Oireachtas Joint and Select Committees
Tuesday, 6 October 2015
Joint Oireachtas Committee on Agriculture, Food and the Marine
Dairy Industry: Irish Farmers Association
For the second part of the meeting we are joined from the IFA by Mr. Sean O'Leary, dairy chairman; Mr. Teddy Cashman, liquid milk chairman; and Ms Catherine Lascurettes, dairy executive. I thank them for coming here to discuss current issues concerning the dairy sector.
I draw the attention of the three witnesses who have just joined us to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
All the members were present when I read out the text concerning them earlier.
I invite Mr. Downey to make his opening statement, followed by Mr. O'Leary.
Mr. Eddie Downey:
I thank the Chairman and members of the committee for inviting us today to discuss the opportunities and challenges facing the dairy sector and Irish dairy farmers. Accompanying me today are IFA national dairy chairman Sean O’Leary, IFA national liquid milk chairman Teddy Cashman, IFA general secretary Pat Smith and IFA dairy executive Catherine Lascurettes.
The end of 31 years of quota creates a real opportunity for Irish milk producers, who operate cost-competitive, grass-based production systems, to supply fast growing global dairy demand for high quality, sustainably-produced dairy products and ingredients. However, this positive outlook comes with major challenges around volatility of prices and input costs in particular. Indeed, dairy farmers all over the world are currently living through a difficult period of sustained low milk prices.
Extreme income volatility for dairy farmers has been the norm since 2007. Farmers will need tax policies and milk price instruments to help them manage this reality. In addition, farmers will need well-resourced advisory services to help them improve efficiencies further. The Government must also ensure that the banks give farmers access to flexible, internationally competitively priced finance with variable repayments to reflect income variations. At the conference of parties, COP, in Paris in December, the Government must secure climate change legislation which gives farmers credit for their low carbon footprint in the global context, and which does not prevent them from expanding sustainably.
I will hand over to our national dairy chairman, Seán O’Leary to present the issues in greater detail.
Mr. Seán O'Leary:
There is a positive outlook for dairy, but there will also be cyclical price and income challenges. World population is growing rapidly, with the equivalent of the population of Germany being born each year. It is projected to grow to 9 billion by 2050. Most of the population growth is predicted to occur in emerging countries and as numbers grow so will the percentage of those emerging populations classified as middle classes. This is important because the emergence of more affluent middle classes always coincides with changes in diet. Consumers in those countries will be ambitious to move from poorer quality vegetable protein to higher quality animal protein, often supported by government health related policies, such as the Chinese school milk scheme.
The long-term outlook as predicted by the Organisation for Economic Co-operation and Development and the Food and Agriculture Organisation, OECD-FAO, market analysts and confirmed by most experts is for demand to grow somewhat more slowly than in the previous decade, at around 2% per annum, with global supplies chasing it at a slightly slower pace. There is huge potential for countries that are capable of producing high-quality dairy products and ingredients efficiently and sustainably to supply this growing demand. Ireland is one of the very few countries well placed to capitalise on this opportunity.
Volatility in milk prices and input costs has, however, multiplied over the last decade. This is a result of much greater levels of trade, the quasi-abolition of market supports in Europe, and the greater prevalence of weather events across the world. Economic and geopolitical events, such as the absence of China from the market, the current low oil prices and the Russian ban on EU food imports, have also played a part in worsening price volatility. Farmers will have to learn to manage the impact that the extreme fluctuation of prices will have on their income in order to supply this growing demand and fulfil the sector’s economic potential.
In respect of solutions for the short and longer term, right now the biggest issue for dairy farmers is cashflow or, more to the point, how their cashflow will evolve over the coming months in the face of low milk prices, high superlevy and tax bills and repayment commitments. Come next spring, we will have the added challenge of lower milk cheques as relatively smaller volumes and lower constituents mean lower milk price value.
The early payment of up to 75% of the basic payment scheme, BPS and rural development programme, RDPwill provide welcome short-term assistance. The distribution of Ireland’s €13.7 million share of the EU targeted aid, which we have called on the Minister to match with national funds as is explicitly permitted by the EU and to distribute equally among all the farmers concerned, will also be of some help.
It is also vital that all rural development programmes be fully funded, and that TAMSis administered efficiently and promptly to allow farmers carry out their investment plans in good time. However, the type of cash flow pressures we are seeing right now will be part of the dairy cycle over the coming years. A suite of policies and instruments must be developed and offered to farmers to help them manage their income for the longer term. The setting up by Minister for Agriculture, Food and the Marine, Deputy Simon Coveney, of the Dairy Forum is welcome in this respect, and it must be used by the Minister to put pressure on all stakeholders – including banks, industry, Government and the EU - to deliver long-term viable solutions to the challenges of farm income volatility.
The €500 million EU aid package voted by Council on 7September, which enhances APS for dairy products, increases promotion budgets and makes €420 million worth of direct payment available to EU dairy farmers, will provide some assistance. However, the EU Commission and Council have shied away from doing the one thing that would actually help put a floor on dairy markets and turn them around faster – increasing the so-called intervention safety net so that it is more in tune with actual production costs. The Minister must keep this issue on the agenda and progress it, not play the EU Commission’s game and wait for markets to recover and leave the issue unaddressed, to cause difficulty again when the next price trough arises.
Banks and other finance providers must come under greater Government pressure to make available to farmers competitively priced, flexible financial products, which allow farmers to take repayment holidays or go on interest=only repayments without re-pricing or re-negotiation costs. The Minister must also seek maximum leveraging of the European Investment Bank funds to support the sector, including farmers.
With all the stakeholders around the table of the dairy forum, we want to see the Minister drive greater engagement from industry around fixed price and margin contracts and other forms of optional price-margin hedging. As yet, too few farmers have access to or even understand the potential value of such contracts to help them manage their business for the long term. A crucial piece in addressing income volatility will be to tackle the EU Commission on state aid rules, in order to increase our ability, at national level, to deliver individualised tax-based solutions.
IFA has proposed a detailed scheme to allow farmers to put away funds in good years, to be returned to their taxable income for investment or in poorer years. Such schemes exist in New Zealand and Australia, and in a smaller, more restrictive way, in France. It is essential that we provide this type of individualised flexibility to assist farmers in managing their volatile income.
With budget 2016 only a few days away, I also take this opportunity to thank members for attending our lobbying session last week. The land mobility initiatives facilitated by last year’s budget decisions are immensely valuable for new entrants and expanding dairy farmers. However, more can be done to facilitate farm investment. I remind the committee of IFA's proposals to encourage lifetime transfers and farm restructuring by phasing transfers through partnerships and to accelerate capital allowances for sole traders, among others.
One element which the forum did not discuss at its inaugural meeting, and which we cannot and must not shy away from, is the need for efficiency benchmarking at processing level, with a view to identifying savings and removing costs, including through co-operation, and even consolidation. This is an exercise which the industry itself must undertake, but it must be part of the focus driven through the dairy forum. Only an optimally efficient dairy processing and marketing sector will be able to deliver on its fullest potential for the Irish economy.
Ireland’s sustainability credentials in milk production, being measured through the Bord Bia sustainable dairy assurance scheme on every dairy farm, and promoted through the Origin Green campaign, must be given the fullest recognition in Paris at the COP later this year.
Liquid milk is facing a particular challenge. One of our team today is our national liquid milk chairman, Mr. Teddy Cashman. He has invited the members to the launch of the IFA Liquid Milk Handbook later this week, and can talk to members later on of the particular concerns we have on the sustainability of specialist, contracted liquid milk suppliers in the post-quota era. Expansion opportunities do not exist outside of exportable milk, and with intrinsically higher feed and labour costs in delivering milk counter-seasonally, there is a real need to reassess payment structures and regulation within the liquid milk chain to secure fresh, locally produced milk supplies for a sector worth over €500 million at retail level.
I will hand back to IFA President, Mr. Eddie Downey.
Mr. Eddie Downey:
It is very clear that Irish dairy farmers with the right supports and help have a bright future in growing their business to supply quality products for a growing global demand. The difficult situation we are experiencing right now, and will be experiencing for some months, will improve as markets rebalance and prices recover. With the correct suite of instruments and policies available to them to opt into, farmers can learn to better manage this extreme volatility. We also need delivery in Paris later this year of legal changes recognising our sustainable grass-based milk production system to make sure we are not unfairly restricted from expanding under climate change regulation. In the race to expand for export, we must not ignore or take for granted our domestic market, especially our liquid milk market.
I thank the IFA representatives, some of whom were here before, for the presentation. This is obviously a vitally important area as we have come out of the era of quotas. I think quotas were in place for approximately 32 years. Many farmers viewed the end of the quota era as an opportunity to invest, getting away from the super levy culture and moving into investment. The financial crisis came and had a major impact, which was touched on in the presentation. Intervention and production opportunities were also touched on.
Unfortunately, the dairy industry produces a commodity and one is dealing with the markets. All the markets are volatile. In the US, there is the change in the interest rate and the Chinese market has gone through the floor, all of which are having an impact right across the board. In the most recent milk auction in New Zealand, prices were up 16%. However, 16% of a very low price is not a great deal.
The demographics of the world population present great opportunities. Incidentally, the European population up to 2050 will fall by approximately 50 million. Most of that increase in population will be in the emerging markets or in Third World countries. The population growth will be most evident in places like Syria and Iraq. There will be opportunities but it is about getting to those markets.
TheJournal of Agricultural Economics has looked at the difficulties dairy farmers are experiencing in Ireland, in particular investment opportunities which are being lost as a consequence of no finance being available. A paper by Conor O'Toole and Carol Newman in that journal examined the challenges dairy farmers are facing, in particular smaller and medium sized dairy farmers as a result of having no reserves in place and not being able to withstand the current challenge which the larger farmer might be able to withstand. They called for policy intervention at Government level, similar to the call from the IFA, that is, for the Government to get tough with the banking sector and to provide some level of fluidness in regard to being able to lend to the dairy industry as an industry with growth potential in the Irish economy. That has to happen. Some form of Government-sponsored or European Investment Bank loans may be the only alternative to a fluid banking sector. Do the delegates have a view on what can be done by way of policy intervention in that regard? Do they have suggestions or recommendations?
Do the delegates have views in relation to the EU market mechanisms, such as intervention, export refund or private storage aid, which was introduced and then taken away in September? They mentioned the possibility of intervention. Intervention may be required but obviously it will lead to difficulties with storage and so on. However, one would hope that when the markets improve, one could sell on the product.
What about the export refunds? Does the delegation believe that it would form part of a solution at European level under the regulation and the protocols available to Commissioner Hogan?
No one envisaged the price volatility in the dairy sector - in fact, the price has dropped off the cliff. The price has gone from a high of 43 cent to about 29 cent. According to Bord Bia's figures, the average price per litre is lower than that at the moment. The price was rising from June 2014 but since January 2015, it has fallen off the cliff. Quotas have obviously played a role in the price drop.
In a nutshell, will the delegation identify the two or three main solutions, from a public policy point of view, the Department of Agriculture, Food and the Marine implement? What solutions does price volatility call for? Will the delegation explain its solutions in a nutshell so that the committee can use its resources to ample potential to try to raise these issues? There are approximately 200 dairy farmers in my own county of Donegal. This issue has affected a lot people who invested heavily in this sector because they expected that the abolition of quotas would bring about financial rewards. Unfortunately, many of the smaller or medium sized dairy farmers will go to the wall unless there is some form of intervention at a policy level, whether using European tools or in regard to banking, and the economics back this up. In regard to banking, one will only borrow from the banks if one seeks to invest. Why would anyone invest in a sector if there is no policy support for a three-year or five-year period? I would like to hear the thoughts of the delegation on my points.
I welcome the delegation from the IFA. We spoke about the sheep farmer being the poor relation with the previous delegation but as a dairy farmer, I know what it is like to be the poor relation at the moment. This time last year, in advance of the abolition of the quotas, I was one of the first to suggest we produce a report at the beginning of the year, following consultation with all of the stakeholders. That was very important.
I disagree with Senator Ó Domhnaill when he said that most dairy farmers did not expect a huge drop in prices. I felt there was an expectation, but perhaps I was living in dreamland, that even though the long-term outlook was quite positive, the short-term outlook would be difficult. As has been said here again, what was said at the time was that there were opportunities and challenges going forward. The biggest challenges existed last year. In my opinion, the superlevy situation was the biggest challenge. This year we were faced with the biggest superlevy bill to come our way in quite a number of years. That bill was the biggest challenge we faced in the short-term because the people who had invested heavily would be the same people who would have to pay back the superlevy.
There are still massive opportunities. During the summer or late spring, I attended the opening of a new Glanbia facility in Belview in south Kilkenny, as I am sure some of the delegates did. Some people might say it is in Waterford but it is in south Kilkenny. A point was made that day which I will not forget for a long time. I think it was Mr. John Moloney who made the point that there are 75 milk producers in Ballyragget, County Kilkenny, who will over the next period put an extra €10 million into the local economy of Ballyragget due to the extra milk they will produce. That is a huge financial contribution to make to a local area. That is the positive side of the development but there are challenges as well. It is important to note that there are plenty of small areas with 75 milk producers that can develop in the same way over the next period.
As I said at the start of my contribution, we produced a report last March.
We brought in all the main stakeholders, the IFA, their colleagues in the Irish Creamery Milk Suppliers Association, ICMSA, the banks, processors and so on. The dairy forum was up and running last week, which is very important. It was probably born as a result of our deliberations at the time. It is important to review where we are now in light of our report. Before this meeting, I suggested that over the next few weeks, we should bring in all the stakeholders again, particularly the banks. They have a huge part to play. Several new producers are coming into the system now, such as young farmers, who may have borrowed heavily and will require assistance. Someone suggested payment holidays or extending payment plans. This time last year, I attended a Bank of Ireland briefing in advance of the abolition of quotas. The bank was very proactive in telling us what it had on offer and that it would be able to handle volatility in the future. I am not certain that is happening. The dairy farmers I talk to are not entirely happy that what was promised last year has been delivered. We need to investigate that. There is only so much we can do in Ireland on this issue. We are now playing with the big boys in the world market and we will have to get used to that. We will have to get our house in order before we can play away.
Twenty years ago we were getting 20 cent per of milk but now we are getting 26 or 27 cent. The cost of production has increased by 50% in those 20 years. That is why we must look at where the costs are and what we can do to reduce those costs. Energy costs have increased a great deal, although they have reduced a little in recent times. We must analyse where those costs come from and whether we can produce milk more efficiently. Milk farmers are very efficient and produce a very efficient product but we must analyse that 50% again and how it can be pared back.
That is why I think it is important to have the processors in as well, when we have the opportunity. Are they in a position to give a better price for milk? They will probably say "No", but we must see what exactly they can do. Our report mentioned the New Zealand lesson and people mentioned this from time to time and the Northern Ireland lesson. We must learn lessons from them. New Zealand was in a similar position to us 20 or 25 years ago, producing probably the same amount of milk as we did pre-quota and the prices went through the roof. There have been serious consequences there, such as animal welfare and mental health issues. Farmers there did not go down the efficiency road and analyse where the costs arose. We must learn from that. There was a similar situation in Northern Ireland. There are obviously issues that can be dealt with at European level, which would be very helpful. The package of measures that was announced was helpful to a certain extent, as was bringing forward the 75% of the single farm payment. The downside of that, however, is that there is only 25% left at the end of the year, making coming into springtime challenging. There are pros and cons. There are huge challenges but there are also huge opportunities.
Where I come from is not a huge dairy part of the country. I saw when the quotas went up in springtime last year, the huge investment people made and it is vitally important the banks do not put pressure on farmers. When things look good, the bankers are out there willing to throw out their money but when some little thing happens, they put the pressure on and want to call that money back in.
This a time to be reasonable with people and to give them an opportunity to get over this little difficulty they face. With our current strong, positive outlook, there is a chance for the future. The banks should not tighten up on farmers at this time. I have spoken to farmers who are experiencing serious cash flow problems, particularly small farmers who do not turn over much milk. Many farmers use their co-operatives where they sell their milk to get their feed and so on. In June and July, they had small cheques coming in.
It is crucial that the EU intervention price be increased. There was an opportunity to do that and it should be examined again. The €500 million aid package will be a help and, as Deputy Deering said, providing 75% of basic payment is welcome but when we get to December and January, farmers will be in difficulty because that is the time they need money as the spring approaches and they have to spend a great deal of money on feed and so on. The outlook is good but there will be a difficulty for the next few months and it has to be managed for farmers.
I thank the IFA dairy representatives. It is important that we ensure that the industry continues to grow at a sustainable level and that farmers can make money. We received a briefing document before the meeting, the first line of which is a post by Oliver Moran on Ireland, which is on the Agricultural and Rural Convention website. He states: "Having had a massive economic crash in 2008, one driven in part by an unsustainable property bubble, Ireland seems to be rushing headlong into another potential troubling bubble called milk." While the prices over the past few years were not unsustainable and it was great that everybody benefitted, five or six years ago, milk was 18 cent a litre. We are relying on a world market. The price of a barrel of oil is currently less than $50 a barrel whereas it cost almost $200 a barrel less than 18 months ago.
We need to examine how we provide support to ensure people remain in the industry. When we joined the EEC, people over-extended in the late 1970s with their investments and banks took possession of their farms eventually. We cannot allow that to happen again. As Oireachtas Members, we can make statements and lobby the Minister but when the IFA, as the main farming organisation, meets the banks, it must ensure they are honest and truthful in the way they deal with farmers. They extended the hand of friendship, brought them in and gave them the money they wanted. As Deputy Deering said, when bank officials appeared before the committee to discuss the expansion of the dairy industry, they could see problems coming down the line. The briefing document refers to the European Milk Board and reports from France, Spain, Italy, Portugal, Ireland, Germany and even New Zealand highlighting problems. I hope these are short-term problems but the Russian situation is causing a major issue for the dairy industry while China's lack of economic growth is causing another issue. We have opened all the markets we can and farmers cannot deliver more efficiencies. We have the most efficient dairy farmers in the world at this stage and that has been borne out by Teagasc figures. Farmers have delivered the efficiencies and it is now up to us, as legislators, and the co-operatives, which are controlled by shareholders, to make sure the primary producer is not squeezed. In every agricultural sector, the retailer is taking the profit and we have to change that.
Senator Comiskey mentioned the supports the EU Commission has provided for the dairy industry and he said he would like an increase in the intervention price.
The price is now 22 cent per litre. If we increase it to 35 or 36 cent, it will make the co-ops lazy. They would see they had a level at which they could sell into the market at 25 or 26 cent and, accordingly, would not try to market it. We must ensure all markets are exploited. It is all about efficiencies. Regarding the banks, we cannot see people who are overextended being closed down. I hope this is only a minor blip and the view is that the price will return. It might not return to the level of 43 or 44 cent a litre, but if it gets to 30 or 31 cent, it will be all about efficiencies. As farmers have geared up for higher production, they are producing more, perhaps at a better price. We have the most efficient dairy farmers in the world such that they cannot cut their costs anymore. We must, therefore, ensure the cost of imports such as fertilisers and oil is not allowed to rise in the world market.
The Government has supported agriculture for several years, particularly in the past two budgets through the farm partnership scheme and tax breaks. I agree that farmers should be allowed in their tax income to put funds away in good years for investment in poor years. The Department of Finance has to examine that issue.
I am not surprised at what has happened because the committee, under the Chairman, carried out a detailed analysis of the issue of market volatility in the dairy industry. The Chairman anticipated it well. We heard from the Irish Dairy Board, the Irish Co-operative Organisation Society, ICOS, Teagasc and other interested parties. I remember saying at the time that the Food Harvest 2020 proposal to increase milk production by 50% was ambitious and that one had to hasten slowly. I was warning people who had no knowledge of the dairy industry to be wary of getting stuck into it. That warning was prescient. We understand what it is like for efficient farmers. What must it be like now for those who are inexperienced?
The average price of milk last year was 38 cent per litre because of various world factors. In New Zealand there was a drought in 2012 that led to a large price increase. In 2013 there was a drought in America, with a cold snap in the European Union. It is a function of the market. Demand rises because of various events which are mainly weather-related. The Fonterra Co-operative Group in New Zealand had warned about price volatility and I was not surprised at the turn of events in the price of milk. It is a global issue. Production expanded because of various events which, as I said, were mostly weather-related. Then the market and consumer preferences changed. There was a downturn in the Chinese economy, which resulted in a decline in demand in China for milk. It is important, therefore, that the marketing bodies and processors continue to sell Irish milk in the way they did before. I recall when the committee was dealing with the issue of milk prices that we had the banks in. They are offering all sorts of financial product. I am always concerned about people who come offering incentives, which is grand on a fine day. However, it is on the cold day when one has no shelter, that one needs help.
Questions were being asked about how we should pay the superlevy fine which was €100 million but which was reduced to €60 million, thanks to the appeals system. The banks made all sorts of suggestion such as having prompt pay systems.
They were going to do the devil and all. Bank of Ireland had set aside a fund of €1 billion to assist in meeting the 2020 targets and wondered why nobody was using the AgriFlex loan facility. Farmers in Ireland have a very low level of debt in comparison to their counterparts in other European countries. The banks had various suites of financial options for farmers but the only point they put forward with which I agreed was that dairy farmers should take a "better-before-bigger" approach when considering expansion. I think that was a key point. I do not know which of the banks said that.
AIB were on the money. Before one expands, one should consider how efficient one is at that point in time. That is a very important lesson. Another issue relates to forward selling. With markets are in their current state, however, it is very hard to engage in such selling.
In my view the banks must give farmers some type of holiday to work through the situation. In the context of tax, the Government is obliged to take income averaging and various other issues with which farmers are faced into account. We need short-term solutions to address what, I hope, are short-term problems. That is the issue. Some things have been done. I agree with Deputy Deering that it is all right having what one intended to get brought forward but that leaves a very lean period at the end of the year. In farming circles generally, that period is already quite lean.
Well done to our guests for the points made in the presentation. We can certainly pursue a number of issues. Deputy Deering has made a proposal - on which I know the Chairman will follow through - that we should again invite some of the bodies, in particular the banks, to appear before the committee to see what they can do. If there are policy issues that we can pursue with the Government, we will not be found wanting. Now that people are in difficulties, we must focus on the financial institutions, even in the short term, in order that we might help them in the context of cash flows.
I thank Deputy Penrose and will call him again.. I am aware of an issue that will be raised in respect of the report. We invited Ornua - the new name under which the Irish Dairy Board operates - Teagasc, Bord Bia and the banks to make presentations. We were under time constraints because we wished to publish our report before 1 April. The other factor was the super levy and the opening up of the markets which had been well flagged in advance by all the farm organisations. A decision was taken to use that information as a platform to bring in the other witnesses. We felt at the time, and I take full responsibility for it, there was no need to invite the farm organisations because we felt we had the information that we needed and were under time constraints. I hope the IFA will take that point on board. We have never ever shirked from bringing in farming organisations. Lest that be an issue for any of the witnesses present, I want to clarify the point before I invite them to speak.
Mr. Eddie Downey:
What has been clearly stated is that the dairy sector is vital. A major opportunity has come along for farmers who have been operating with their hands behind their backs for 30 years. Farmers could not expand their enterprises. We came late to the European Union from that point of view and, therefore, we were disadvantaged. In the intervening period, farmers in New Zealand increased output four times over while we stood still. That is the reality.
The removal of the milk quota has made no difference to the price. The price has increased by 0.8%. That is not the issue. As was quite rightly pointed out, what have affected us are global changes such as, for example, those in the financial sector, what has happened in China and America, falling oil prices and, of course, the Russian ban. We trade in a commodity which must be traded at a world price. It is how we manage the givens in the market and get it to deliver a sustainable situation for the family farm units here that is at issue. We pride ourselves on our family farm units. We do not want to see them disappear, nor do we want them to become huge units. We want to continue to have family farms. That is why we put forward our policy.
Everyone has identified the banking system as being critically important, which it is, but we need flexibility in it. Every time I met the banks, I made it clear that we want sensible lending to farmers. We want the lending stress-tested properly and we want to know if the farmers will be able to make the repayments. We have no ambition to end up with a situation such as that in New Zealand, where debt levels have gone through the roof, or the Netherlands, where debt levels are at €18,000 per cow, which is unsustainable. We do not want to arrive at such a point, lumbering our family farmers with that type of debt level.
We need a sensible approach to lending. However, there is also a responsibility to manage the loans sensibly. The banking system has to provide more flexibility to deal with short-term problems. No one built a milking parlour for one year. I do not like it when a farmer starts jumping up and down saying he is going to go broke. My view is very simple. The farmer built a milking parlour for 20 or 30 years. We want parlours to be built for 20 or 30 years and we want sustainable industry. I met a man at the ploughing championships. He told me he is after taking out a lease on land at €300 an acre for the next ten years. He says that the milk price is going to break him but his problem is not the milk price. We need to get that message back to farmers and I will happily live with that. We also have to get the message back to the farmers on the ground to be sensible with the measures they take.
The other big issue is volatility. We have proposals in our budget submission. We need to examine them and see if we can get something that works sensibly, which will allow a farmer, if there is a good year, to put a few euro aside in a tax account or wherever and bring it back in later. No tax will be foregone because the averaging system will take it out of it in any event. Let us allow the farmer the power to manage his business and use it in the most efficient way. I think that can be done.
Another big issue raised concerns oil prices, which are down. Grain prices are also down. Is this a short-term problem? How long will we be seeing low prices? The problem is that grain prices continue to be low. When grain prices are low, American farmers drive milk production and will continue to do so. They also have forward contracts for milk, which will potentially elongate this problem. Political intervention is required. There has been a complete failure on the part of Commissioner Hogan and his team to examine the intervention system. They keep telling us that it will take eight to nine months before they review the system and are at the other end of it. We need to start that eight or nine month process. This should have happened and we should be two months or so into it already. Everyone in this room has stated this fact already but the key point is that this is a commodity which is being traded by commodity traders.
Commodity traders do not come into a market when a price has fallen. They stand back. By not looking at intervention, the signal has been given that we are going to allow the price to fall. If we had put our hands up and said we were going to look at the intervention system, the signal would have been clearly given that there is a floor and that we had better get back in and buy the product we want for the next number of months. Traders would have re-engaged. That is the position that should have been taken and why there has been such a failure. It is not that intervention would have had a huge effect. There would not have been a huge buy-in or laziness on the part of the co-operatives to buy into the intervention system at an increased price from where that intervention is as of now. The markets are stronger than it. We want the intervention system and the prices to take account of the current cost structures. It is as simple as that. We want that put in place.
The cost of doing business, including the costs of energy and fertiliser, is another issue. Four major companies control the fertiliser market. Is there a cartel in operation? The market has four major companies and a levy, which protects one major player, on imports into Europe. This is crying out to be examined. One major company in Europe is protected by a levy to stop other product coming in. This is manipulation of the marketplace which is placing extra costs on farmers and needs to be examined.
Investment, banking and flexibility are important issues but farmers must take responsibility as well. We cannot simply say that the industry is wrong or that the price is wrong.
Farmers have to make good solid investment and that means having good quality advice from Teagasc. Farmers have to be advised of the level and the cost of borrowing at which they can operate. The co-operatives need to be efficient and farmers together with the co-operatives need to co-operate in generating more efficiencies. Given the size of the milk pool, there are certainly question marks over the number of co-operatives.
Russia made a political decision to stop the export of European products into Russia. It was a political decision to put that ban in place. The consequences of that political decision are clearly being felt on family farm units all over Europe, particularly in eastern Europe. The political system in Europe needs to stand up and take responsibility for that and make good decisions. The failure on intervention stands out as a failure.
It was AIB bank which came up with the phrase "Better before Bigger". We are absolutely clear that is how it should be. If a farmer cannot make money with 50 cows, he should not have 200 cows. Farmers should start and get the processes right and then build up from that point. We want to build the industry. It involves sensible banking, good control of costs and Government intervention by way of taxation and other supports.
My colleague Mr. O'Leary will add to my contribution.
Mr. Seán O'Leary:
The president has covered many points. Senator Ó Domhnaill mentioned in his contribution that dairy farming is a commodity business. Largely that it is true. As an exporting nation we find ourselves more exposed than other countries. However, it is not just a commodity business and Ornua has been working on developing the brand - developing the Kerrygold brand - and moving it up the value chain. That investment which had already taken place did in some ways shield us from the worst effects of the fall in milk prices. The effects of the fall in prices happened faster in Europe and in New Zealand where they had a higher cost base. To a degree, as has been said around this table and in the report, volatility was not a surprise. It will always be part and parcel of milk production. The timing was a surprise, with the quick fall from the high prices down to the current price level.
Teagasc has said that one third of dairy farmers will lose money in production this year. The fall in prices in the middle of an expansion phase is the major part of the problem. Farmers invested from cash flow, maybe through lack of the financial products. This was obviously a mistake, as investment should be longer-term. A number of issues have made this problem worse. The valley of the trough went lower and is lasting longer than we expected. It is not the normal 12 months to 18 months cycle of highs and lows. That is another lesson for which we have to plan. Senator Ó Domhnaill asked what we were going to do about that level of volatility. The president referred to solutions to deal with volatility. What has also helped some farmers in some processor areas is the ability to lock in margin. Glanbia has done this. Other co-operatives have developed fixed price contracts, not tying in the margin.
What we were pushing for at the forum was that the Minister would push the industry toward looking at further long-term volatility coping solutions. We are a small country in the overall scheme, however, we have a number of plus factors and our structure is good in terms of farmer ownership. We have the power and we have to push it in terms of getting co-operatives working closer together and developing products. Initiatives are being taken by Ornua in terms of developing a hedging index, which will allow farmers to consider hedging as well as developing products so that they can hedge forward at an industry level and by extension tie in milk price over a period. That will give farmers some security. That is not for everybody. All of these options come at a cost and we cannot lose sight of that. However, when farmers who are heavily exposed in the level of debt they carry, and the new entrants in particular, can tie down their input costs and the margin in general it will give them a far greater coping mechanism.
This is something we have to measure.
Referring briefly to the issue of intervention, the Commissioner has taken a steadfast position against it. He has said to leave the market do its work and that we will be out of the downside more quickly. We have stated consistently that there should be a review of emergency levels and have called for a review. The Commissioner has said such a process will take too long. There will be another volatility crisis in the next number of years followed by others. It is provided in legislation that the EU must review the intervention levels to reflect the costs of production and the market at a point in time. We need this to happen. This is not just about the response but is something that has to happen and will bear fruit further down the line.
I will not deal with the issue of the retailer and the middleman and who gets the margin, which is more Mr. Cashman's area, except to say the milk sector would be more exposed to the problem. Mr. Downey has dealt with most of the other issues. Mr. Cashman might deal with the issue of liquid milk and where the margin goes, which is an area that has to be examined.
Mr. Teddy Cashman:
On retailer margins, legislation was introduced this year relating to competition. Our biggest problem with it is that it did not go far enough in terms of having an Ombudsman, as is the case in the UK. Below-cost selling is also not banned any more. Those kinds of instruments are helpful to keep things in line. I have stated in the past that we need legislation and not aspirations to make these things work. We have heard many aspirations but have not seen enough done on the legislative front to ensure they are realised. This is about fairness. When we speak of the product chain in Ireland or any other market, there is the retailer, the processor and the farmer. We are farmer representatives but it is fair to say that each link in that chain needs to be paid. Money is being transferred and the economics work through the economy for that to happen. We are looking for a clear portion of the retail price to be passed back to the farmer to ensure our costs of production are covered and we can make a margin. We do not begrudge others in the chain their margins or their businesses but we need enough to keep us alive and to ensure there is fairness in the system. What was introduced in the retail legislation in Ireland has not gone far enough. Commissioner Hogan has made noises around this issue at a European level. I attended a National Milk Agency meeting today. One of the issues the chairman raised at the meeting was how prices for dairy products have crashed so hard across Europe and in fairly mature retail markets such as France, Germany and the Netherlands. A huge amount of the produce of those countries is sold to big home populations. We have a low population relative to our dairy output and are largely an exporting nation. Those other countries would not face the same scenario. There has been a certain amount of use or abuse or whatever way one might want to describe it of the situation by the retail sector to gain more margin. The sector has been opportunistic in some markets.
When it comes to the retail scenario, my view is that this concerns fairness. As a matter of fairness, there should be proper remuneration at every point along the chain. Farmers carry the greatest cost. We also return possibly the most to the economy because we source our raw materials here. Unlike foreign direct investment, to a large extent, all the input costs come from the Irish economy. The money is transferred around the economy and benefits everyone. The same scenario applies to the 75 farmers in Ballyragget mentioned earlier.
In the context of the retail scenario, it is about fairness and having proper legislation in place because aspiration does not work and what is required must be properly legislated for. The legislation does not go far enough. We need to support European legislation to create fairness in the context of that scenario.
I have raised the point here that Mr. Cashman has just made. Part of the scenario is the margins the retailers are taking. I have not seen any feedback on an initiative that was introduced, although the IFA may have got some on it. We saw the pressure English farmers were under with their milk prices. Morrisons, one of the largest retailers in the UK, made a token gesture, whereby they provided an option for their customers when buying milk off their shelves to pay the farmer 10 pence more. I do not know what the response to that initiative has been. Under my colleague's chairmanship, we published a comprehensive report on the retail section in this area. Commissioner Hogan was mentioned. This area is part of his priority and I hope there will be an investigation into the retail sector, especially into below cost selling. Morrisons made a token gesture in giving their customers the option to pay 10 pence more for 1 litre or 2 litres of liquid milk on their shelves, which would support the local farmers. I do not know what was the uptake of that initiative. Has the IFA done any research on that?
Mr. Teddy Cashman:
I think it was a cynical enough gesture. I would not support it. In the British scenario, there are aligned contracts in England. The Tesco, Marks and Spencer and Sainsbury contracts are linked into the costs of production, and have been for the past few years, and they are a much more sustainable system. I do not agree with them entirely but they are a better system than what Morrisons were supporting. They only came about eight or nine years ago because there was a sense that there would not be enough milk in UK to supply the liquid milk market there. It was a response to dumping down and people getting out of milk production at the time. It was a cynical gesture. I cannot give the Senator figures as to the take-up of that initiative because they are hard to get.
Ms Catherine Lascurettes:
I want to select a question Senator Ó Domhnaill raised earlier regarding EU market supports and export refunds in particular. A large swathe of the EU market supports were done away in 2007 or at the end of the previous Common Agricultural Policy, the one that has just finished. The situation prior to that was that, by and large, we had a global market with relatively low prices and an EU market with much higher prices. The logic of the export refund measure was that one was bridging the gap between the two, but that is no longer the case. Today, skim milk powder and whole milk powder prices would be similar for such products coming out of the EU for export, and also, for example, on the Global Dairy Trade, which, incidentally, this afternoon went up another 9.9%, so markets are righting themselves, as we speak. They have a way to go, as was pointed out, but they are going in the right direction. However, it is cyclical.
We no longer have a budget for market supports at European level. We now have to tap into the so-called crisis fund. Such a fund can only be generated out of a levy on farmers' basic payments. I would have some reservations about export refunds in terms of how useful they can be at present. The current Common Agricultural Policy does not do a great deal to address the issue of volatility. There is much more work to be done around providing information that can be used through the milk market observatory to establish indices and to do the kind of thing that can be done by the USDA in the United States, namely, providing hedging mechanisms and options that are readily and simply available to farmers. The Commission should take an interest in this area. For all sorts of the WTO-related reasons, I do not think we will see export refunds being relevant again, particularly in the context of their being no fund for them.
I have a few brief points. To return to the competition legislation which was briefly mentioned earlier, as was pointed out we did a good deal of work on producing that report which made a number of recommendations. However, the legislation does not go far enough. We should go down the road taken by the English but it must tie into the overall European context.
The vast majority of our multiples are European based. Would the volume of milk in supermarkets make a difference in this context? If one were to buy a litre of milk today, one would pay the same price as one would have paid for it this time last year. The volume of milk in supermarkets is quite small in the overall context of what farmers produce. The vast majority of our milk products, be it milk power or other products, are exported.
Have our guests any comment to make on the suggestion that the price of milk has bottomed out? We all like to think it has and that there will be a gradual increase in the milk prices in the next period, although nobody can know or guarantee this. What is our guests' opinion on the perception that the price of milk has bottomed out?
Mr. Seán O'Leary:
We look to New Zealand because that is where the price became the lowest most quickly and that was how it stayed for quite a while. What has been said for some time is that the prices being paid for milk were below the cost of production and that they were unsustainable. New Zealand was more exposed than other countries in that it was exposed to the Chinese market and when that market was closed, it found itself in difficulty. There have been four positive GDT auctions in New Zealand. Obviously, the volumes are a little lower, but it was working hard to try to change sentiment, which is what we were seeking to do in Europe through the use of intervention measures. Sentiment plays such a strong roll in the market and it has changed. We have seen spot prices climb week on week in Europea. Last week they were up, on average, about €30 a tonne across the product range, with the exception of cheese. The market has, therefore, turned around. The next job is to get milk prices to rise.
To return to the issue of contracts, their duration and so forth, it has saved us to a degree with prices coming down. It is the lag effect, but it will probably work against us if prices start to rise. From talking to farmers at the national ploughing championships two weeks ago - members will have heard this also - they are looking to seeing the price start to change next spring resulting in a positive sentiment. I hope that will be reflected in a positive vibe in the market.
In the other big market, the US market, an increase in production in the region of 1.4% on an annual basis is what is being talked about. Demand is increasing in that market also. The currency factor is a plus for us.
The culling rate in New Zealand is quite high. A reduction in the region of 6%, 7% or 8% in this production year is being talked about. If that were to happen, we would see lower production. The overhang of product and the likes of the APS introduced by the Commissioner can play into this also. We will see a gradual price increase, the bottom having been reached, but nobody is saying it will be immediate, rather it will be slow. If farmers receive that positive message, they will react with more confidence. Despite what many have said, I do not think farmers jumped headlong into it. They took account of what was going to happen and what their capacity was within the farmgate to expand. There was pent-up frustration having been held back for 30 years, but, by and large, the plans made over a period a time will stand up to the pressure.
The immediate pressure of cashflow in an expansion mode is something at which we must look. Maybe the brakes have been put on a little bit by this price fall but I think the right supports have to kick in at the right times, that is, from Government, the banks and the processing industry, which has to get itself together in terms of efficiency and benchmarking. With the monitor farms and the greenfield farms, farmers can measure efficiency and not everyone measures up. Where are the efficiency and benchmarking measures within the processing industry and how does one processor measure up against another and against its international counterparts? We need to put focus back on that. Mr. Cashman will deal with the other issue on the price.
Mr. Teddy Cashman:
The question, as far as I remember, was about the impact on the Irish market in the local scenario. It is simple enough. In Ireland, liquid milk is about 10% of the market. The retail market for liquid milk is €530 million or €540 million. It is a question of nurturing the market at home because we are among the biggest consumers of liquid milk in Europe and in the world. The UK, Scandinavia, Ireland and probably Australia are the biggest consumers of liquid milk in the world. What one has, one holds and nurtures. It expands into the world after that in that if people nurture and appreciate the market at home, it is much easier to sell abroad and bring people in here as well. A buy-in from the whole community is important. It might not be as tangible from the financial point of view but what is done at home must also be projected in sales abroad. There are two issues around it.
We could discuss this all day. We are heading into a very dodgy area with liquid milk. I do not have to tell the witnesses this. It is not a very profitable business. We could be facing a situation where in a number of years, we will not have fresh milk to put on our corn flakes in the morning. That is probably a fact. It may be a scary fact but unless it is nurtured properly, to use Mr. Cashman's words, by all concerned, that could be the scenario.
Mr. Teddy Cashman:
To respond, we will launch a document on Thursday, 9 October, in the Alexander Hotel which covers many of those issues and it is timely because of the end of quotas and the different opportunities available to farmers now. Many of those issues are pretty well covered in the document. It is useful from that perspective to lay out the issues around it. I think that covers it.
I thank the representatives from the IFA for their attendance. Mr. Cashman touched on the issue of 10%. The sheep are divided and so is the dairying but it is much more imbalanced. That is critical. It is interesting what was said about the incentives that were put into the British liquid milk system to prevent the scare of not having fresh milk available. It may seem inconceivable here but it is still possible. I am aware that Deputy Deering is actively involved in this. I am quite taken by the suggestion to devise a suite of long-term volatility coping solutions. That is something at which we should look. Only a Corkman could come out with that but it is very good and I think it is something-----
One could say that about GAA clubs and counties as well. There is a lot behind that. On the Competition and Consumer Protection Bill, which I hasten to add we asked the IFA in to discuss, we were staunchly in favour of legislation underpinning the Ombudsman. We have been told the regulations are ready to be published and the implementation of what is there should be a good step. We will see if it is enough but if it is not, I think it will have to be led by Europe. A previous Commissioner, Mr. Ciolo, put, for the first time, a reference to the producer organisations into the CAP to give power to the producers to negotiate without having to fear the Competition Authority, as it was in the past, and which the witnesses are aware of. From that point of view, there is work to be done.
We should not forget the liquid milk producers. Ironically, it is the one the consumer in Ireland is most familiar with but almost takes for granted because the milk is on the shelves, yet it is probably the most vulnerable at the moment. It certainly needs to be watched. Sometimes it is the fear of loss that spurts some kind of initiative, which seemingly happened in Britain. That is something that we should keep an eye on as well.
The State-aid rules have been referred to. It would be interesting to see how France got around that and whether there was a certain trigger point, when the price hits a certain level above that, from which a fund is extracted directly rather than from the farm profits from the price of the milk, and put into a holding fund that triggers back in as a support when it gets below a certain point. Maybe that is because such a process does not constitute State rules and is actually farmer funded directly. There might be a way around that. The other issues were the contracts, in particular, for liquid milk and a recognised percentage margin which should be backed up by the legislation and regulations from the Government.
We will bring in the banks and if we have time, depending on what happens, we will bring in Ornua and Bord Bia as well. They are important players from the point of view of a long-term industry. This industry will be the main driver of the Irish agri-food sector from the point of view of output and production, along with beef. Certainly dairying is the one in which there is big room for expansion.
Mr. Seán O'Leary:
To return to the point that the Chairman made - I see it in the recommendations from the report - on the funding of an insurance-type product, what one would say is that anything that might be introduced would have to be done voluntarily at a farmer level. Some people might say at times that farmers need to be protected from themselves but I would reject that. There were one or two funds introduced by some processors last year and that was used to support milk prices in recent times. If some products or initiatives are introduced by processors, the important thing is that there is a transparent system, that farmers see that if money is there and is not being passed onto them directly, that it is put into an alternative fund and that it is transparent and does not reflect back on base milk price. It is a question that some farmers are asking of their processors - the fund is put in place but is it then being used to subsidise a lower base milk price? There is not the same situation in dairying as there is in beef with regard to farmers and processors but I think whatever systems will be put in place in future will have to be voluntary and transparent. With the structure of farm ownership that we have in the industry it should be possible with whatever initiatives take place but the voluntary part has to be borne in mind.
I take Mr. O'Leary's point but the way to deal with that is to make sure that it has Revenue taxation approval because then it has to be transparent and that is what would protect against it being used as a cushion for the processors. If it has that scrutiny attached to it, that cannot happen.
This has been a very interesting meeting. I hope all concerned agree. I thank the witnesses for attending and making their presentation. That concludes our proceedings today. There is no further business and the meeting now stands adjourned until Thursday, 8 October at 10 a.m. when we will have representatives from the Organic Farmers Representative Body in attendance. I apologise that some of the members had to go to a Seanad vote at the end.