dairy industry means co-ops have seen an increased strain on cashflow over recent years in order to fund this capital expansion.

The report suggests that once debt levels in the industry begin to reduce, dairy co-ops will have more cash to pay out in milk price.