Careful planning will be required if we are to protect dairy farm incomes into the future. This was one of the key messages for farmers at our Dairy Day event on Tuesday supported by Bord Bia. It was driven home by New Zealander John Penno, who told farmers that future growth in production should only come on the back of a strategy that is focused on first creating added value.

Penno, who founded the milk processing business Synlait, now valued at over NZ$1.7bn, warned that “scale does not drive profit”. He reinforced the point by showing that despite the milk pool in New Zealand growing from 4bn litres to 20bn litres, 25% of dairy farmers were now unprofitable and 50% of farms had a debt to asset ratio of more than 60%. Since milk production peaked five years ago, debt levels have risen 25%.

There needs to be an acceptance that tomorrow will not be like today

The challenges being experienced in the New Zealand dairy sector were mainly attributed to an over-investment in processing capacity on the back of a projected increase in milk output that did not materialise. This was added to by a move by farmers to capitalise increased profits into rising land values and in doing so taking on more debt.

Penno, who admitted to having sold all his dairy farms five years ago in the belief that they were overvalued, forecasts a tough period ahead for New Zealand dairy farmers. The challenge of grinding down debt and refocusing on growing profit rather than volume will only be made more difficult by the need to comply with much stricter environmental standards.

Lessons

So what are the lessons for Irish dairy farmers? First, there needs to be an acceptance that tomorrow will not be like today. The landscape at both farm and processing level which allowed the milk pool grow by 2.5bn litres over the past five years is changing. At farm level, much of the low-lying fruit has been picked. Expansion opportunities on existing dairy farms have largely been exploited and, while new entrant opportunities still exist, many of the most progressive farmers have or are in the process of converting their farms.

Expansion, cost and risk

For the vast majority, further expansion will bring a very different cost structure and more risk. The lesson from New Zealand is that as farms get bigger and move away from the family farm model, it is harder to stay profitable. As scale increases and the business shifts from an owner-operator model, cost structure changes and with this the ability to adjust the cost base during low-income periods, becomes much more difficult.

At processing level, we are perhaps already seeing expansion cracks appear. Seldom have we seen such divergence in the trend between farmgate prices and the Ornua PPI index. The question is, does this reflect the cost of investing in additional processing capacity? Or does it reflect the extent to which higher returns from premium products are now being diluted across a much bigger milk pool where a higher percentage is being processed into commodities?

Advice

There is no doubt that both are contributing factors and again, there are lessons from New Zealand. Penno warned farmers that they should not simply produce more milk and think the market is going to take it. His advice was that any investment in growth at farm and processing level should be part of a 20-30 year strategy that must be aligned to long-term trends in consumer demand. Penno warned of a potential collapse in the dairy-based ingredients industry over this period due to the emergence of new technologies that allow for casein to be made from fermented yeast.

Of course, the potential exists to further grow output from our dairy sector. Dairying is one of the few sectors that is competitive on a world scale and where there are no misguided technological barriers, as exist in the tillage sector. But volume growth should not be the benchmark against which we measure success.

Strategy

Whether the national milk pool expands to 9bn litres or 11bn litres over the next five to 10 years is irrelevant. Any future strategy for our dairy industry should be benchmarked on the extent to which it delivers growth in farm profitability. Learnings from New Zealand show the importance of maintaining a firm grip on costs both at farm and processing level. The Government’s 2030 strategy which will shape the direction of the dairy industry over the next 10 years clearly requires careful consideration.

Positive step in beef price transparency

The new beef price indices launched by the Minister for Agriculture Michael Creed this week are a step in the right direction.

Finally, 18 months after it was first floated by the IFA, farmers have some measure against which they can compare price trends in the main EU export markets for Irish beef. Over time they must be developed to take account of the extent to which the EU beef market is becoming exposed to global trends. At this stage, none of the indices capture the extent to which global beef and sheepmeat markets are surging ahead, largely due to increased demand from China.

Brazil price

This week we have seen the Brazil beef price soar to up to €2.93/kg fuelled by a doubling of exports to China in recent weeks. As we reported last week, with increased access to the Chinese market, this global trend provides enormous opportunity for a sharp correction in Irish beef prices in the weeks and months ahead. It is no surprise that in recent days we have seen factory agents become much more active in marts as feedlots begin to fill.

Meanwhile, the next step is for the offal price index to be developed to reflect Irish and EU prices. The argument of commercial sensitivity does not stack up on the basis that daily reports can be provided in the US and the market continues to function.

Technical efficiency driving profitability

As Mathew Halpin reports, the third phase of the Teagasc/ Irish Farmers Journal BETTER Farm programme will wrap up at the end of January 2020.

Since 2008, more than 70 farmers have participated directly in the programme as demonstration farms, with many thousands more having attended open days.

The willingness of these farmers to take on new technologies and to share their learnings through the pages of the Irish Farmers Journal is what underpinned success.

In 2008, the programme was established by Teagasc and the Irish Farmers Journal, with the support of the FBD Trust, ABP, Dawn Meats and Kepak, to demonstrate that improved technical efficiency could drive profitability on beef farms.

In the coming weeks we will be showcasing how this was consistently delivered on farms regardless of system or land type. Obviously the true success of the programme will be the extent to which Teagasc advisory can roll out the key learnings nationally.

Food for thought on farming

Last week’s Nuffield conference provided plenty of food for thought for the Irish farming sector. As ever, it exposed us to new thinking with some interesting contributions from returning scholars around calf welfare, educating children about farming and the benefits of grass-fed milk.

If agriculture is to overcome the climate challenge, this is the kind of innovative thinking that’s required

One of the more interesting contributions from the Nuffield conference came from 2018 scholar Klaus Laitenberger, a vegetable grower from Co Leitrim, who recommended a number of unusual crops that he believes will grow well in Ireland and provide higher returns for the farmer.

Interestingly, one of these crops, Jerusalem artichoke, can sequester twice as much carbon dioxide from the atmosphere as a tree. If agriculture is to overcome the climate challenge, this is the kind of innovative thinking that’s required and not just blindly planting thousands of acres in monoculture forestry.

However, perhaps the most important contribution at this year’s Nuffield conference came from Prof Alice Stanton from the Royal College of Surgeons, where she outlined how highly processed plant-based foods actually have a much higher carbon footprint than grass-fed meat or dairy.

Following the frustrating and often one-sided debate on climate change carried on RTE last week, this is the real science we must get better at communicating in order to defend Ireland’s highly carbon efficient model of production for meat and dairy.