Mr. Martin Keane:

I thank the Chairman and committee for inviting us here and showing an interest in what we have to say about the difficulties facing the industry regarding volatility. I am joined by Mr. T.J. Flanagan, who is dairy policy executive, and Mr. Seamus O'Donohoe, who is chief executive of ICOS. I am a dairy farmer from County Laois and am president of ICOS. We appreciate greatly the opportunity the committee is giving us. I understand that there is a time constraint.

We are discussing what is probably the 90% of production that goes towards products for export and not the 10% that is used in the domestic liquid milk market. The big challenge from the industry's perspective is market weakness. We have one chart that demonstrates the level of movement from the peak. The two lines relate to butter and skimmed milk. They range from a return of more than 40 cent to 20 cent, so that shows the level of flux that must be dealt with by the industry. The bottom portion of that graph demonstrates clearly where intervention levels are. Intervention levels are at about 20 cent. The European intervention system at 20 cent is relatively inadequate because it is eight or nine cent below the cost of production.

The ongoing volatility is exacerbated by many different contributing factors. One of them is the short-term global supply. For the past 18 months, weather across the globe ranging from North America to New Zealand has been favourable to agricultural production. This culminated in a production increase of about 4% or 4.5% while demand was only growing by about 2%, so therefore there was oversupply.

China was huge in the market in the earlier part of 2014 and would have imported huge quantities of whole milk powder. I suppose this was driven by its experience in 2013 when it experienced a shortage, an internal drought and a problem with foot and mouth disease. New Zealand was not in a position at that time to balance up for its internal deficit. That fuelled China's appetite for huge imports in the earlier part of 2014. As a consequence, it has exited the market for some time and this has exerted a significant downward pressure on the market.

While it is a political decision and we respect the authority of the EU to make political decisions driven and informed by what is going on in Ukraine, the Russian embargo dumped a lot of product back onto the market for which new homes had to be found. A total of 250,000 tonnes of cheese and 30,000 tonnes of butter needed a new home. While we are not exporting huge quantities directly to Russia, it nevertheless has driven the oversupply in the European situation.

The superlevy is another issue. Quotas end on 1 April 2015. All of the opportunity that was spoken about earlier exists and farmers have been gearing up to deal with the opportunity to expand for the first time in a generation. We have had the imposition of quota for more than 33 or 34 years, so naturally farmers have been taking the advice that there is an opportunity to expand and have been looking at their relative position 30 years ago when the size of the output from the Irish dairy industry was equivalent to that of New Zealand. Over that 30-year period, New Zealand's output quadrupled while Ireland's stood still. There was that pent-up need to expand. Farmers are slightly ahead of the game in the sense that they have been building up stock numbers. This is a requirement because one cannot turn on the milk tap. It is not like a water tap that one can turn on. One needs to plan well in advance. The Commission committed to a soft landing. Our experience has shown that this has not worked and the soft landing has not materialised. Ireland is almost 6% over quota with a bill in the region of €100 million. It would probably be reduced if the current spell of cold weather continues. We are looking at that type of impact. The bill across Europe could be €2 billion.

ICOS has been working to combat the problem for five years. It would have had speakers at many of the annual events at which they would have spoken about the challenges and opportunities. We would have tried at European level to convene a coalition of like-minded people to see if something more could be done. Those on the other side of the debate were greater in number so there was no great chance of success. We now find ourselves at the eleventh hour with a huge problem.

Much of the challenge is around cashflow management. This year, 2015, looks like a perfect storm of negativity, with milk prices forecast to be at least ten cent per litre back on the average for the past year and a half. This would not be overstating the impact. This takes €500 million from the cashflow of farmers and rural areas. If one factors in the superlevy bill, which may cost farmers €100 million, one can understand the difficulty faced by this industry, particularly farmers as the first link in the chain.

The other thing that has happened over the past year and a half is that farmers have funded the early years of the expansion and much of that has been funded from the cashflow generated in 2013 and 2014. Some of that needed to be capitalised but probably the banking facilities that were available to farmers were not as robust as they might have been and their appetite to lend might not have been as deep as people would have perceived it to be.

Farmers would have used a certain amount of their cashflow and this put them in a very invidious position heading into 2015. If one takes into account those two points and the fact that the income return from the market for 2014 was strong and then considers that the cash has been spent but that we will still have to pay tax bills in the latter part of 2015, one can see that these are three huge challenges which need to be dealt with.

In the context of industry strategies, Food Harvest 2020 identified volume targets. That is fine and reference was made to volume and opportunity in the discussion which took place earlier. There is an aspect of all of this which cannot be overstated, namely, the need to ensure the resilience of the sector. We need to grow margins and not just volume. If we learn anything from New Zealand, it is that volume alone is not the answer. We must also ensure that family farms are economically viable. It is from such farms that the industry itself and the jobs to which it gives rise flow. In recent times we have been working to discover whether there is a way to counter volatility. Some progress has been made in the context of farmers being offered the option to fix a price in respect of a proportion of the milk they produce. This idea has not gained a great deal of traction, however, because when prices are high it is difficult to persuade someone to accept a fixed price in the mid-30 cent range when they can get 39 cent on the market. It is also very difficult to get consumers to buy into the concept when retail prices for milk are low. This concept must be further developed and expanded because there are huge advantages, not just for farmers themselves but for the industry in general and for end users.

Back-to-back contracts could play a role in this regard. These relate to circumstances where everyone is prepared to buy into a concept whereby there needs to be a reasonable share of the cake for all involved in order that the overall position is sustainable in the long term. In America, there are options around future markets and future contracts. For example, the Chicago Mercantile Exchange sets the daily price of grain and farmers can take hedging positions as a result. It is our contention that some sort of mechanism of this sort should be developed, whether in Ireland or at European level. Serious consideration should be given to this matter.

We welcome the announcement earlier today that funding is being made available for research on moving up the value chain, which is to be carried out in Limerick and at Moorepark. In the context of the development of the Irish dairy industry, there is an absolute necessity for us to move up the value chain. We must not just chase volume, we need to chase value as well.

People are bound to ask what we want. In the first instance, we are seeking a resolution to the superlevy bill of €100 million. The challenge in that regard will be massive. However, removal of the butterfat adjustment could allow us to save up to one third of that amount. The latter is technically possible. In 2008, for example, the impact of the bill was halved when a 2% proportion was identified. There is a further 2% to be obtained now by adjusting our butterfat coefficient. The Irish dairy industry has been making progress in terms of adding more value to milk by means of the solid content. When the base was set, butterfat levels were much lower than is currently the case. The superlevy is not driven by litres, it is driven by percentage butterfat.

We are of the view that serious consideration should be given to the level of intervention that exists. The latter is far below the cost of production and is set at a base of approximately 20 cent, which clearly does not send a positive signal to buyers. If the base was between 24 and 26 cent, it would send a very different message out to the purchasing community across the globe. This could give rise to a two-pronged benefit because if overheating took place, product that is placed in intervention could be released into the market in order to cool things down. It is not just a one dimensional tool and it could give rise to various opportunities. It is worth examining and we ask that serious consideration be given to it.

Other jurisdictions have access to volatility management financial tools. Such tools are not allowed in Ireland. In good years, those in such jurisdictions can place a certain percentage of their profits in accounts that are similar to the SSIAs people used to have in Ireland.

The moneys involved can be drawn down at some future date. It is at this point that they attract taxation. We are not advocating that tax should not be paid on profits. However, such facilities would assist in smoothing out some of the fluctuations between good years and poor ones. The instruments to which I refer are available to people in Australia and New Zealand. I am of the view that, from a national perspective, we should consider introducing something similar here. There would probably be a short-term cost involved but, as time passed, money would flow back into the Exchequer. These measures are designed to negate some of the worst exigencies of what is happening in the context of cashflow and cash management on farms for 2015. In the long term, we need to continue to support innovation and technology. We are of the view that, in conjunction with Enterprise Ireland and the third level institutes, we need to encourage the pursuit of excellence and impress on people the need to add more value.

There has been a great deal of discussion about infant formula. I would not underestimate or understate the traction Ireland has in the infant formula market internationally. Part of our impact in this market is driven by the fact that we have good-quality assurance systems and we are seen as being trustworthy because we do what we say. Some countries prefer to use formula that is produced externally rather than internally. Reference was made earlier to the huge opportunity that exists in this regard in China. Each baby in China has four or five people interested in it as a result of the policy which obtains there. As a result, no expense is spared to ensure that there is a high-quality product available. We can supply that product, promote the image of Ireland and move up the value chain.

Mr. Cotter referred earlier to the ageing population. With ageing comes challenge. In that context, there is a major opportunity regarding clinical nutrition and high-protein supplements for people who are ageing in order to prevent muscle wastage. The opportunities do not exist just at one end of the spectrum; they extend the entire way along it. As a result, we need to invest in technology and build a platform of expertise in order that we might add value to the products we are already supplying.

Market access is critical. Some people selling into China have a marked advantage as a result of the zero-rate tariffs they have obtained. The 15% rate we are obliged to pay represents a huge impediment. Work needs to be done, probably at European level, to free up this and other markets. The recent trade delegation to China was very well organised and extremely successful. All the major players from the Irish industry took part in that mission and were on message, which was good to see. However, the barriers to entry need to be addressed.

I thank the committee for its time. If the Chairman or members have any questions they wish to pose, we will endeavour to answer them.