Oireachtas Joint and Select Committees
Tuesday, 3 November 2015
Joint Oireachtas Committee on Agriculture, Food and the Marine
Dairy Industry: Irish Creamery Milk Suppliers Association
We are in public session. I remind members and witnesses to turn off their mobile phones. I welcome Mr. John Comer, who is the president of the Irish Creamery Milk Suppliers Association; Mr. Pat McCormack, who is the deputy president of the association; Mr. John Enright, who is the general secretary of the association; and Mr. Paul Smyth, who is the association's policy officer. I thank them for coming before the committee today and apologise for the delay in beginning proceedings. We had an extensive agenda of private business to deal with before we could start.
I know the witnesses are familiar with the matter of privilege, but I have to bring it to their attention again. Witnesses are protected by absolute privilege in respect of their evidence. 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 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. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded 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.
Mr. John Comer:
It is always good to have an opportunity to address people of influence, particularly on matters pertaining to our industry and business. Approximately 18,000 Irish dairy farmers supply 6 billion litres of milk annually, with the capacity to grow further, if their solvency is not hindered by the current milk price. With all this expansion and milk production, there are large borrowings at farm level, and all the associated anxiety that results from the trough in the milk price in global markets. This is having a major impact at ground level in the confidence of our members to invest further and to fulfil the ambitions of Food Harvest 2020 and Food Wise 2025, and all they envisage doing for the overall economy, particularly the rural economy. As we know, agriculture reaches into every parish across the country, and if it is not nurtured well and if the policies do not ensure we maintain the Irish family farm model, it will be a great loss to us all.
Irish farmers are selling milk below the cost of production. Our scientific body and others estimate that the cost of production is approximately 28 cent per litre. Glanbia pays 24 cent per litre. It does not take Pythagoras or a mathematician to work out that this is not sustainable, by any stretch of the imagination, into the future. In the past year, the average price was probably above the costs of production and the price of milk solids is high. However, major anxiety is building in rural Ireland about what the price of milk will be next February and March, when the cows calve down and the solids are poor. Farmers will probably receive less than the base price of 24 cent and could receive approximately 22 cent or 23 cent per litre for milk. This will not last, even in the short term.
My organisation has always been concerned about how we could mitigate this volatility. We are producing a product that is oversupplied in global markets, and correcting it might not be a simple matter. In the long term, can the Irish family farming model survive in an unregulated global market? Policies are deficient in equipping farmers with the tools to mitigate the volatility that has the potential to cause insolvency to individual farmers across the State. There is a three-pronged approach. Each farmer must become as efficient as possible within the farm gate. Everything else is outside the control of the farmers, and they must look to national and EU governance to provide them with tools to offset some of the ruinous volatility. The intervention price is structured around 20.4 cent per litre, and it is not acceptable. The concept of the intervention price was to implement a floor price close to the cost of production. While it was probably close to the cost of production when it was first implemented, the cost of production has spiralled upwards since then, while the intervention price has remained the same. This is a significant deficit, although the concept is still as valid as ever.
There are issues around aids to private storage, APS, or private storage aid, PSA, as some call it.
I compliment the Commission and the Commissioner for improving the terms and conditions around PSA. While modifications were made to it, there are still issues around the PSA for cheese where the allocations are not adequate for Ireland. We have only got 1,835 tonnes of cheese in there and we need to have better tonnage. In relation to cheese, in particular, it is hampering to some degree.
One must ask if there is a better way of doing business. One wants to be careful with the words used, but as a sector, both in Ireland and across Europe, we must ask ourselves if there is a better way of dealing with a crisis. In my view, with all the information available to us, and all the technologies available to analyse markets in the future in terms of the milk market observatory at European level, it would not have taken a genius to forecast at least a year ago that we would be in this position. Why did we wait for the crisis to develop and then go looking to the Commission and the taxpayer for funding to offset some of the crisis? To my mind, that is poor in terms of policy. We must explore better tools than those currently in place, such as export refunds. There are moral implications to export refunds. In my view, export refunds will never function again because they will not be tolerated morally across the globe. Then one has got the APS and after that, one has intervention. With all the governance and all the policies, all the huffing and puffing - for sure, everyone is well meaning and I am not casting aspersions on anybody - the reality is the end product is not fit for purpose in helping us as farmers maintain a supply chain that will serve consumers well in terms of the family farm in the future. Perhaps we could have provided an incentive so that some of this production would not have happened, particularly in the eastern bloc countries. Six months ago, funding could have been used as an incentive to those producers, especially in the eastern bloc countries, not to be producing milk at 16 cent or 17 cent a litre. Of course, the influences include the Chinese economy and the Russian ban, but we need to have better policies in place that help offset some of the turbulence that certainly is out there.
In farming or, indeed, any business, net margin is the only important figure. We have reached a stage, in Europe and globally, where our costs are certainly not within our control. There are few global companies dealing in fertiliser, which is one of our biggest costs. It appears a cartel has developed. There is very little competition. Traditionally, when oil prices were coming down, fertiliser prices followed them down. It did not happen this time and one would have to ask why one of the biggest costs on farms - second or probably equal to feed costs in terms of meal - has not come down at all. In fact, it has gone in reverse and all the indications are that it will go up further.
Second, there are interest rates. We have clear statistics that show definitely that the extra cost in interest in a year on Irish borrowings, pertaining particularly to Irish farms compared to our competitors across Europe, would be in the region of €80 million. Irish farmers are paying €80 million more per annum in interest than our counterparts across the European Union. When one benchmarks that against how much talk there was about the superlevy fine of this year and other years, that exceeds those particular figures.
The Commissioner, Mr. Hogan, made us a lot of promises and commitments on "legislation" - I use that word because in the past week or two it has been diluted somewhat in some of the commentary from the Commissioner himself - to deal with the power of the multinationals. As individual business people, as is the nature of farming across all of Europe, it is almost impossible to compete with the power of the multinationals.
Some multinationals that operate in this country have a turnover in excess of €32 billion or €33 billion, to take Tesco as an example. They can structure and organise in a way that does not suit primary producers. The clear evidence is that, irrespective of the price of beef or milk, the primary producer has been taking a smaller percentage of the final retail price, year in, year out, since the 1970s. This is a point we have to address and committee members all have a responsibility as legislators to grapple with it. Our percentage of the final retail price has been decreasing. Whether milk is at 25 cent or 50 cent per litre, we are getting a smaller percentage. That is not happening by accident. It is happening because we are individuals who are easily manipulated and extremely vulnerable because of the fragmentation in the way we have to do our business with the growing power of the multinationals. Some measure must be put in place to guarantee fairness in margins. The price to the farmer in the last year is on record as having reduced by 35%, while the price to the consumer has come down by 2%. Something is happening. We need to be cognisant of that. We do not need to be afraid of it and we cannot shy away from it. We have to find ways of dealing with it, and we have to call it as it is.
EU state aid rules have to be looked at as well. There is scope to make policies more fit for purpose for individual member states, rather than abroad brush policy across the EU 28. The farm management deposit scheme was cited. This was a good scheme. The concept was well-received by the Ministers, Deputies Noonan and Howlin, but they said they might be hampered by state aid rules. There should be an examination of these rules.
What is coming from Europe at the moment is market-oriented policy. That means that the only way to cure low prices is by a round of insolvencies at the primary level, to curb production to match demand, or an extreme weather event. These two variables make it almost impossible for us, as business people, to second-guess markets. We find ourselves in a position where there is a three-year lead-in from the decisions we make today to when that product is ready for the marketplace. We have to guess where the markets will be in three years' time and when we have produced the product, it is extremely perishable. We are vulnerable on both fronts. It is not like other commodities. We make no apologies for saying that we need to think outside the box in terms of honing a specialised policy on food production. Everybody in the world has an interest in food production and it is of critical importance. Consumers are more astute and tuned-in than they are given credit for sometimes.
In respect of the funds coming from Europe, our proportion of the €400 million left over after €100 million went to marketing would be €13.7 million. We were given indications by senior politicians, who will not be named, that this would be matched at national level. We hope that will be followed through. In that case, our preference would be that it would be brought to the farmers who are in most need as soon and as directly as possible, as in a single payment per farm. Some kites are currently being flown about it being skewed towards young farmers. The ICMSA is very clear that it would certainly like to see young farmers and would encourage them from every angle. However, from an analysis of the crisis that has developed at farm level, it is very hard to differentiate between somebody who has just turned 40, and has young children and more dependants, and a young farmer. We should not put one farmer against the other. There should be equity in the distribution of the funds, whatever the final figure might be.
GLAS was available for dairy farmers in the past in REPS.
That is almost useless to dairy farmers. Technically they can access it, but in practical terms it is not functional. I do not know of any dairy farmers who are currently in it.
I cannot go without mentioning the beef forum. There are 1.2 million dairy cows in Ireland that all have a calf and they all end up as culled cows. Because of that, we say that we produce over half the beef in the country. The beef forum was reasonably good in terms of the commitments given, but we were disappointed that the commitment to have a full review of the grid was not honoured even though there were clear commitments there. There was a clear commitment to get every animal from a quality assured farm a quality assured bonus. That did not happen. There was also a commitment to deal with the 30-month age limit, but that was not addressed. In 2016, there will be 150,000 extra head of stock in this country but we will find ourselves in the same position as last year if we do not take note of those extra animals and make sure that we have followed through on some of the commitments.
I thank Mr. Comer for his presentation. He has suggested a European intervention price of 28 cent per litre. Would he consider the intervention price as the number one remedy that would protect farmers from volatility? Would he agree that it should be based on average European production costs? The system we have now was fixed back in 2003. Do we need a system that moves with the production costs, because input costs vary all the time? A fixed intervention cost is not effective. There are arguments made against it that it influences the market. However, if the intervention price were the same as the world market price there would be no need for an intervention price because it could be sold at that price anyway. I am interested in that.
If the Minister does not add to the European intervention, I understand that it works out at about €697 per farmer. If one considers the scale of the losses incurred by farmers, €697 is a token contribution. It is a drop in the ocean compared to those losses, and for someone in significant difficulty it will not have an impact on their finances. We need to be realistic about this. If a farmer is losing €30,000, there is not much point in thinking that €697 will save him. Should the money be given to every dairy farmer or should there be a system of targeting the money at those who are really vulnerable? The common call seems to be to give it out to every dairy farmer, whether they are in financial crisis or not. For a farmer who is doing very well, maybe not this year, but who is generally in a very stable financial situation with very low borrowings and very good productivity, €697 is just a little Christmas bonus, whereas it will not rescue someone who is in significant difficulty. That is the case that has been made. Some cows produce up to 9,000 litres of milk, but if the average cow produces 5,000 litres of milk and a farmer has 60 cows, the turnover will be very small. I am interested in that.
I am glad that Mr. Comer is focused on the retailer issues. This committee issued a report on this. The price issue and the dominance of the multiples is probably the biggest issue faced by European agriculture into the future. I have said this since I became the Fianna Fáil spokesperson on agriculture. The Commissioner has taken that issue up and we need action on it.
The first thing is to show up what is happening because, as Mr. Comer has pointed out, the farmer is getting a smaller and smaller percentage of what the retailer gets.
Would it be helpful if the Commission were to decide that as long as this crisis persists, there would be no payback of the superlevy and it would be deep frozen until prices pick up again? A trigger price could be set at which repayment would begin, but it would be optional to repay and the money would not be sought until a 28 cent per litre figure was achieved by the EU. They would not look for money back until the price went over that. Would that be helpful to farmers who are paying back for excess production of milk in a rather bizarre fashion? Would that be something simple Europe could do without any significant cost to Europe because it would only defer the collection, not write it off? There seems to have been some principle made of collecting that money, which is small beer in the European context but is still a fair bit of money.
I thank Mr. Comer for his presentation. A number of matters were discussed at the committee before the abolition of the milk quota. It was said that it would be a utopia, a big boost and a benefit to producers, yet now we have an international oversupply, which inevitably was going to happen.
As regards the drop in prices in this country, Mr. Comer says the base price is down to 24 cent per litre at the moment. He has indicated that for the first half of next year the price will be in a similar position. How does the cost of production in this country compare with other EU states? Is it affecting them as badly as it is affecting producers here?
Given the power of multinationals and big retailers, as Deputy Ó Cuív mentioned, they are able to manipulate the market for their own benefit. What can this committee do? We have had these people in here but their responses have been disingenuous. Is there anything further this committee can do about that to try to force a more equitable playing pitch?
In his written presentation, although not in his oral one, Mr. Comer states that the European Commission appears intent on abandoning product price supports and letting the market dictate developments. What is Mr. Comer basing that comment on and could he elaborate on it? If that is the case it means that given their production costs, it will be far easier for farmers in less developed countries to survive than it will be for ours.
Mr. Comer mentioned the beef round table last year and said that little has been achieved since many key issues, including the review of the beef limit, have not been addressed. Is the round table a talking shop or has it had any positive impact on farming in general and farm producers in particular?
I agree with Mr. Comer's view that the fall in oil prices has not been reflected in fertiliser prices, although it is the main commodity. Is that price determined nationally or internationally? There is also a knock-on effect on feed prices.
I welcome the ICMSA delegation. This is all about cashflow as far as I can see and we are in a perfect storm with price reductions.
The superlevy for this year and the next three years for those who are in that situation has caused and will continue to cause that particular difficulty. There are 18,000 milk producers in the country. Will the witnesses give the committee a breakdown of those who are new producers and existing producers and those of the 18,000 who may have borrowed substantially in the past year or two to increase production? There are many strands to the problem, apart from the very low price base line of 24 cent per litre which is below the cost of production. Farmers have borrowed substantially on the basis of a potential income in the high 20s per litre but it is now only 24 cent per litre. The banking and borrowing issue is probably as major an issue as the cashflow problem. If those figures are available, I would be interested to hear how many members of the ICMSA are in those particular categories?
I note on the front page of the Farming Independenttoday an article about the increase in milk production. Dr. Pat Dillon, head of Teagasc at Moorepark research centre, expects us to far exceed our 50% increase in production well in advance of 2020, which was the initial target. This year alone we are 1.1 billion litres ahead of 2009 which was a bad year for milk production from a price point of view. Despite the fact the price is low, there appears to be continual expansion. Given that farmers were planning, prior to the abolition of quotas, for a certain amount of young stock to come into the herd, one cannot decide suddenly to turn them away. Within the industry there seems to be a reasonably progressive attitude that the position will improve and that if they continue to produce this extra amount of milk, it will compensate for the drop in price. Would the witnesses agree with that assessment?Obviously the extra milk being produced this year will compensate to a certain extent for the drop in price.
I mentioned the banks. Have the witnesses had dealings with the banks about some of their members who may be in difficulty?
The issue of the multinationals was mentioned by Deputy Martin Ferris and Deputy Éamon Ó Cuív. We did much work in the committee on legislation in this regard. I agree with their point of view. Would it make a difference if legislation were in place, at European or national level, to deal with this issue? There is no doubt supermarkets in Ireland use milk as a loss leader and have done so for many years. Certainly four supermarkets in the one town will not charge the same price for a litre of milk. The majority of our milk products are exported. While I agree there is a need for legislation, would it make a substantial difference in this issue? We depend on exports and are always seeking out new markets, but the markets we had hoped to get into, whether in China or Russia, are under pressure. I would welcome the opinion of the witnesses on this issue.
Ireland is a small fly in the ointment from a milk production point of view and is dependent on outside sources to survive. While the witnesses have outlined some of the national issues that could be dealt with, including the commitment to €13.7 million, I agree with Deputy Martin Ferris who made the point that €800 or €900, though a small sum, is welcome to a dairy farmer who may have serious difficulties.
I was, and I remain, one of those people very much in favour of the abolition of milk quotas on the basis that they held back production over many years. Mr. Comer noted in his presentation that one would not need to be Pythagoras to understand there would be an issue. Certainly, this time last year, the vast majority of people knew this issue would arise to some extent. Perhaps we did not expect it to be as bad as it is, although some might have predicted it accurately. We are now in the middle of the storm and trying to get out of it. The wind is blowing in all directions and in some cases it is a tornado. The question is how to achieve a balance, but the problem is that what has happened will happen again, even if we get out of it next spring or next summer. In five or six years' time, the same thing will happen again, as sure as we are all sitting here today. We do not know how many of us will still be here in five or six years' time, but the same discussion could well be taking place no matter who is sitting around the table.
Learning from what has happened must, therefore, be the main concern. We must put structures in place for the future to enable us to deal with the volatility in the market and the cashflow issues facing farmers. The superlevy has contributed to a huge cashflow problem in this country. In fact, the people most seriously affected by that levy are possibly the very people who would have liked to produce more but have been held back to some extent for financial reasons.
I welcome Mr. Comer and his colleagues from the ICMSA. Many of the points I intended to raise have been made by colleagues. I am sitting here today as both a farmer and a politician, two professions in which one must be an optimist to survive. The farmer must hope the weather helps out and that he or she is able to make a profit at the end of the year. A politician must be hopeful of being re-elected at the next election. Mr. Comer suggested that one did not need to be a genius like Pythagoras to see there would be a global depression in regard to milk prices. Certainly, all the research that was done did predict a drop in prices this year and next. It seems, however, that the farm organisations, the banks and the advisory bodies did not do enough to curtail what is now an expansion, and it has put people into great difficulty.
It would be interesting to know what the actual investment has been in the dairy industry by farmers via on-farm investment. I suppose information on how much was borrowed is easily obtained from the banks, but that will not tell us about the money that was spent which had been saved over the years. The dairy sector is in crisis at present, but that also was the case six years ago when the price of milk was 18 cent per litre. We are a small player on the global stage and to achieve a price increase here requires some type of problem in other countries. When grain is cheap, for instance, America produces as much milk as it wants because it is done on a grain basis.
I have a hypothetical question for the delegates. In their view, should the abolition of quotas have been done gradually rather than having one drop? As Deputy Deering noted, we are almost ahead of the 2020 target at this stage. Do the witnesses agree that implementing the abolition on a gradual basis might have prevented some people from getting into the difficulties they are currently experiencing in terms of the investments and borrowing they made? We were basing our expectations on a price of 40 or 41 cent per litre. People thought there would be a golden egg forever but, as we have seen, it comes in cycles.
Has the ICMSA been in discussion with any of the retailers in this country on the question of prices? We saw what happened in Britain when Morrisons tried to play a public relations game by stating that if people wanted to pay more for British-produced milk, it would let them do it. That was cynical. Could something be achieved by way of a general meeting with all the retailers with a view to ensuring they no longer use milk as a loss leader?
On intervention, there is a view that if the intervention price is increased to 28 cent per litre, it might make the co-operatives lazy. If they have a floor price of whatever, they will not go out and look for new markets and seek to expand what they are selling. The argument is that if they are able to sell in at whatever price per tonne, which guarantees the farmer 28 cent per litre, that will be the base price forever and we will not see any increase.
It is argued that if intervention is raised to that level, it may make the co-operatives lazy in looking for new markets and trying to expand products.
I thank Mr. Comer for coming here today and for not reading out his presentation verbatim. At least he presented it without reading through it. We could all do that.
I am somewhat surprised. Twelve months ago I sat here and warned people. I was an agricultural consultant for many years and met many farmers. I warned dairy farmers to be wary of what was about to happen. I cautioned them very strongly. I know a couple of farmers who got into dairy. I warned other farmers who were thinking of changing that unless they won the lotto, they should not do so. Therefore, I am somewhat surprised by the delegation's attitude. Farmers are very cautious, as I know from having a brother who is a farmer. Since farmers are so cautious, somebody must have encouraged them. I did not hear a farming organisation saying "stop". As individuals, we have to take some responsibility as well.
The banks were before us, as was the Irish Dairy Board. They predicted this. They spoke about the circumstances in New Zealand, China and the Middle East in addition to the Russian ban. I left the committee that morning saying one would want to be a right fool to believe this would be a gold rush. Perhaps I am a very cautious person but if I were leaving here after having listened to the presentations, I would have said "stop". One is dealing with a perishable commodity where one is forced into the market and one is depending on processors to give the best price.
At the time in question, there were discussions about the superlevy bill being approximately €100 million. Reference was made to the appeals system and all that followed. The year 2014, especially the early part, was fairly good. Good prices were achieved and there was good production. Now the tax bill has to be faced. If one is in the Revenue Commissioners' online service, ROS, one has another few days. If not, one had to go the other day. Those are the circumstances that arise. There was a collapse in the milk price, which was predicted. Unless I am wrong, the Irish Dairy Board indicated there would be a significant drop. It was hoping there would be a recovery in 2016. I recall this vividly.
Farmers have become more efficient and effective and are promoting later lactation and an increase in milk solid constituents. That is perfect at this time of the year. Things work like that. There is a dilution when one goes into the milk season. It is related to the mixed production of grass. We now have good weather and everything else. I am not surprised the figures indicate we are galloping ahead at such a pace that the 2020 target will be reached two years early. We have taken many steps, including through cow conditioning, dealing with culled cows and getting rid of certain things. The efficiency factors are certainly being focused upon by farmers in a very positive way.
Regarding the issue which I agree is important, I disagree with Senator O'Neill that the wiping out and abolition of quotas at one stroke might bring about what was referred to. It was affecting the whole market. We are a small player in the market. One could see what was going to happen.
I believed the banks would be cautious. Has there been a high level of borrowing? The banks pointed out that there were a considerable number of farmers with very little borrowed at the time. Has there been a high level of borrowing since then? As Deputy Deering suggested, the figure might be possible to obtain. What degree of leniency are the banks offering farmers? The banks are great at, as it were, putting their arms around one's shoulder to get one in. However, when one experiences a bit of trouble, are banks appropriately lenient by giving an interest-free period and not levying people with significant inputs?
We have had the retailers before the committee. As Chairman of a previous enterprise committee, I was the first person to produce a report in this regard. The retailers would not even tell us their margins. I am not surprised, therefore, that the ICMSA cannot get the margins. Some of the retailers just dismissed us out of town altogether.
We produced a good report. Deputy Doyle, as Chairman of this committee, has another excellent report. We all know where that is. The farmer, as primary producer, gets whatever is left on the table. The retailers take everything. The middle men and the retailers are in there. The farmer carries the load and they take the profits. Particularly at this time, they have a role to play.
I agree with the witness. I recommended at the time that we should have legislation with teeth instead of puffy legislation with different elements. The legislation should confer proper investigative powers. This was shunted to the Competition Authority, but that was a waste of time; where would people get the evidence? No more than in any other industry, who would come forward? That was a waste of time. We have stepped back from bringing forward legislation with teeth, which is regrettable. The president is right in stating that it is probably easier to do this at a European level. Let us do that in an umbrella process.
I know the dairy forum made some progress, especially for younger farmers, which is accepted and welcome, but the ICMSA and Macra na Feirme are speaking about the possibility of an income bond being put in place to cover valley periods between decent returns. That must be examined. It is no use to say this has not been done before. It is a very useful tool and it can be used at a time of reduced prices and consequent income volatility, which we are now experiencing. This will recur, as it happened six years ago; it could happen in four, five, six or seven years again. There is a cycle to this. I support the ICMSA very strongly in that, as it is very useful, innovative and welcome. We should not be afraid to explore ideas that have not been tried before in other areas. There are peculiarities in farming that are not present in other types of industry.
I recall that the other prediction was that in 2016 things would start going back up for farmers, and the dairy sector in particular, as it is on its knees now. Taking Dr. Dillon's projections into account, one would need to be very cute to survive the next 12 months. Unless there is a significant intervention, many people will find it hard to survive, and it becomes even more pressing if there is a family involved because of the other commitments. One must also take into account unexpected or unanticipated events in farming, as it is no different from any other walk of life.
This is an extremely important area for the committee. There is much downstream activity with regard to employment that must be acknowledged, not just on the farm but all over the place. It is very important for rural Ireland. With that said, I will support the witnesses in any way I can.
I welcome the representatives here today to speak to a key issue facing the dairy sector and the 18,000 farmers, as the witnesses noted. There are two big issues. The first is what multinationals are paying for milk, and on the other side we have the international commodity markets. It is very difficult to deal with both. We can take Tesco Ireland as an example. Its financial statements for last year indicate that it is working on a net margin of approximately 1.5% overall of what is turned over in the supermarket. It makes money in that regard, but it and many other multinational supermarkets make their money when paying for the goods. They pay after 90 days but the goods would be bought today and paid for by customer within seven or eight days. They make 3% or 4% in the intervening 80 days, holding the money in accounts. They are using agriculture and every other sector in doing that. They can really squeeze small suppliers, and I know some examples. Tesco Ireland is squeezing suppliers as tightly as possible because it makes money on those suppliers. It is wrong, but how do we deal with that?
There is something that can be done from a legislative perspective in both Houses.
The groceries order is one issue, but other measures can be introduced to deal with this.
We have seen huge volatility in prices on the international commodities market since January 2007. Oddly enough, until then the milk commodity price was fairly stable. It is probably reflective of the international global economic situation and of supply and demand issues. The commodity markets work on fear and opportunity and supply and demand driving fear and opportunity. The battle will be very difficult and I agree with Deputy Penrose. Many people have invested in the milk sector on the basis of quotas being removed, but unfortunately this leads to an oversupply in the market and we have seen it in the price volatility we have now. How this can be addressed is a key issue, as is how to address and reduce the €80 million in borrowing costs. There is an efficiency bedrock and all farmers, including dairy farmers, strive to get these efficiencies. One can only get so much through efficiencies. I am not sure what the rate of borrowing is, whether it is 5% or 10%, but if it is approximately 10%, then €80 million in agricultural borrowings means a cost of close to €1 billion. Are these borrowings only within the dairy sector?
The rates are quite competitive but the interest is €80 million. If the rates are competitive, and I know some of the banks charge up to 10% for borrowings, perhaps there is a need for State intervention or a mechanism for lending to agriculture given its importance and Food Harvest 2020. Is there a need to look at this if the banks do not provide value for borrowing costs? I am not sure. There are tools that can be used.
The European dimension is critical. One way to control price volatility in a global sense is to introduce intervention prices. Do the witnesses have any suggestions for the committee to make to the Commissioner or the Minister? A twofold reaction is needed at national level and, more importantly with regard to commodity price stability, at European level. How do we get this?
Almost everything has been said but I have a slightly left of field question, if I can be excused because I am sure it is way off the mark. I have been listening today. The quota has gone and we have too much supply and are now deep in commodity land globally. It is very ugly because the commodity price has dropped. I hate to hear remarks to the effect that we will get out of this and that we will be back in six years' time because such remarks are depressing if I am a dairy farmer because I know I will live my life in these awful times.
In the context of the pathways for growth and the wonderful people who come from Harvard every year and speak to us about a strategy for Irish agriculture, I am very proud of Ireland, and our dairy sector is so much better than that of anybody else. Look at Kerrygold relative to the size of Ireland. Kerrygold is the second biggest selling butter in the United States. I am aware that Bailey's Irish Cream is owned by Diageo. I am talking about an overall strategy for Ireland. We are the 12-month, grass-fed beef and dairy country. We produce the creamiest milk in the world. Is there a strategy that takes us out of commodity land into more added value, or is it that we just produce too much of it?
I asked a small dairy producer whether he had thought of kefir and he asked me what on earth it was. It is a stronger version of yoghurt and is produced by a Russian family in the United States. It will be worth €500 million by next year and was started only a few years ago. It is an opportunity. To me, there are always opportunities for specialist products.
It would take us out of this awful commodity world where things get better and things get worse again and the people whom the witnesses represent wonder if they will ever win the game and get out of the seesaw of a life in which they very obviously live.
There are two more groups. Some useful suggestions and questions have been raised, in particular the last one on moving from dependence on commodities in which we have always traded now that we trade in a global products environment.
Mr. John Comer:
I thank the Chairman. I want to bring in some of my colleagues. I will be as brief as I can. Many of the questions overlap and I will try to take them in order. One would want a fair brain to go around to everybody and try to attribute each question to everyone.
The major question is intervention price, which is not as straightforward as it might seem. Of course the concept is what we would call very pragmatic. The idea behind an intervention price is to ensure the price is not below the cost of production. Therefore, when the markets are in a downturn, we ensure we do not lose critical mass in terms of the production base across Europe. The intervention price is currently at 20.4 cent, which is based on 2003 costs. The costs have increased. One can argue a cent or two either way, but let us assume that the figure is 28 cent. Therefore, it would follow through that the intervention price should be available at 28 cent a litre.
Farmers are not fools. We understand clearly that when the market starts to recover, that product in intervention still has to come back out and that will slow down the recovery. However, it will stop insolvencies at farm level because it will keep farmers ticking over and it is to be hoped they will be there for the recovery. The alternative to intervention only helps factory farm structures, whereby the weakest are picked off. Denmark is one such example. About five years ago, there were 18,000 dairy farmers there but that figure has decreased to 3,000. The average milk produced per farmer was 300,000 litres, which is roughly where we are at now, and it is now in excess of 1 million litres. The 3,000 remaining farmers are still running into solvency difficulties. Is that a model we want to let happen in Ireland? It will happen. As individuals we cannot deal with those challenges. Milk will always be produced, but will farmers increase their herds to 500, 600 or 700 cows because they picked off the guys who went broke? Intervention is a useful tool, and although it is not perfect, it is all that is available now and should be invoked. We need to be more imaginative about tools in the future.
Deputy Deering referred to it being a cashflow issue. I beg to differ. It is a cashflow issue in 2015 because the average was not so bad. If prices fall below the cost of production, the bigger guys will hit the deck because scale will cripple smaller farmers. If farmers are making 0.5 cent a litre, scale will help them, but as soon as prices fall below the cost of production, cashflow is no longer the issue. It is fundamental to solvency. Sometimes it is misperceived as a cashflow issue. Currently, it is a cashflow issue. By early spring of next year, given all the costs and low solids, it will be more serious and there will be systemic solvency issues. It can happen that fast.
There were several questions about borrowings, and perhaps the general secretary will comment on it. From my recollection, the banks structured repayments at 29 cent a litre, but we are back to 24 cent. This means people cannot repay their loans. Banks have built in six-month moratoriums into newer loans, which is a recent development. People can go interest-only for six months at 29 cent a litre, but we are back to 24 cent. Young progressive farmers who bought into what Deputy Ferris referred to as euphoria are affected.
If one goes back through the records - Deputy Penrose referred to other things and he should have looked at some of the previous records - the ICMSA was always pragmatic, as I would have said, and considered by others to be ultra-conservative. I never thought we were. It is a natural thing for a farmer or any business person to want to grow and expand his or her businesses and improve his or her lot in life. If everyone does it together, it is obvious what will happen.
The crash in 2009 came when we had quotas. I always said that quotas were never fit for purpose, were not flexible enough and left us even more vulnerable.
However, the total free market is not the answer for a perishable product that has such a long lead-in. The global dairy trade price was down today by 7.4%. That is going to send another shockwave through the industry. It is a question of the position at a human level and to where the mind goes. A farmer may receive a price of 24 cent per litre on a given day and might then hear that the GDT price has gone down. All the while, he may have built up a sizable debt. No farming organisation or politician has personal debt of this nature. They might give the advice or it might be the Teagasc people and it may all be well-intentioned but it is the individual who ends up carrying the debt and that is a strong concern for him.
I was asked by Deputy Ferris whether the beef forum was a talking shop. Certainly, I think it was well-intentioned. It was a tricky negotiation process given the involvement of beef processors, farm representatives, Bord Bia and the Minister for Agriculture, Food and the Marine. We were happy with the conclusions but we were absolutely up in arms with the follow-through. We do not think it was in any way appropriate because we were given commitments for five different points, none of which have transpired into reality. The direct answer is that in retrospect it seems to have ended up as a talking shop that did not deliver.
Deputy Deering asked where we stand on borrowings. We have dealt with that question and the scale of it. We dealt with the question on the abolition of quotas as well.
Senator O'Neill asked about the farm organisations and the banks. We have dealt with that. Our organisation believes in incremental steps to growth. That is the only way to proceed. It was suggested here that we would be back in this situation again in six years' time. I do not believe it will take six years. I have absolutely no doubt that milk prices will rise to 39 cent or 40 cent per litre again. There is an underlying good news story, that is to say, the nutritional value of our product is now recognised internationally through science. The body of the science is behind it. This is a temporary thing but the question is how temporary. Is the temporary element going to be long enough to cripple the family farm structure? There is a duty of care to the consumer as well. Any consumer who is surveyed throughout Europe will say that the family farm is the vehicle they want to supply them with food. However, they do not realise how vulnerable the family farm is in such a volatile environment. We need to explain this to people as best we can.
I hope the members will forgive me if I have left anyone out. I cannot read my own writing at times. Senator Ó Domhnaill referred to Tesco and where we could go with the legislation and the squeeze. I do not blame Tesco for squeezing farmers. In fact, it is the duty of the multiple to do that. It is a plc and must answer to shareholders. Otherwise, it would be in breach of corporate governance requirements. However, the legislation must counteract this such that the multiples are not in breach of any law. I believe this must be done at European level. There is no way a member state the size of Ireland or any other member state, even Germany, can deal with this alone. Certainly, we have to be creative in our representations and we must ensure people are well-informed. We can set the seeds here for sure, but I do not believe we can do much at member state level.
My colleagues may wish to contribute presently because I have probably left out something. Anyway, Senator Mary Ann O'Brien asked how we get out of the commodity cycle on international markets. Of course we do not have a market like Germany or France. We must export 90% of produce. However, the reality is that much of our produce is not commoditised. The GDT price reflects the spot markets on commodities. What we are supposed to be reflecting in our milk price is the value-added premium product created by the investment that farmers have made in concert with Bord Bia and by coming up with robust innovative products that have value-added. It is not even reflecting commodity prices. The current price reflects a value-added price. I will leave it at that. I apologise if I have left out anyone's direct question.
Mr. Pat McCormack:
I have some observations from the questions. There was a question about the superlevy bill and the freezing of the repayment. It would be far more worthwhile for this country if the butt of that adjustment was followed up. With hindsight, we reckon this would reduce the super levy bill on a permanent basis by 35% to 40%.
This matter relates to a comment that was made about the gradual abolition of quotas. It was always ironic and problematic that quotas were being phased out and we were getting 1% per annum for a four-year period but no national increase in the final year. The phasing out should have been gradual, for example, 1% the first year, 2% the next year, 3% the next year and so on. We would have avoided the glut at the roundabout that was 31 March 2015.
Senator O'Neill suggested that, had the intervention been increased to 28 cent per litre, it would have made co-ops lazy. Co-ops are allegedly driven by dairy farmers. We want to maximise our return, given the fact that the cost of production has increased. As the president stated, it may hold people in the game.
I will highlight Mr. Pat Dillon's comments in today's newspaper. Given the climate conditions, 2009 was the most horrendous year for dairy production since I started milking cows 20 years ago. If this year was not the most ideal, then it was certainly the second best. We cannot underestimate that. I would be careful about those figures on the effect of weather conditions. We do not need the weather of 2009 in 2016.
Mr. John Enright:
Regarding the banks, we have conducted an analysis of the interest rates that Irish farmers pay compared with their EU counterparts. Had we the EU's average rate, we would be paying €80 million less. To put that in context, this year we paid a superlevy fine of €70 million. The higher rates need to be addressed.
Another issue arises for farmers from time to time. If a farmer gets a better interest rate from another bank, he or she must employ two solicitors to transfer the security from one bank to the other. This is because of the property crash, not farmers, yet we are paying the consequence. The charge is probably €2,000 or €3,000.
As the president stated, there is no point in our dealing with the multiple retailer issue in Ireland. We export 90% of our beef and close to 90% of our dairy products, with the majority going to European markets. Something must be done at European level to address the issue.
The Commissioner has stated that he is examining the issue of interest rates and finding cheaper sources of funding for Irish farmers. The latter needs to happen quickly. In 2016, interest rates, bank charges and loans will be a major issue for farmers.
We mentioned 2009. Some have stated that what happened then could recur after six years, but it could also recur after three years. No one knows. We must be prepared. The 2014-16 period is a good example of the difficulties that we face. The year 2014 was a relatively good one for dairy farmers. I welcome Deputy Penrose's comments on the farm management deposit scheme. If I have a good year farming, I should be able to set aside some funds for the more difficult years. Unfortunately, many dairy farmers are being encouraged to form companies. We have grave concerns about that. The majority of dairy farmers are sole traders and we should support them in that way. The farm management deposit scheme could play a valuable role in addressing future crises.
Mr. Comer mentioned the beef forum. The dairy forum is also up and running. Mr. Enright made a valuable contribution regarding tools that could be used in future. Is there any value in the dairy forum making suggestions and do the witnesses find it beneficial? It has only been up and running for a while. When dealing with farmers, nothing beats talking to them and the industry.
Processors in particular were mentioned. It was stated that they were farmer driven.
Farmers did not drive one of them very well in recent weeks when it, unlike other processors, decided to reduce the price it pays for milk. Was this reduction preceded by talks or negotiations between the ICMSA and the company in question? One wonders if a discussion needs to take place with the processors regarding the price they could pay.
Mr. John Comer:
The processor in question, which Deputy Deering did not name, was represented at the dairy forum.
To respond to the Deputy's first question, there is great value in having all the stakeholders around the table engaging in a fair and honest discussion. One of the kites being flown is a tool known as margin protection insurance which is designed to deal with volatility. When one analyses this scheme, however, one finds that while it would probably deliver, it would do so at enormous cost because it involves the introduction of another multinational company to provide insurance policies that would protect farmers' margins and thereby remove another swathe of money from the equation. Ultimately, someone must pay the cost. Would it be paid by the consumer? These types of topics are being discussed at the dairy forum.
The ICMSA had long, hard and tough negotiations with Glanbia, the company that pays the lowest milk price, at 24 cents per litre. There is outright anger among ICMSA members who supply Glanbia at the company's decision to reduce the price. The Ornua purchasing price index, which is based on a basket of real products traded in a real marketplace, suggests that the actual price is 20.06 cents. The processor paying the lowest price is the one that put itself on a pedestal as if was a paragon of perfection in terms of processing product. It was to have innovative products which would deliver a greater return than the returns available from other processors, yet it pays the lowest price. This is very difficult to explain but it shows what can happen, even with a player as large as Glanbia which should have the scale and expertise to lead the market up, rather than drag it down.
That is fine. Dairy is a key player in the agriculture industry. We have seen all the ambitious targets set out in Food Harvest 2020 and Food Wise 2025. The joint committee, in its report on managing volatility in the dairy sector, identified price volatility as a potential hazard in terms of dairy expanding and achieving its full potential for rural areas and the country as a whole. It is important that we try to play our part, whether with the banks or the Minister and Government of the day with regard to dealing with state aid rules or developing new market management tools which could give a degree of certainty to farmers, as primary producers. The industry cannot be based on the producer of the raw material not knowing whether it will be necessary in three years' time to dip into reserves or borrow money, having paid tax in the one good year where the business made a decent profit. That is not the best model and our goal is to address that issue.
If it is agreeable to the remaining two delegations, we will ask them to make their presentations and take questions together. I ask Deputy Deering to take the Chair for ten minutes while I attend to another matter.