Andrew Doyle (Wicklow, Fine Gael)
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We shall resume in public session to discuss the EU scrutiny proposals that are before us today. It is proposed that the proposals listed in Schedule B do not warrant further scrutiny. Is that agreed? Agreed.

I remind members and witnesses to switch off their phones.

I welcome Mr. Aaron Forde, chairman, Mr. Bernard Condon, director of the trade and ingredients division, and Ms Anne Randles, secretary and director of administration, Irish Dairy Board. I thank them for coming before the committee today to brief it on the difficulties facing the dairy sector during 2015. I apologise for the delay. This is our first meeting after the Christmas recess and we had a lot of private business to get through.

I remind witnesses that they are protected by absolute privilege in respect of the evidence they give to the committee. However, if they are directed by the committee to cease giving evidence in regard to a particular matter and they continue to do so, they are entitled thereafter only to qualified privileged in respect of the evidence they give. Witnesses are further directed that only evidence connected with the subject matter of today's proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or entity either by name or in such a way as to make him, her or it identifiable.

I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I invite Mr. Forde to make his opening statement.

Mr. Aaron Forde:

I thank the Chairman and thank the committee for inviting us here. We have a short presentation which deals with the immediate short-term market outlook and looks somewhat into the long term, including the issue of volatility and how it will affect Irish dairying through 2015, in particular.

I shall give a flavour of the Irish Dairy Board. The organisation has a turnover of just over €2 billion and we are Ireland's largest dairy exporter. We export 60% of Irish dairy to over 100 markets around the world which is equivalent to just over 3.3 billion litres. In EU terms that means we are a sizeable dairy organisation. About 14,000 dairy farmers on this island depend directly to indirectly, to some degree, on the fortunes of the Irish Dairy Board and the returns it makes for Irish farmers.

We have a team of 3,100 professionals scattered around the globe who sell premium Irish dairy. We have been established since 1961 as a State organisation, as members will know. That means we have over 50 years experience marketing Irish dairy around the globe. We are an organisation of brands but we have an ingredient business as well. Possibly our best known brand is Kerrygold but it is not our only brand. Kerrygold has achieved the No. 1 position for imported butter in Germany with a significant market share and earns a serious premium in Germany and in the USA.

In Germany and the USA, it is also the No. 1 imported butter with sales at retail level of over €500 million. Other significant brands in the business are Pilgrims Choice, which has achieved the No. 2 cheddar cheese brand position in the UK and is a significant outlet for Irish dairy. Moo is a brand aimed at younger consumers in the UK, which is performing well, and Beo is a brand we sell on the African continent. We also have an ingredient business which is business-to-business with significant global food manufacturers and dairy customers around the world. That ingredient business accounts for approximately one third of our €2 billion turnover. That is a little about the Irish Dairy Board itself. A little about the journey we have been on over the past two and a half to three years follows.

In mid-2012, drought in New Zealand dampened milk supply while Chinese demand began to ramp up and we saw the impact of that coming into dairy prices. Chinese buying began to take off in mid-to-late 2013 due to low domestic milk production and foot and mouth issues eliminating herds in China. Prices began to drop sharply following a boom in supply. Every milk production region in the world responded to higher demand from China and some other milk consumption regions. We had a perfect storm of good weather and good prices driving milk production in every region in the world. In late 2014, Chinese demand had dropped to very low levels while the Russian ban came into place. That meant that two of the top five dairy importers in the world were, in effect, out of the market. It affected sentiment at buyer level very significantly but also had a real impact on market prices. We have seen market prices fall right through the second half of 2014.

Volatility in general in our view is supply side, or milk supply side, driven. Prices in the mid-to-high 30 cent per litre range are not sustainable in the long term. We say that for the foreseeable future because "never" is a long time. For the foreseeable future, prices at that level are not sustainable for two reasons in the main. First, they drive milk supply around the world to excessive levels. When milk supply gets ahead of global demand, we see downward pressure on prices. Second, they constrain demand growth in that they become affordability issues for consumers in many international markets. Markets have become more volatile since the complete deregulation of CAP about ten years ago. Volatility normally originates from the supply side with weather being a key driver. Weather drove milk supply through late 2013 and right through 2014 and has been a key catalyst in getting us to where we are today. Obviously, currency, energy supply and demand, biofuel versus conventional fuels, geopolitical events such as those I have outlined with the Russian ban, and the pace of global economic growth and growth in emerging markets play into the volatility agenda also.

The outlook for 2015 is that we see a very difficult year ahead from a farming point of view. We have had record global milk output growth through 2014 of approximately 5.5% driving high stocks, particularly in whole milk powder and cheese. Slowing demand from Russia and China, two of the globe's top dairy import markets, has weakened sentiment and prices. Milk output has continued its momentum into 2015 despite the downward sentiment and some downward impact on prices. Milk prices in the EU and Ireland today have not reflected where markets are at for a number of reasons. Today, the global dairy trade auction run by Fonterra from New Zealand would return a price for Irish milk in cent per litre terms of just over 20 cent. Today, milk prices in Ireland are approximately 30 cent. Spot milk, if one is unlucky and does not have a customer or contract for it in the EU, is 24 to 25 cent. Milk output in Ireland and through much of the EU continues to be quite strong because milk prices to farmers are not at those spot levels - the global dairy trade levels - yet. Many of us, including IDB, have a market strategy which has allowed us to deliver better returns to farmers than the spot market, as I will go on to outline.

Current market sentiment is not in a good place although it has improved somewhat in recent weeks since year end. We can cover that in more detail during questions. Buyers have moved from more strategic long-term purchasing to tactical buying, taking very short-term decision and very short contracts. All sellers of dairy products are concerned about stock build, particularly in some commodities like whole milk powder and cheese. As with a car dealership, if one has stock, it is not getting more valuable at this point. Milk prices are lagging product prices by about three months because of contractual situations. As such, farmers have yet to see the full impact of even contracts done in the second half of 2014. Our prediction is that the market will remain weak until milk supply puts the brakes on and is constrained and, or, there is an uplift in demand following a Russian return to the market or improved demand from China. There are some signs of stability coming into the marketplace albeit at very low levels and small levels of trade.

In the medium to long term, we are still very positive on dairying. However, people need to eat in the short term and farmers and everybody else in the supply chain need to get through this difficult market situation. We see a stabilisation occurring later in the year and a return to sustainable levels for both the farmer and the consumer. We are in the middle of the supply chain. At one end we have a farmer who would like sustained and high prices while at the other we have a consumer or customer who would like sustained and low prices. Marrying those is not an easy task. China will return to the market and Russia should stabilise over time, although that is possibly a more difficult one. The marginal costs of milk production are high around the world. We are one of the lower cost production regions in Ireland because of our grass and comparative advantage in producing milk from it. Where costs are higher, milk production will be choked off before it gets to very low levels. The exceptionally good weather conditions we have had right through 2014 in all major milk producing regions are unlikely to persist for the long term. Where one takes a five-year view, consistency does not come in weather any more than it comes in milk prices. We have relatively low levels of milk production and low levels of farmer debt. Of our farms, 60% have no or low levels of debt, which is a good position to be in facing into the challenges we have ahead.

In the long term, our outlook is positive. The population will continue to grow around the world to 8.5 billion or thereabouts by 2025 and will be 9 billion by 2050. The emerging market economies where IDB has had a very strong focus over the last number of years, including the continent of Africa, Russia, and China, will deliver growth. The growth will not be in Ireland or Europe, it will be in the emerging market economies. As diets in these economies become more westernised and people incorporate more protein, we expect good demand and growth for dairy.

Also, across the world, we are seeing more focus on nutrition for active ageing and all other life stages, as well as sports nutrition, which is quite positive for dairy.

As I stated earlier, if the Irish Dairy Board, IDB, sold all its milk on the Global Dairy Trade, GDT, auction, it would see a return to the farmer of 20 cent per litre. Our strategy has been different in building brands to help sustain our prices in times like this. We are developing value-added and differentiated ingredients which is a hand-to-hand business with key dairy and food companies across the world. The IDB has been diversifying markets. Over the past five years, the UK, Germany and the US have been core markets but we have invested in Saudi Arabia, made acquisitions in Spain and elsewhere, as well as placing sales teams in Russia, Africa and China. We are active in selling forward on financial markets but there is limited liquidity in this area in Europe. The board is one of the larger traders on the Eurex Exchange. We do much contract management with customers which includes fixed-price milk schemes and stock management. There is a limit, however, to the extent that this can be useful. Most customers do not want to contract all of their requirements and most farmers do not want to contract all of their milk. Contracting has a role, however, in protecting the entire supply chain from volatility. Ireland is more exposed to volatility than most. We export nine out of every ten litres we produce. Ireland has four times greater exposure to world markets than other European dairy countries because of our need to export. There are also logistical costs involved in exporting that a typical Dutch, French or German dairy company would not have.

The board’s aim is to pay the best achievable prices. Performance on milk prices and gross returns is measured by the purchase price index, an index of the basket of return for all products the IDB buys. This is benchmarked against the prices of 18 of the top EU dairy companies. We had a record year in 2014 for product price. Product purchases and exports were up 16%, some 41,000 tonnes, important as farmers and members gear up for life after quotas in April. The IDB will pay a record bonus for 2014 of €11 million to its members, up 12% year-on-year. While our 2014 results have not been finalised, it will have been a good year for profitability. This is important to the IDB, its stakeholders and funders. It also facilitates significant working capital availability to the industry of €300 million.

The industry is, unfortunately, facing into a significant superlevy bill. Due to high milk prices, farmers kept producing. My own co-op, Aurivo, is facing a significant superlevy bill as is every other co-op. It will be potentially one of the highest ever imposed. This needs to be reduced in any way possible. The GDT price is 20 cent per litre. Intervention prices would return 20 cent per litre. We have got support from the Minister on the introduction of market support measures that would send a signal that the baseline should be higher than 20 cent a litre which would be tremendously useful. We urge that intervention support should be set at levels more reflective of production costs. While the European Commission would have an objection to that, it needs to be more reflective of reality of dairying today, namely somewhere in the mid-20s.

As trade deals are negotiated by key trading blocs, it is important the EU moves at pace on it and preferential access to key markets around the world is put in place. The support from successive Governments for the IDB in communicating the grass-fed and premium qualities of Irish dairy products in markets around the world is always appreciated and hopefully will continue.

Market volatility is a reality of competing in global markets, particularly when we need to export 90% of our dairy product off the island. We have a difficult year ahead but the medium to long-term outlook remains positive. The IDB has strategies in place to best manage volatility and will continue to pay its members a leading product price. It is working with one of the leading brokerages on the Eurex Exchange to see what else can be introduced to the Irish market to insulate farmers and processors from volatility.

Our ambition for Irish dairy across global markets is great. Over the past 18 months, up to 40 trade team members have gone off to fly the flag for Irish dairy in various markets around the world. When we get to the other side of this difficult year, there will be positive outcomes from that work. We count on the Government’s support to ensure EU policies work for us. As a team, we are building a robust and valuable diversified asset for the Irish dairy industry and its 14,000 farmers that will deliver strong sustainable medium-term and long-term returns. We are confident the global markets we are building will generate strong and sustainable returns for Irish farmers. There are short-term difficulties because supply of milk has outpaced demand, which, unfortunately, has gone in the opposite direction. We believe the fundamentals are there to pick this up again later in 2015. All involved, from the supply chain to the processor must ensure we have a business that can come through these difficult times. Thankfully, 2013 and 2014 have been good strong years for milk prices, averaging at 39 cent per litre. We face into the upcoming challenges in good shape and, hopefully, will come through in late 2015.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I thank Mr. Forde for his interesting and comprehensive presentation. It was very useful. I have a few questions in order to get clarification on issues. Mr. Forde said the Irish price at the moment is about 30 cent per litre. The spot market price is quoted at 24 cent per litre. He said that the New Zealand world price was 20 cent per litre. Would he be able to hazard a guess as to where the Irish price, on present trends, will fall? How far can we sustain the differential by targeted marketing, premium products and so on?

The big concern at the moment is that there has been expansion in dairy product and in production. Presumably, some farmers have been doing this on the back of retained profits, have a lot of experience and very high productivity and will weather whatever storm comes because they have seen this coming and going in the past. However, are there farmers who have got into dairying, quota levels and so on, or who have been involved in major expansion in anticipation of the end of quotas and who have borrowed very significant amounts of money? One might say that the sustainability level in Ireland is x cent per litre and, on average, that might be true. However, have we any idea how many farmers are above that because of commitments made, namely, overheads, borrowing commitments and so on? These farmers might not be the most efficient or have the greatest experience. Do we know, as the price comes down, how many farmers are likely to get into financial trouble? Does the industry have a plan in place to try to assist these farmers and to avoid suddenly facing a crisis? Such a crisis might not affect all farmers but it might affect a reasonable number, particularly those who expanded too rapidly. Like many industries, when things were going well, there was a lot of talk about getting in more, producing more and borrowing more. As the price comes down, what is the tipping point at which we are going to see significant numbers of farmers getting into trouble?

Mr. Forde mentioned that marginal costs of production are lower here than they are internationally. Would it be possible to quantify this? Is it two cent per litre or three cent per litre? What is the difference resulting from the natural advantages we have with grass? This would give us some measure of how we can take a hit in terms of a change in the global price and how sensitive it is to price.

Will the reduction in energy costs have an upside or a benefit? Taking in the whole industry, is that significant? Taking it from grass production through to getting it on the market, how much will it be a counterbalance or does it have any significance at all? On mitigation, at the end of the day we are an Oireachtas committee and a big part of our role is to get information but what are the things we can do or what are the things, politically, that could be done?

I was interested in what Mr. Forde said about the superlevy penalty because I queried the Minister a few times about this. He seems to think the best he was able to achieve or was going to be able to achieve would be a deferral of the superlevy penalty. I know that the witnesses collectively, and as individual co-operatives, etc., have a lot of contacts in Brussels. Do they think there is a realistic possibility of getting the superlevy reduced? It seems to me to be farcical. There was some talk about the butterfat content and so on. Could the witnesses clarify what angle we should be pushing? What case should we make to the Minister? Is it on how it is measured as a superlevy or just a reduction of the superlevy?

The second issue Mr. Forde mentioned is that intervention at 20 cent per litre is too low and that it would have to relate to production costs. This goes back to my previous question on the marginal production costs. In the Irish context, what would that have to be, give or take? I will not hold the witnesses to the last cent but it would be important to give us the figure in ballpark terms.

We often talk about the promotion and maintenance of Irish agriculture products, whether it is beef or dairy, because it is grass-based. Is it sufficient for us to continue just to say it is grass-based? Does that suffice in the market? Will the day come when we will have to define what grass-based production or largely grass-based production is in order to reassure the market? Is that an issue we should be looking at in the medium term? Should we be saying that there will be a definition? There is a definition of organic farming. Do we need a definition and if so, would it be beneficial in the longer term? Should we have a certified definition of grass-based production to which a farmer could adhere? A person could then put a certificate on his or her product knowing no one else can claim to be doing it this way if he or she is not actually doing it the same way.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I also welcome the delegation here today and thank them for the very informative presentation. This is going to be the big agricultural story of the year. The superlevy is going to be the number one difficulty starting off the year. The witnesses are right to point out that we are facing huge penalties and unfortunately those who are going to be penalised are more than likely those who are depending on a drive in milk production in the next number of years in particular. If they are going to be facing these serous penalties, we are at a very delicate starting point. Something has to be done. To follow on from Deputy Ó Cuív's point, deferral rather than reduction is not going to sort out this problem. How do we get around this issue and the difficulties that we seem to be having and which have been outlined by Deputy Ó Cuív? Are we the only country experiencing this issue? Are there other options we could be looking at with regard the reduction of the penalty?

We seem to have been continuously facing penalties over the past years and this year seems to be the worst year ever. Would that be correct? Over the past years there would have been substantial penalties but this year the penalty seems to be the most substantial to date. Are we being penalised now, or potentially being penalised now, because of our faults in the past and because we have not been hitting our quota or thereabouts? We have been over the quota and because we have been over the quota continuously, and the pressure is coming now, are we being excluded from support at EU level?

There was a statement made about too much production internationally. We are going to have a 50% increase in production in Ireland, we are set for that and we have all been talking about it for the past years. How do we square that circle? If we increase production we will immediately drive down prices. Supply and demand always results in the same outcome. How are we going to balance that equation? This is the big question we need to address and there needs to be more discussion on this.

On the price range, the witnesses spoke about the spot price and the actual price at the moment, which is 20 cent per litre. The witnesses spoke about the cost of production. We have a low base cost in Ireland, given our grass-based production and so forth. but unfortunately, we do not produce all our milk off grass. There was a discussion here prior to Christmas with regard to liquid milk, for example. At 20 cent per litre, we will not have liquid milk production in Ireland. It is as simple as that. It would not be possible. Gone are the days when it was a hobby to turn in the cow's milk and a person would get 20 cent per litre, with an expression of appreciation and a request to do the same the following year. This will not happen. How are we going to overcome that issue?

That is the big challenge we will face in the new term post-2015 and it is a longer term challenge. The issues will balance out in terms of where we are in the world market. The bigger challenge for Ireland will be the cost of liquid milk production going forward over the next period, and not just in the short term. That big issue needs to be tackled in some form or another. Are there plans to deal with it? I would like to hear the view of the board on the matter.

As the delegation rightly said, consumers always want value for money. However, quality was not mentioned. The quality of milk here is as good as anywhere else, an aspect which should be sold to consumers. I like to think that consumers will always opt for quality rather than a cheaper offering. In my opinion as a milk producer, we have substantiality increased the quality of milk over the past 20 years and now test for everything and anything. Obviously the producer must bear some of the cost. We should make more of our quality product. We are not doing enough to promote the quality aspect. Perhaps, due to the recession, consumers will opt for a cheaper product but it is not always the best product.

As Deputy Ó Cuív mentioned, volatility in prices is the biggest issue to face the dairy industry for the next period. Can the board state what it believes will be the average price range for the next five years? In 2008, a specialised dairy farmer's average income was €45,000 per year but within a year it fell to €23,000 which was almost a 50% decrease. A number of farmers have invested substantially and are investing substantially. I am afraid they will get into serious financial difficulty trying to meet the liabilities generated by such investment, be it increased numbers or increased infrastructure. My comment follows on from the point made by Deputy Ó Cuív.

Earlier it was stated that only 60% of farmers have no or low debt levels. Is that an old percentage figure? What is it based on? The reason I ask is because farmers, in the past year or two, have invested substantially and had to borrow. I do not mean to be alarmist but a 50% reduction in farmers' income is similar to what happened when the construction bubble burst. We need to address the matter and make plans. Are there plans to tackle the matter?

Andrew Doyle (Wicklow, Fine Gael)
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There is a vote in the Dáil but I shall allow Deputy Penrose to contribute if he so wishes.

Willie Penrose (Longford-Westmeath, Labour)
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I thank Mr. Forde for his informative and comprehensive presentation. He outlined the stark reality facing dairy farmers in the next year or so. Some months ago I read, with deep apprehension, about what lies ahead for people who have recently entered the dairy industry. A lot of people are availing of the abolition of the quotas and everything else and existing farmers are planning ahead, all of which will increase the level of production.

As Deputy Deering has rightly stated, 60% of farmers have manageable debts but 40% of farmers will have challenging debts. One of the big issues is the cost of funds in Ireland when compared with the ECB rate and the differential margin charged by the associated banks and other lenders. The Government must look to funds being made available to the farming industry by a strategic investment bank or somebody else, but particularly to the dairy industry in the years ahead.

Deputies Ó Cuív and Deering are correct that the years ahead will be very challenging and competitive. We are in the midst of a perfect storm. We have had a very significant increase in supply at our own level but we must get rid of 90%. There is also a declining world market as evidenced by the reference made to the Fonterra 20 cent market. We are heading towards an equilibrium price which is what the board is trying to achieve but I am worried that some farmers have not paid attention. I have read that some of them will plough ahead but I think they should hasten slowly. That is my advice to farmers and I used to deal with a lot of them.

There must be a reduction in the superlevy but there is a pathological resistance to doing so at EU level. We debated this matter here intensely about 12 months ago but nothing has moved. Unless there is a move this matter will form part of the perfect storm. Everything else has fallen and now the superlevy will be removed as well. It is the worst confluence of circumstances to face the industry.

Deputy Ó Cuív made a point about grass-based production. I agree with what Deputy Deering said about quality. I agree with him that quality is critical, that people pay more for quality and that we should promote our quality product. The American beef market has been opened but the Americans want full grass-based production that is done without using concentrates and everything else. Therefore, in terms of a designation and demarcation zone, the board will have to ensure that Ireland is presented as being green and organic which will give us a competitive edge. The Irish Dairy Board will have to focus on how we can achieve that competitive edge for the foreseeable future.

These issues need to be addressed and I thank the board for drawing them to our attention.

Andrew Doyle (Wicklow, Fine Gael)
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Does the Deputy wish to say anything else?

Willie Penrose (Longford-Westmeath, Labour)
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No.

Andrew Doyle (Wicklow, Fine Gael)
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I wish to ask a few questions but I must suspend the meeting due to a vote in the Dáil.

Mary Ann O'Brien (Independent)
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I thank Mr. Forde for a very informative presentation. My question concerns Fonterra and the view of Mr. Forde and his board on it and what it has achieved over the years. New Zealand is quite similar in population size to Ireland, albeit in the middle of nowhere, but it has commandeered the Chinese market. It now has 30% of the world's dairy. Is the IDB collaborating with it? Has the IDB, for want of a better word, poached some of Fonterra's best minds? Surely that must be in Mr. Forde's vision for the future of the IDB? How is Fonterra making a profit at the prices it is receiving? The IDB has better brands, even from where it is starting. I think the IDB can outstrip Fonterra eventually but I would like to hear Mr. Forde's vision in terms of this aspect.

Mr. Aaron Forde:

Certainly there are issues around animal welfare and environmental conditions that we must stick to that perhaps the New Zealanders do not.

Andrew Doyle (Wicklow, Fine Gael)
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On the acquisitions, there were 41,000 tonnes extra last year in advance of a growing supply pool. What impact does that sort of possible year-on-year growth - I am not saying one can do it every year - have on the predicted increased pool of milk that will be coming on stream?

Mr. Forde mentioned acquisitions the IDB have made. What are they? One of Mr. Forde's slides mentioned the need for support measures similar to New Zealand, Australia and the US. What measures does he have in mind that do not breach state aid rules?

The Chinese were probably always going to curb their purchasing, but the Russian issue has been a bolt from the blue, which has created the perfect storm this year. How does Mr. Forde envisage that playing out? He said it should be resolved, but what are the threats and opportunities in that market? It is a significant market if we could get back into it fully. Cheese is probably the area in which we are most affected. That is a list of questions, but I think Mr. Forde has them all noted.

Mary Ann O'Brien (Independent)
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I have one last supplementary question. Regarding Bord Bia, which I know has nothing to do with the IDB - I am sure there is some communication between them - are there any plans to collaborate and perhaps take on a little of the Origin Green blanket? Again, in regard to New Zealand, I believe we are better placed than anybody in the world with our provenance and heritage to own this space globally from a brand point of view.

Mr. Aaron Forde:

There is some overlap between the questions and hopefully we will cover them all. Deputy Ó Cuív asked where we predict the price to fall to. While there is always some reluctance to make these predictions in markets, as is the case when prices are on the way up, most commentary predicts an average price for the year of somewhere in the region of 26 to 28 cent including VAT. We fall in that range according to where we see markets today.

In terms of how many farmers we see to be in financial difficulty, that picture is not visible at this point. Perhaps groups like Teagasc have a better handle on it. In Auriva we have a farm profitability programme in place where we work with people who are not in difficulty but who want to make their enterprises more efficient, whether they are milking 40 cows and just want to make more money out of those 40 cows, are new entrants at any level, or want to expand. Many co-operatives around the country have similar programmes in place. Our aim is to make each of those farm enterprises more sustainable and see their way through difficult years like this. Whatever stage in the supply chain one is at, whether at the farm production end, the processing end, or the customer end, one's business must get more and more efficient and sustainable year-on-year, given the increased volatility we are all experiencing.

Deputy Ó Cuív's third question concerned the marginal cost of production. Teagasc has quantified that at an average of 26 cent per litre. That is from farms which do profit monitors, which not all do, and there is a range up and down from that. There are farms that have their cost base quite a bit lower than that and there are some higher than that, but that is where it is.

I will ask Mr. Condon to deal with the question about energy costs.

Mr. Bernard Condon:

The reduction in energy costs is quite a complex question because it has three different impacts. The first is that it reduces the cost of production so it reduces the cost of producing milk for the farmer. It is a major input into what we call "the three F's" - feed, fertiliser and fuel. The negative element associated with that is the fact that it has much more of an impact in production systems with a high variable cost base. For example, a US factory farmer will benefit far more from a low fuel price than an Irish farmer who is producing off grass.

The second impact is on demand in developing countries. If one looks at some of these big dairy importing countries such as Venezuela, Algeria or indeed Russia, one can see that they are very heavily dependent on oil dollars. Generally speaking, a low oil price is demand-negative in developing markets. However, in developed markets where a lot of energy is imported, a low oil price generally gives a boost to domestic demand and is demand-positive. When one graphs energy prices and dairy prices, they are very closely positively correlated so in general, lower energy prices lead to lower dairy prices.

Mr. Aaron Forde:

I will ask Ms Randles to answer a number of questions led by Deputy Ó Cuív. I think Deputies Deering and Penrose spoke about the superlevy penalty. Perhaps Ms Randles would address that.

Ms Anne Randles:

I thank the Deputies for the question. Deputy Ó Cuív asked whether it was a realistic possibility that something could be done in terms of reducing the superlevy. The discussion is still open and we must continue to insist that a solution is found to what is a very protracted issue that we are most unfortunate to find ourselves in. We need to focus on this at a time when farmers throughout Europe who have identified a future for themselves in dairying and are investing for the abolition of quotas. It is very disappointing two and a half months out that we are still looking at this. I accept that one of the Deputies said that it had been raised over 12 months ago in this committee.

There are technical amendments. It was referenced in terms of the butterfat adjustment. It is within the ability and scope of the European Commission to make that decision within the forum of the milk management committee. It is a regulatory change which can be done and there must be continued pressure on the Commission to make that adjustment on butterfat, which will certainly reduce the penalty although it will not abolish it.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Would the reduction be significant? It is unlikely.

Ms Anne Randles:

It will not be significant but it will certainly reduce it by a small percentage point. At this stage and given that we are facing a historical superlevy bill, it is something to push for.

The reduction in a superlevy is very much a political decision. There are a number of other member states which will be facing into it. These member states are what we call the dairy member states - Germany, Denmark, the Netherlands and Ireland. They would be the key ones along with perhaps Poland. All of these countries must collaborate and insist that a solution is found. We believe there is a certain element of responsibility at EU level because there has been a long lead-in time to the abolition of quotas. Much emphasis was put on the issue of a soft landing as a responsible way of arriving at the situation we are in, yet in the last year of quota we find ourselves possibly facing the historically highest superlevy bill throughout Europe, and not just in Ireland. It is possible that the Commission will be receiving one of the highest level of receipts from the superlevy under this particular budget heading on the last year the quota exists.

This is a period of transition. It is a long lead-in time and farmers have been investing and have been encouraged to invest for a new era in dairy production within Europe. On that basis, there is an element of responsibility at European level to accept that action needs to be taken not to hamper the investment that has gone on in the industry in Europe in response to a political decision to remove quotas.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Is it a fact that Europe is not actually over quota? In other words, if one adds up all the individual country quotas and all of the production on a Europe-wide level, one would still be within the quota.

Ms Anne Randles:

That is correct. One would be comfortably within quota.

Andrew Doyle (Wicklow, Fine Gael)
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There was also a question about intervention.

Mr. Aaron Forde:

There was one question about intervention at 20 cent per litre, whether it was too low and what the marginal cost is. We have said that the marginal cost is 26 cent. A case would have been made to the Minister by us and others about attempting to get the intervention price raised somewhere into the mid-twenties. As I said in the presentation, there is a philosophical objection on the part of the Commission about setting the intervention based on costs of production but to reflect today's realities, we feel strongly that intervention needs to be somewhere in the mid-twenties.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Would the marginal cost in the higher cost producing countries be 27 or 28 cent per litre?

Mr. Aaron Forde:

Absolutely.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Would it be about two or three cent more? Is that the kind of difference one would be talking about?

Mr. Aaron Forde:

It would possibly be more in some countries.

Mr. Bernard Condon:

If one looks at China, although some of the reduction in Chinese demand has come from the demand side, an awful lot of what they were importing is now being produced domestically. That is another dynamic. The marginal cost of producing milk in China is somewhere around 45 to 50 cent per litre so the gaps can be huge.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I am talking about it at a European level, for example, if I was a dairy farmer in Germany or some other country with a higher production cost. We are talking about 26 cent per litre but are other EU members talking about 27, 28 or 29 cent?

Ms Anne Randles:

It could be well into the thirties, comfortably so in some countries. There has been a move to have a minimum milk price level in the forties to reflect the fact that production costs have been growing in a number of member states.

Andrew Doyle (Wicklow, Fine Gael)
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One would have to question the value of having an intervention price set at world market prices. It does not do anything to act as a cushion. It is irrelevant if the product is at world market price except that it is the buying price.

Mr. Aaron Forde:

Deputy Ó Cuív asked a question about promoting the grass-based nature of Irish dairy. This issue was also touched on by Deputy Deering in terms of quality. It may cover some of Senator Mary Ann O'Brien's question on Bord Bia. Over the past two years or so, all of the stakeholders in the industry have worked with Bord Bia and the Department to shape the sustainable dairy assurance scheme, which has commenced. Real audits are being done on farms. For the first time, it will give a measure of sustainability in terms of pasture-based farming. In 18 months' time, we will have audited information from the 17,000 to 18,000 dairy farmers in the country as to what that means. Since its establishment, the Irish Dairy Board has promoted grass-based dairy and the taste of Irish dairy off grass but to date, we have had very little scientific evidence to back it up. This scheme will give us that evidence so we are strong supporters of it and are supporting Bord Bia-----

Andrew Doyle (Wicklow, Fine Gael)
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Does that include the carbon footprint?

Mr. Aaron Forde:

It does.

Andrew Doyle (Wicklow, Fine Gael)
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That is the simple one for people to understand.

Mr. Aaron Forde:

It does extend to IDB support financially in conjunction with Bord Bia. That is a subset of Origin Green about which Senator Mary Ann O'Brien asked.

We are strong supporters of all those initiatives and will continue to be so. International competitors, who do not have the advantage of grass-based production or the taste it delivers to dairy products, are attempting to move into this space, and unless we have the scientific evidence to back up what we are saying, we will be short-changed. We are very strong supporters of the sustainable dairy assurance scheme, SDAS.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Will it be said in times to come that this kind of a standard in process will become EU-wide so that this accreditation would have a wider validity and others could not claim to be grass-based on labelling unless they genuinely were? They might not have the systems that Irish dairy farmers have but they can try this. Legally, there is nothing to stop them saying they are grass-based and putting green pastures on their advertising unless there is some wider standard.

Mr. Aaron Forde:

As we build our knowledge base and our information, we feel sure we have a good story to tell. We just need the data to back it up. There are people making claims that we do not believe will stand up over time. We believe this scheme and the data from it will, over time, offer us a strong competitive advantage as an international marketer of dairy products.

Deputy Deering touched on the growth in Irish milk production and how that 50% growth feeds in internationally, as well as its potential to drive down prices and how we balance that out. I would ask Mr. Condon to touch on that.

Mr. Bernard Condon:

It is something we need to be conscious of but we need to put Ireland's growth in the context of international growth. The 50% growth we are looking at is about 2.7 billion litres over a nine-year period from 2011. If we look at what New Zealand has done in the past two or three years, with its 10% growth off a 20 billion litre base, it is at or around increasing production annually at the same rate we are talking about increasing production over a five to ten-year period. The US is forecast to be up about 3% this year and, again, that is an extra 2.7 billion litres onto the world market. Therefore, although the 50% looks massive from our perspective, we are less than 1% of global milk supply and less than 3.5% of European milk supply. All else being equal, if markets are performing appropriately, the demand growth will certainly be able to cater for our increase in production.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I read recently about, and Mr. Roche made a presentation to us recently on, the New Zealand situation. The Irish Dairy Board figures on increased production are definitely correct but, despite the profitability, the amount of income generated has not increased in New Zealand. It is something we need to be wary about in that we may increase production but it is not necessarily going to generate more money. That seems to be the situation in New Zealand, or is that correct?

Mr. Aaron Forde:

On many farms in New Zealand, that would be the case. Anecdotally, one would hear that debt levels and the ability to service those debts are a concern. They are experiencing the sharp end of volatility in the same way we are at this time. The message of expansion for expansion's sake is certainly not a cure for all ills. Having all parts of the supply chain in good shape - from farm, through processor and through to the customer level - with the cost level in good shape so they are able to make money, is the key message.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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The message is be wary.

Mr. Aaron Forde:

To some degree, yes.

Deputy Deering also asked a question on liquid milk. The IDB is not involved in any way, shape or form in liquid milk and, given the state of liquid milk in Ireland, we will not be getting involved. I have some knowledge of it from Aurivo. It has been a difficult market for a number of years and continues to be. There is perhaps an issue on the distribution margin through the supply chain.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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Does the Irish Dairy Board have a view on the actual cost of the production of liquid milk at, for example, 20 cent per litre?

Mr. Aaron Forde:

At 20 cent per litre, no milk production is economic, be it liquid or manufacturing. Consumers, retailers, processors and farmers should not wish to see liquid milk prices down in that range because it threatens the very existence of the supply chain. Much has been said about further consolidation of the processing end and that undoubtedly will happen because economics will drive it and it needs to happen. However, we look to our near neighbours in the UK, whose industry is in a dire strait despite the fact it is a very consolidated industry. To some degree, we are casualties of a very competitive consumer mindset and a very competitive retail landscape. Hopefully, the industry can move into a better place, particularly for the farmers concerned.

The next point touches on that and I will ask Mr. Condon to say a few words from an export point of view about consumers looking for value, marketing the quality to consumers and so on.

Mr. Bernard Condon:

This question arose in the context of the improving quality of Irish milk so I want first to acknowledge the fact it has improved greatly and is a very high quality product. On the flip side, I would say the standards that are being applied across the total production in Europe are of a reasonably high standard so, in general, when one is going into the ingredients markets, they look at European product as being homogenous. In other words, French production is seen as being the same as Irish or German production from a technical standard perspective, or that is the view the markets have. Therefore, we in the IDB have focused on the product attributes we can market and which are derived from grass-based production. We see those product attributes most in fat and in butter. The great thing about Irish butter, which we can compare to continental or American butter, is that it is softer and more spreadable than other butters, it has a lovely golden colour whereas other butters have a white colour, and it tastes lovely and creamy compared to other butters. What we have tried to do is brand that under the Kerrygold brand and extract a premium from the market for that. I believe this is where we have the leverage and where we have seen massive success. Over a third of the product we currently buy goes out under the Kerrygold brand and this generates a significant premium in the market. Our plan and our investments are aimed at increasing that proportion year-on-year.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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Are the quality standards we have in Ireland ahead of the European standards and how do they compare with New Zealand standards?

Andrew Doyle (Wicklow, Fine Gael)
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Senator Mary Ann O'Brien asked about the price New Zealanders can take.

Mr. Bernard Condon:

In terms of the technical standards of that product, they are very similar. Again, an ingredient buyer or commodity buyer will not really differentiate between New Zealand and European product from that perspective. I believe we have to focus elsewhere, namely, on the product attributes which are derived from a grass-based system. This does give us a point of difference and it speaks directly to consumers.

Mr. Aaron Forde:

The next question was on volatility and Deputy Deering asked about the price range over the next five years or so.

Mr. Bernard Condon:

A question we are frequently asked, particularly when we are in front of farmers, is what is a sustainable milk price and what type of milk price should we be putting into our long-term forecasts and budgets. We can only take it from the market perspective, although there is another side, which is the cost of production. From a market perspective, we see markets functioning in an appropriate way when milk prices are between 28 cent and 32 cent per litre. At that level, generally speaking, a reasonably efficient farmer can make a decent living and, generally speaking, it is a reasonably affordable level that allows developing world demand growth at an acceptable level.

The only other point I would make is that, particularly at the low end, it looks very lean compared to the average cost of production, which was discussed earlier. The cost of production was calculated when the milk price was in the high 30s, and when the milk price is between 28 cent and 32 cent we would expect the input prices to come back, so there would be an impact on margins.

Mr. Aaron Forde:

Deputy Deering asked about the figure of 60% of farmers having no debt. I inverted a story carried in today's newspapers that only 40% have debt, according to a report which was launched yesterday by Teagasc and sponsored by Bank of Ireland.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Does it refer to all farmers?

Mr. Aaron Forde:

Just dairy farmers. Senator Mary Ann O’Brien asked our views on Fonterra. Not all of them are for publication here. The Irish and New Zealand industries started at a point in our journey 30 years ago with similar output levels. We entered the quota system which put a regulatory cap on our output. Fonterra drove on and now processes 17 billion to 18 billion litres of milk in New Zealand and almost 20 billion litres in various other parts of the world while we are at 5.7 billion litres, which is similar to where we were when we entered the quota system. Fonterra has had major opportunities to grow. Structurally, it was very different in the past. There were three big dairy companies, which have since morphed into one. This mirrors a trend of consolidation in global dairy, including here in Ireland to some degree, albeit slower. Fonterra has significant scale in world dairy.

IDB is not small. We are the market facing arm of 60% of Ireland’s dairy, comprising 3.3 billion litres. We are significant and have good relationships with Fonterra. We regularly meet it and all the other significant dairy actors on the global stage. We collaborate with them by exploring projects in markets in which we might potentially have synergies, for example if another company has strengths and we are not so strong. A number of projects are ongoing with global players, which is healthy. When we were in a no-growth scenario from a volume point of view it made sense to do much of our business from an Irish base. Now that we are in a growth scenario we have packed 36 of the brightest and best we can out of Ireland, some of whom came from other dairy companies, including Fonterra. We have a team of very good people.

Fonterra is returning what the market delivers to it through the Global Dairy Trade, GDT, auction, and eight or nine months ago it had a view that the GDT was the best thing that ever happened to New Zealand dairy farmers. I am not sure that is its view today. An auction system which it runs for a large portion of its output it amplifies volatility on the way up, but also on the way down. Our strategy of investing in brands, markets, people and innovation delivers a much more stable income to dairy farmers over time.

The Chairman asked about the 40,000 tonnes of additional product. In 2013, IDB had more demand for dairy than supply, particularly butter, because of the good work being done in many of our growth markets. Thankfully, much of that 41,000 tonnes of extra product, an increase of 16%, has not posed any difficulty and we have been able to place it in markets and deliver returns in line with our EU peers in the industry.

IDB looks at acquisitions from one of two points of view, either as a route to market or as a route to value. A route to market would be a business in an overseas jurisdiction that can take Irish cheese, butter or milk powder and put it under a brand or has relationships with customers or facilities that can further process it and deliver tonnes of Irish dairy into the market. A route to value would be a business that can take some Irish dairy, not necessarily a lot, but has a good brand or customer relationship or it is in a market in which we want to grow that will deliver value in terms of profitability home to the parent for distribution back to the members.

I will give examples of four recent acquisitions. In 2013 we acquired a company in Saudi Arabia called Al Wazeen Trading. We are constructing a facility there to produce soft white cheese under patented technology developed with Teagasc and we are very excited about the prospects of the Saudi acquisition as a hub into the developing markets of the Middle East. In Spain we acquired a cheese business and established IDB Espana, which will deliver a good route to market for casein, cheese and powdered dairy ingredients. As a bolt-on to our dairy ingredient business in the UK, Adams Food Ingredients, we acquired a company called FoodTec, which will take us further up the value chain and deliver synergies to our ingredient business there. In the US, we acquired the remaining stake in Meadow Ingredients, a cheese ingredient business that is profitable in a growing market for IDB.

The issue of support measures was raised. We were thinking more in terms of trade agreements and Ms Randles will deal with it.

Ms Anne Randles:

As our chairman said, one of the key focuses of our strategic plan over the past three years has been to grow new markets for the additional product that will come on line. We are working in a very low-margin business and any differential we face in terms of market access, particularly in terms of tariffs, can have a very disproportionate effect on our competitiveness in a third country market. China is the major focus in this regard. As Senator Mary Ann O’Brien said, New Zealand has a free trade agreement with China which has allowed it to grow business substantially there. The fact that New Zealand enters the Chinese market with zero or very low average tariff levels gives it a very beneficial strategic advantage over us in one of our most important third country markets. We have been dealing with this, and it is not easy. We were disappointed that Australia has also negotiated a free trade agreement with China to give it comparable market entry conditions to New Zealand. It puts us on the back foot again.

There is an element of frustration at a European and an Irish level, given that our focus is on third country market development, that China is not on the list of countries with which the European Commission is prepared to negotiate a free trade agreement. There will be no opportunity in the short to medium term for us to gain similar market access to the most important import market in the world for dairy products. This must be addressed in some form. If there is not to be a free trade agreement across all products, is there any opportunity to differentiate and negotiate just on dairy or agrifoods? Standing back and saying it will not happen is frustrating for us.

It is not acceptable in the longer term. We ask the Irish authorities and the Government to see what can be done in that regard.

In terms of market access, the Transatlantic Trade and Investment Partnership, TTIP, negotiations with the USA are crucial for the development of business for the Irish dairy industry as well. We have had phenomenal success with Kerrygold in the US and we have grown that brand substantially. On foot of many of the issues we have discussed already in terms of promoting Irish dairy, its points of differentiation and grass-based production, particularly on the branded side, we foresee enormous benefits and opportunities to grow that business. It is a premium branded business for Irish dairying and it is a key and mature market that can take a significant amount of additional branded business. We would strongly support the swift conclusion of those negotiations and, hopefully, quite ambitious market access for dairy products into the US.

Mr. Aaron Forde:

You asked about China and Russia, Chairman.

Andrew Doyle (Wicklow, Fine Gael)
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Some of it has been answered.

Mr. Aaron Forde:

Yes. From the IDB point of view, we are active in both markets. We have been in China for some time and we entered the mass market there a number of months ago with liquid milk. That has made a promising start. In the case of Russia, it is out of many people's hands. It came as a bolt from the blue, as you said. We had a team of ten people in Russia building Kerrygold and some of the other brands. That is difficult for us now, but we have retained a small team there to keep our shelf space. We are trying to be creative about how we do that so when the market reopens there is potential to build on the investment that has already been made and we can get up and running again very quickly.

Andrew Doyle (Wicklow, Fine Gael)
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Thank you.

Éamon Ó Cuív (Galway West, Fianna Fail)
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My understanding is that, effectively, quotas were abolished in the North years ago because people were able to buy quota from Britain and therefore they were not constrained by the quota. It appears to have created a big difference between dairy farming in the North and in the South, which shows in the liquid milk market. It also appears to have had the effect of depressing the price because the larger farmers increased their production. One would expect that since the farms are more northerly than the southern counties of this State they would not have any reduced natural production costs as they have a shorter growing season. Has the experience been that one gets what I call treadmill farming? In other words, one increases one's production, the price drops and one ends up trying to just keep the cashflow going. One is selling the product to make sure one gets rid of it. Has that been the net effect of what happened with, effectively, the abolition of quotas in Northern Ireland? Is that likely to be replicated down here?

Mr. Aaron Forde:

Speaking from an Aurivo point of view, we have farmers on both sides of the Border. I spoke to a farmer in Donegal last week who was as puzzled by the phenomenon as the Deputy is, whereby ten miles over the road there is a farmer who has a completely different mindset in terms of drying off cows, keeping in production and what the Deputy quite aptly terms "treadmill farming". There is a different scale of farm there and there is a different profile of milk production. The farmers have probably plateaued in terms of where they have reached and now there is more of a focus on the cost of production and trying to make more money out of the enterprise.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Would it be to our advantage or disadvantage over time to try to treat the island as one island? Certainly, the liquid producers always say that the big problem they face is the team purse coming from the North. Would it be better if we had a more similar situation and if there was a more coherent situation as an island as we move forward?

Mr. Aaron Forde:

There have been difficulties in that regard both in beef and dairy, and while we remain two different geographies that will remain the case.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Two different entities rather than two different geographies. That is the problem. We have the same geography, but politically they are in a type of no man's land.

Mr. Aaron Forde:

Yes, two entities.

Andrew Doyle (Wicklow, Fine Gael)
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I thank Mr. Forde, Mr. Condon and Ms Randles for their attendance. It is reassuring to know that the Irish Dairy Board is working at trying to develop markets and is very cognisant of the extra production that is coming on stream and will continue, including worldwide. It will be a market where there will be volatility in energy and there will be other factors such as markets closing down. There are factors which are outside our control.

We have also listened and learned, gaining some valuable insights into what we can do as a committee by putting pressure on both the Department and the Minister with regard to market supports, the superlevy negotiations, trade agreements and, in particular, to ensure we are on a level playing pitch with countries such as Australia and New Zealand in valuable, lucrative markets like China.

I certainly found this morning's hearing very informative and I thank the witnesses for that. We are due to hear from other witnesses. Deputy Deering referred to Mr. Roche and the Positive Farmers Conference. That was organised by a group of dairy farmers such Michael Murphy and others, from whom we would be well advised to hear. I know him for quite a long time and he always has an interesting angle and version of matters, and it is usually in the other direction from where conventional thinking is. However, it is very provocative and might be well worth hearing.

As there is no further business we will adjourn.