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.