Oireachtas Joint and Select Committees

Wednesday, 13 April 2022

Joint Oireachtas Committee on Agriculture, Food and the Marine

Fixed-Price Milk Contracts: Irish Co-operative Organisation Society

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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Before we begin, I want to bring to everyone's attention that witnesses giving evidence from within the parliamentary precincts are protected by absolute privilege in respect of the evidence they give to the committee. This means witnesses have full defence in any defamation action for anything said at a committee meeting. However, witnesses are expected not to abuse this privilege and may be directed by the Chair to cease giving evidence on an issue. Witnesses should follow the direction of the Chair in this regard and are reminded of the long-standing parliamentary practice to the effect that, as is reasonable, no adverse commentary should be made against an identifiable third person or entity. Witnesses who are giving evidence from a location outside the parliamentary precincts are asked to note they may not benefit from the same level of immunity from legal proceedings as witnesses giving evidence from within the parliamentary precincts and may consider it appropriate to take legal advice on this matter. Privilege against defamation does not apply to the publication by witnesses, outside the proceedings held by the committee, of any matter arising from the proceedings. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against any person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I welcome Mr. T. J. Flanagan, the CEO of the Irish Co-operative Organisation Society, ICOS, and Mr. John O'Gorman, its dairy committee chairman.

Before I ask Mr. Flanagan to make his opening statement, I note Senator Lombard and I have been lobbied on this by individuals. We find ourselves in a very unusual scenario where financial institutions were pressing fixed-price contracts on people, especially people who had a significant amount of liabilities with them. The contract has serious shortcomings in that it was purely based on milk price prediction and had no prediction regarding costs. When these contracts were first formulated there was a trigger there that would have input costs included. That was taken out. We can blame whoever we want but some people felt their contracts were too complicated. I suppose they would not mind how complicated they were now if that trigger had been included in them. From where I and others who have been lobbied on this equation standard stand, we now have a scenario where the primary producer seems to be the only one who is going bear this huge escalation of costs no-one saw coming. The milk price is rapidly heading for 50 cent per litre and is going to go significantly the other side of it, which is going to help the dairy farmer to offset the huge increase in costs that is there in the industry currently. However, ICOS has a significant amount of producers and I ask the representatives give us some background on this. We are by no means here to have a bash at the society. We are glad of the representatives coming in to give us information on it that might enable us to lobby various people to see can we get some compromise solution to the situation we are in. How many suppliers are affected? There are a number of co-operatives that have and some others that have not. What is the percentage breakdown? How many people have over a third of their milk in it? How many have over 50% of their milk in it? I suppose if you are under 10% or 15%, while it will be painful, the pain will probably sustainable enough but if you have a high percentage of your milk and are stuck at 32 cent per litre with costs probably going north of 40 cent it is an untenable situation.

We are appreciative of ICOS coming in to give us the background to the situation. As I said, there are a number of people in the chain. There is the primary producer, the processor, the person who is purchasing off the processor and then the retailer. There are four links in the chain and unless some mechanism is found for sharing that financial pain or dividing it then it is going to be very difficult for the man who has a significant amount of his milk on a fixed-price contract to survive. That is where we are coming from. As I said, we have been lobbied and we felt it was better to give it an airing here and discuss it. I hope we can then go the Minister or to the Department and see can they knock heads together to see if we can get some compromise that allows dairy farmers to get through the unenviable situation they find themselves in.

Mr. T.J. Flanagan:

I thank the Chairman. We submitted some written comments that were probably circulated to the committee yesterday evening. With the Chairman's permission I might take those as read because the committee has had a long day.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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That is all right.

Mr. T.J. Flanagan:

There are a number of key observations we would like to make before the questions. I ask Mr. O'Gorman, our dairy committee chairman and chairman of his own co-operative, Dairygold, to raise those key points first.

Mr. John O'Gorman:

The Chairman's opening remarks have demonstrated he has a very clear understanding of where we are at the moment with the fixed milk price contracts in place. I reiterate co-operatives are member-owned organisations controlled by members and are in place to support them at every twist and turn. As co-operatives we fully understand and empathise with the members who have a high percentage of their annual milk supply in fixed milk price contracts. I wanted to reiterate that.

We are in an unprecedented situation with the significant input price inflation that has taken place. The Chairman has gone through the background so I will not belabour it too much but members were looking for a volatility management tool and the only option really open to milk processing co-operatives was to have back-to-back contracts with our customers. It was very much hanging on our ability because the co-operative itself could not take on the risk of a fixed milk price contract, so we back to back that with our customers. As the Chairman correctly said, the early iterations of the milk price contracts had a ratchet in them linked to the major input costs at farm level, namely, fertiliser, feed and so forth, but they were removed. Farmers did not like them as they felt they were tied to doing business with the co-operative by having them in there. That could have been a valid argument but the co-operative did not have the wherewithal to lock down a third party from a supply point of view so we were unable to continue to facilitate them.

We again reiterate and reaffirm our understanding and empathy of those milk suppliers and restate that the commitment of the co-operatives and the principle of the co-operative movement is to work with and support members of the co-operative, especially those in financial hardship. We must acknowledge the events of recent months have been unprecedented. They were caused initially by Covid and supply-chain disruption and so forth and exacerbated by the unfortunate war in Ukraine. Previous milk price volatility had prices at standard constituents ranging from the mid-20 cent per litre mark to the mid-30 cent per litre mark. As the Chairman correctly said, they are now reported to be approaching the mid-40 cent mark and probably higher. Prior to this it was not ICOS's understanding that milk suppliers would have significantly more than 20% to 30% of their milk supply tied into contracts. Indeed, we have some member co-operatives that have milk suppliers far in excess of that range and some approaching maybe 90%. There are not many but some milk suppliers have approaching 90% of their milk tied into milk supply contracts. In this regard, the banks must bear significant responsibility as they are in part accountable for encouraging certain suppliers to go down this route of tying in large volumes of milk into fixed-price contracts to minimise or de-risk the farm investment. On the basis of what we know now, it was unwise to become so heavily exposed by fixing a milk price while not having some security around inputs.

I am afraid the options to remedy the situation are limited. They involve appealing to the buyers, in other words, our customers, as fixed milk price contract holders are back-to-back contracts whereby a volume of milk is matched to a volume of product. We understand these conversations have taken place with only very limited success. From our position the integrity of the contract is very important in principle and we have to protect our reputation as a reputable trading partner. The only other option is for the wider milk pool to carry the cost. It should be pointed out that the co-operatives are also losing significantly in this regard as the cost of processing milk has increased massively and the processing margin has also been eroded due to the high inflationary costs around energy and so forth. However, co-operatives have been as creative as possible to help farmers and will continue to be, especially in the cash flow element, through their current difficulties.

We need to build new options into the fixed milk price scheme to deal with the risk of inflation, such as a financial transaction through the futures markets for feed, fertiliser and energy. However, these are very complex financial instruments and are not without risk. This is something we need to look at in future from a fixed milk price contract point of view. This would allow farmers to lock in their input costs as well as their output prices, thereby securing a margin. We have a very good example of this in the US.

It is something we need to examine. The farmers lock in a fixed margin so irrespective of whether milk is 50 cent a litre or 20 cent a litre, they have their margin which moves in time with it. It is probably a little easier in the American situation because their major inputs are bought in. From an Irish perspective, we are fortunate and have a very strong competitive advantage in being a grass-growing region of the world. Most of the costs of producing milk from an Irish dairy perspective are in the growing of grass, such as fertiliser. Feed is a cost as well. The initial scheme provided some options in this regard, but there was very limited farmer enthusiasm for it, unfortunately.

In closing, we appeal to the Oireachtas committee to prioritise the establishment of an income deferral scheme to manage volatility, along the lines of the ICOS 555 proposal. This has been a request of ICOS and farm organisations for up to seven years. We believe it is within the gift of the Oireachtas and the Government to deliver on this. If we had more options on volatility, farmers could deploy a range of measures to reduce volatility rather than rely on a single measure, which was the fixed milk price scheme. That was all that was available to them. It was introduced by co-operatives in good faith and it has served the industry well until recent unprecedented events.

I am happy to take questions or comments on this.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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I know Senator Lombard wishes to speak, but do you know how many milk suppliers or what percentage have fixed-price contracts and what level they have them at, be it 10%, 20%, 30%, 50% or over?

Mr. John O'Gorman:

The only figure we have is from the individual co-operatives and we have tried to work this out. We believe that 5% to 6% of the national milk pool is in a fixed milk price contract. That varies from co-operative to co-operative. Some co-operatives had caps where they only allowed a maximum of 10% take-up on each scheme of the individual's annual milk supply. As I said, ICOS was unaware until very recently that there were member co-operatives allowing individual suppliers to go beyond that point, which was a very risky undertaking. The closest figure we can get, and we do not have access to individual contracts between member co-operatives and suppliers, is somewhere between 5% and 6% of the national milk pool.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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That would probably affect 10% of suppliers.

Mr. John O'Gorman:

I imagine it is perhaps a little less.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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We are talking about 1,700 to 1,800 milk suppliers who are caught in this. I would have thought it was higher.

Mr. John O'Gorman:

There are individuals and individual co-operatives that are heavily exposed here, on the 30% plus, but the vast majority of them, while they are involved in a fixed milk price contract, are at the lower end of it and up to 80% or 80% plus of their milk is on the variable scheme.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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Of course, the lower the percentage, the higher the number of suppliers who would have contracts.

Mr. John O'Gorman:

Yes.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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I would have thought that 3,000 to 3,500 would have fixed-price contracts.

Mr. John O'Gorman:

I do not believe the figure would be that high, to be honest, but I do not have evidence of that. I would not expect that it would be that high.

Photo of Tim LombardTim Lombard (Fine Gael)
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On that issue of the figure, it varies according to whom one talks. How could we get a definitive figure for how many fixed milk price contracts are in the movement? Can the witnesses provide that information or who can?

Mr. T.J. Flanagan:

On that, there is a difference between the number of people who have fixed milk price contracts and the people who have problems with their fixed milk price contracts. A lot of people have reasonably small volumes tied up. That is, perhaps, part of the difference here. There could be 2,000 that have all sorts of volumes tied up, but in terms of those who have problem volumes, it is certainly less than 1,000. Those are the problem volume ones. The total volume of milk in fixed-price contracts is certainly well under 1 billion l. Our understanding from talking to people is that it is somewhere between 450 million l and 600 million l. That is the volume in it.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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How much?

Mr. T.J. Flanagan:

It is between 450 million l and 600 million l or 700 million l. Those are the numbers one gets when one rings around the industry. While everybody who has one is saying they would be better off if they did not, the vast majority is in smaller contracts or smaller proportions of their milk.

Photo of Tim LombardTim Lombard (Fine Gael)
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How could we get a definitive figure? Who has it? Do we need to write to every individual co-operative or can Mr. Flanagan provide it?

Mr. T.J. Flanagan:

We could get it if it was going to lead to something. If we thought that there was something that could be achieved if we could do that, it would be-----

Photo of Tim LombardTim Lombard (Fine Gael)
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It would be important so we could put a perspective on the problem, if it is a problem. Without having that figure, we are speculating on the basis of who called to my door last Saturday morning. The figure could be very appropriate. If ICOS could gather that information and forward it to the secretariat, it might be a helpful step forward in our deliberations.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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Mr. O'Gorman said the general milk pool could have carried the cost. In talking about that, and to get a handle on what kind of figure we are talking about, we have to know the exact volume of milk. The volume of milk is more important than the number of suppliers because we are talking about the volume of milk. If one could know the volume of milk that was held by suppliers who have more than 10% of their milk in a fixed price scheme, that would be helpful. In general, people who have less than 10% might not like it but they will grin and bear it, whereas once the volumes go up it is a different scenario.

I am sorry for interrupting you, Senator.

Photo of Tim LombardTim Lombard (Fine Gael)
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That is no problem. The Chair is more than welcome to interrupt me at times.

Perhaps the witnesses might explain the system all the way through. How this works is that Ornua would forward sell a product to a supplier. It would then purchase that from a co-operative movement or a limited company milk supplier, and it would have its fixed margin in between. The co-operative movement or the milk supplier would then forward sell it to Ornua and get it from the milk supplier, so its fixed contract is sorted out in between. In other words, the fixed costs are sorted out between both. The farmer then sells it to the co-operative movement, but does not have the fixed price of inputs tied in. The farmer's lack of fixed price is the only break in the link. Am I correct that this is where the issue is?

Mr. John O'Gorman:

The Senator's assessment of it is very close. I will describe how it works in practice. Initially, there was a desire by members, milk suppliers of co-operatives, to have some type of volatility management tool. The Senator will recall, and we are still in that market, that milk pricing is a very volatile business and can fluctuate hugely within a year, not to mind from year to year. Members who were in a post-quota era found themselves going to banks and the like to finance expansion at farm level. We are finding that these are the people who are most exposed. They came to the co-operatives and said they needed a price volatility mechanism or tool that could help them to work on this. The co-operatives went to their customers, be it Ornua or others, to see what price they could get from the market. Whatever volume of product we were able to get from our customers, either second or third party, was what we were able to bring back to our members.

We could offer a milk pool of X to our members, which is linked into an end product price, at price Y for a three-year period, a 12-month period or whatever. Most of them were three-year periods. That could come back at a price where members would say, "Absolutely not; that is not a price I would engage with", or they might say, "That is a price I would be happy with". Bear in mind that it is a variable price. The value of the constituents goes on that, so it is a base price and then one gets one's bonuses, constituents and so forth on top of that. Once the individual co-operative knows what volume it has to offer its members, it is then in a position to offer it.

Generally, what had happened was that the individual co-operative would indicate that there would be a maximum of 10% per supplier. Even if there was unused amounts left over, that would not be exceeded. However, some co-operatives may have facilitated members, as they would have seen it at the time, in exceeding that level. They are the people most heavily exposed now. It is a problem for-----

Photo of Tim LombardTim Lombard (Fine Gael)
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The point I was getting to is that while the customer base and co-operative had the fixed price for inputs and outputs, was there a proposal given for a three-year fixed price for inputs given to farmers?

Mr. John O'Gorman:

Initially, there was.

Photo of Tim LombardTim Lombard (Fine Gael)
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What about with the contracts we are dealing with now? Was there any fixed price for the three-year period?

Mr. John O'Gorman:

They were removed because farmers wanted them removed.

Photo of Tim LombardTim Lombard (Fine Gael)
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That was the farming movement. Was it the IFA or co-operative movements that wanted it?

Mr. John O'Gorman:

There was a general feeling that maybe milk suppliers were being tied to dealing with one individual entity for their inputs and that maybe it was not competitive.

Photo of Tim LombardTim Lombard (Fine Gael)
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With the current milk price contracts going out, has that been reinstated?

Mr. John O'Gorman:

Glanbia has initiated something in the very recent past but any of the milk supply contracts there at the moment causing issues have no link to input costs. The Senator has stated that the co-operatives have their processing costs fixed as well-----

Photo of Tim LombardTim Lombard (Fine Gael)
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That is to some degree.

Mr. John O'Gorman:

Unfortunately, although it is hedged to some degree, they are heavily exposed to energy inflation as well now.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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They did not print too many new contracts.

Mr. John O'Gorman:

No.

Photo of Tim LombardTim Lombard (Fine Gael)
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I ask about the cohort of co-operatives that have over 90% in some cases. Is that an appropriate practice? Has the society taken any action against those co-operatives or spoken with their representatives directly?

Mr. T.J. Flanagan:

That would not be our remit at all. As Mr. O'Gorman was describing, at the instigation of these fixed-price contracts 11 years ago, when everybody was learning about these contracts, there was probably more demand than there was tonnage to be allowed. These are dynamic matching exercises and it takes in a customer who wants to take out volatility and a farmer who wants to do the same. The customer wants to pay as low a price as possible, meanwhile, and the farmer wants to get as high a price a possible. Over a period we might come to a sweet spot and we might think our customers or our farmers would be interested and they are matched. For a good number of years, people would have been taking up 10% on any particular scheme but some of them were three-year schemes. There could be 10% in one scheme, 10% in another and 10% in another. The run for the people who were in fixed-price schemes was probably in the order of a maximum of 30%.

Since quotas ended in 2015, we have had fairly substantial increases in milk supply and, critically, fairly substantial investment at individual farm levels. We have probably seen farmers who are more highly leveraged than would have been traditional in the dairy sector. We understand that substantial pressure was applied by the financial institutions on these farmers to maximise the amount of milk in fixed-price contracts. In response to demand from farmers driven by their financial institutions, co-operatives acceded to that.

Photo of Tim LombardTim Lombard (Fine Gael)
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The point I was trying to make is about who regulates the co-operative movement with regard to the amount of milk leveraged in a fixed-price milk contract. Mr. Flanagan has said the society has no remit when it comes to regulating the industry. There could be a scenario where a farmer might offer 100% of milk, technically. Is there something we could do as a committee in that regard, such as putting a cap on it or dealing directly with the co-operative movement? What do the witnesses see as the appropriate leveraging of quotas over a three-year period?

Mr. T.J. Flanagan:

It is above my pay grade to say what would be an appropriate level.

Photo of Tim LombardTim Lombard (Fine Gael)
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Should there be a regulation?

Mr. T.J. Flanagan:

No. It is not a regulated function. This is a business agreement between two partners; they are a farmer with particular priorities and interests, depending on how much money he or she has borrowed and the repayments to be made and, perhaps, another farmer who is not very heavily leveraged and is happy to ride the markets. That is the traditional way of taking the milk cheque. Some farmers may have wanted to de-risk, and the best offering was X price and with the support and encouragement of their banks, they jumped in as heavily as they could.

Photo of Tim LombardTim Lombard (Fine Gael)
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As for those farmers currently caught in this dilemma, what interaction, if any, has occurred between the co-operative movements and those farmers about issues such as extended credit? They are still paying for it but I am aware that Dairygold has never written to a farmer about fixed milk price contracts. How many other co-operative movements have never written to farmers about extending credit or such pertaining issues? Does Mr. O'Gorman have an idea if anybody has written to farmers or how much interaction there has been?

Mr. John O'Gorman:

There has certainly been interaction at milk adviser level and at area sales manager level.

Photo of Tim LombardTim Lombard (Fine Gael)
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It has not been at a correspondent level.

Mr. John O'Gorman:

The Senator is talking about written correspondence.

Mr. John O'Gorman:

I would not imagine so. There has been contact either by phone or with people calling to the yards to offer supports. Co-operatives are member-owned and controlled and they will do everything in their power to assist members. We must remember these were voluntary contracts entered into.

Photo of Tim LombardTim Lombard (Fine Gael)
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At some stage should the co-operative movement put pen to paper? While Dairygold, for example, has not done so but should it write to farmers? Some people have a very good relationship with the representative on the ground but others may not deal with that representative and could have very little contact. Some farmers may have a very good relationship with their milk adviser but some may never have to speak to a milk adviser because they are doing their business so appropriately. Is it appropriate that Dairygold or other co-operative movements would put pen to paper?

Mr. John O'Gorman:

Every individual co-operative would know which member or milk supplier is exposed and to what degree. There should be correspondence where there is a feeling that supplier X could have an issue and it would be no harm to send correspondence. If we send correspondence, there should be a solution to the problem, or something should be done to work through it. The only thing any co-operative can do from this perspective is to offer extended credit or interest-free credit over a period. The integrity of the contract cannot be interfered with, unfortunately.

Photo of Tim LombardTim Lombard (Fine Gael)
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That type of letter has not been sent and there has been no proposal for interest-free or extended credit. It has been mooted and spoken about but the correspondence has not been issued.

Mr. John O'Gorman:

I am not aware if any letters have been issued. From a Dairygold perspective, the instruction has been to make physical contact with people who seem to be exposed. I do not want to make this a Dairygold matter.

Photo of Tim LombardTim Lombard (Fine Gael)
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I concur totally.

Mr. John O'Gorman:

With Dairygold, 10% was the most that anyone could enter into with any one of these contracts. The maximum exposure any Dairygold supplier has is 20%. The other 80% is on the variable price.

Photo of Tim LombardTim Lombard (Fine Gael)
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I apologise to the Chairman but I will finish with this. This is a very important tool but the integrity of this tool for selling milk will be the biggest issue for the industry in the future. Where will these contracts go? Is there any confidence in the industry with these contracts? As we all know this could be an important tool if it is worked appropriately, what changes could be made? What is the future for these fixed-price milk contracts?

Mr. John O'Gorman:

I agree with the Senator. Fixed milk price contracts in their current form are not a good idea from what we have learned, certainly over the past six months or so. The Senator has correctly highlighted that if a farmer fixes in above a certain percentage of income, that is, the milk price, a corresponding element of costs must be locked in as well. That is if they have a future and farmers demand them. We should remember it has not been co-operatives forcing them on farmers but the farmers who came to co-operatives seeking an income volatility tool. This is what we were able to provide.

If they are to have a future, a margin protection system needs to be built into it. I am not a financial expert.

Mr. T.J. Flanagan:

We need balance in all of this. Over the past 11 years, until this sequence of extraordinary events happened, the sector performed well. The prices that people achieved in fixed-price contracts over the 11 years were attractive and were worthwhile for farmers. That is why farmers piled in on it, then issues arose that nobody could have predicted. I would not overstate the value of a generic letter to every milk supplier. It is much more valuable, if there are boots on the ground in every yard, for the business manager, who is dealing with the individual and who understands the problems, to try to find a solution.

Photo of Tim LombardTim Lombard (Fine Gael)
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In an ideal world, what Mr. Flanagan said would be right but I know it is not happening.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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I thank the representatives from ICOS for coming in. I am not an expert on milk like the Chairman or Senator Lombard. I have a contract here to hand, which I presume the witnesses are familiar with. It seems to be a letter that came to farmers, with a section at the bottom for them to provide a number, name and address, state that they wish to avail of the contract, and a place to sign it. Is that what the contract is?

Mr. John O'Gorman:

Yes, it generally would be. I assume it changes in different co-operatives.

Senator Tim Lombard took the Chair.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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I have another here for 2020. If I buy a tractor or other equipment, I would be advised by the bank of a cooling-off period and to get legal advice to make sure the contract is valid.

Mr. John O'Gorman:

These are voluntary contracts. I am not familiar with the document the Deputy has to hand.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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Mr. O'Gorman can look at the one here.

Mr. John O'Gorman:

The advice coming from any responsible co-operative would be-----

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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Is there a note on any of that? That is a contract from a person who produces a large amount of milk. One would imagine the co-operatives would be more responsible. The witnesses said that 8% to 10% is tied up. I presume the customers that do the forward buying buy more than that from the co-operatives. How is the price of milk decided? It was at 40 cent then went to 41 cent and so on up to 48 cent. If they are able to move on that, what is the big deal in a time of war? If there was no war or fertiliser crisis, with an increase of 300%, or maybe 400% for urea, what would happen? In a war situation, governments have done things they would never have dreamed of doing before. I am not blaming the co-operatives in all this, because there are other suppliers and Ornua and crowds like that have done deals with the co-operatives. I hear that some of these companies make plenty of profit. It is not always the co-operative that is the stumbling block in solving this problem. The Chairman invited others besides the witnesses today, including Ornua. I would like to see why they are not here and I will ask the Chairman about it later.

A solution needs to be found. A limping farmer is no good for the co-operatives, for himself or herself, or whoever the co-operatives sell the products on to. There will be a decrease of 605 million l of milk in the UK this year. A few half-arsed attempts were made by some co-operatives, saying they would give farmers some money now and they could pay it back later. I do not know of all of them. The industry needs to get to grips with this. Some of these contracts were for 31 cent or 32 cent. Milk costs 46 cent or 47 cent and rising. There is no point in saying otherwise. What is the total milk production in Ireland?

Mr. John O'Gorman:

Is the Deputy including liquid milk, which would be in a separate contract?

Mr. T.J. Flanagan:

About 8 billion l are in manufacturing.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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It is like the mouse when the elephant is present. The co-operatives have not come together in the spirit of farmers in this country at a time of war and manned up. There are no winners here. What will the Government do about a contract? I am not a solicitor or barrister but it shocked me that the contract I mentioned earlier was so casual, in that it simply asked people to write down their number and their name, with a price that they would get for three years. This issue will not just lie down. If there was no war but fertiliser prices had increased by €100 per tonne and meal prices had increased by €50 per tonne, we would not be here talking with the witnesses. We would say to take it on the chin and to take the good with the bad. Everything goes out the door, however, when there is a war. There should be a spirit of partnership at co-operatives and among the people that the co-operatives supply. I understand one was invited here. It would be nice to talk to all of them and give them a fair hearing. This needs to be resolved. It is a small amount of money for all the co-operatives, but it is a large amount for individual farmers that could be the making or breaking of them. The co-operatives need to move on this.

Mr. John O'Gorman:

I welcome the Deputy's comments. He hit the nail on the head. This is devastating for the individual affected member. There is no doubt about that. We would have empathy and sympathy for them.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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Empathy and sympathy do not put money in farmers' pockets.

Mr. John O'Gorman:

I was just about to say that it does not pay the bills. The Deputy is correct in saying that the co-operatives are not making money from this. The risk for the co-operatives is too big. It is back-to-back with the co-operative's customer. The Deputy is probably correct in identifying Ornua as being the biggest owner of co-operative contracts.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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Is it an amalgamation of co-operatives?

Mr. John O'Gorman:

It is a co-operative.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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I am correct, so we are back again to the same nucleus of people, including a CEO and all the milk suppliers that put that pot together. We are shafting our own, even with the same nucleus of people. I cannot understand it. One has to be a betting person to be involved in this. It is like "The Gambler"; you win some and lose some. This set-up is unprecedented. In any contract, there should be an option for people who did a deal with the co-operatives to show a spirit suitable for the current situation and the war. By mutual consent, both parties of a contract could change it. It would be a similar scenario to me renting land for a five or six-year period and approaching someone on a lease and telling them that I was not able to fulfil my end only for that person to say that was sound and there would be no repercussions. This is what needs to be done.

Mr. T.J. Flanagan:

The Deputy described a conversation with the end customer. Those conversations have taken place.

As Mr. O'Gorman has said, they have yielded little so far. They have yielded something but little in the big picture.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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Do we have a right to get the end customers that the witnesses all deal with that are in with these contracts before the committee? We should bring them in here and ask them what their game is if they are not prepared to turn around and put on the Irish shirt during a time of war.

Mr. T.J. Flanagan:

The Deputy is dealing with commercial arrangements. It is not in the national interest or in the interests of the 90% of milk that is not locked in to be thrashing those things out in the way we are proposing.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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It is in the interests of a farmer who could go bust.

Mr. T.J. Flanagan:

Yes and nobody wants a farmer to go bust. To be fair, the co-operatives that have the most people in this position and that have the most exposure in this position have been proactive and have announced measures. As the Deputy says, some of them are pre-payments against next year, the year after and the year after that but so be it. There is also some pain taken by the general population of farmers and we can only take that so far. We cannot socialise this among all the suppliers to a large extent. It would be unfair and unreasonable that people who did not lock in big volumes would carry this.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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I am not talking about them.

Mr. T.J. Flanagan:

If the Deputy is talking about a co-operative there is no other money tree or pot of money out there. It is all farmers' money. It is a co-operative.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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Mr. Flanagan did not listen to what I said. I am saying that ICOS's biggest buyer which has X amount locked in should be looking at the situation. It would be happy days if there was no war and it would probably be buying milk at 40 cent per litre but as the goalposts move every week you have to go according to plan. It is like cattle, sheep or anything; you have to move up if they are getting scarce or if there is big demand. If you are able to go with the right hand to keep going up and to adjust to it then that is fine. The witnesses are saying that only 900 of the 1,800 suppliers are locked in at higher rates. It is putting them in danger of going out of farming to be frank about it. That is where we need to focus. Would Mr. Flanagan agree?

Mr. T.J. Flanagan:

I agree and all the focus has been on those who are more exposed than others.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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If we could do so we should find out who these people are and bring them in here to talk to them. Would the Vice Chairman agree to that?

Photo of Tim LombardTim Lombard (Fine Gael)
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It is up to the committee to agree to something like that.

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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I thank ICOS for being here and I agree with Deputy Fitzmaurice's suggestion. I want to elaborate on the point he has made because ICOS's opening statement states: "It is important to clearly state, that these are agreed contracts, which unfortunately cannot be renegotiated." That is not how contracts work. A contract means it cannot be amended unilaterally. Contracts are changed all the time and they are negotiated as a result of changes in positions. If all parties to a contract agree to change it then it can be changed, whatever the case may be. I have an article from Agrilandfrom a week or two ago and this is probably an extreme case because it is a farmer who has 85% of his milk pool in fixed-price contracts. He has 900,000 l in a milk contract and that represents 85% of his milk. That is 33 cent per litre and the other 15% of his milk is on the open price, which is 43 cent per litre. The difference across those prices for this gentleman is €108,000. Can the witnesses clarify who is getting that €108,000? That is what the market has valued his product at, yet it is being lost, so someone along the chain is getting it. Who is effectively pocketing that €108,000?

Mr. John O'Gorman:

It certainly is not the farmer.

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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We know that.

Mr. John O'Gorman:

I fully accept the Deputy's numbers.

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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We all agree on that.

Mr. John O'Gorman:

The farmer is out of pocket there. I am not sure which co-operative he is with but it is not benefiting out of it. The co-operative would have a back-to-back contract with a customer and that customer likely has a back-to-back customer with another customer that may be using the product and the buyer of that customer, assuming it is the end user of the product, is probably on a good bonus because he or she has managed to eliminate the volatility for the company he or she is working for. He or she is probably benefiting and his or her company is benefiting from the misfortune of that poor farmer. It is not his milk processor and I believe, although I do not know for certain, that it is not the person or entity the co-operative would have the back-to-back contract with who is benefiting. There are probably three or four people in that chain who are probably not making money out of that transaction at this point.

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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Is it the retailer or is it a step back from the retailer? Somebody is paying 25% below the market cost for a product. I have been around SuperValu, Aldi and Lidl I have not seen specials for 25% off milk on any of the shelves.

Mr. John O'Gorman:

No and the Deputy and consumers have not seen the full price inflation that is making its way through the supply chain yet. I agree with the Deputy that somebody is making money out of this somewhere along the line but I do not have visibility on that. My visibility is between the farmer, the co-operative and the next step.

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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We are here today because farmers have come to us to say they are under serious pressure. We are going to ICOS because its members are the people who the farmers are selling the milk to-----

Mr. John O'Gorman:

We hold the contract between the farmer-----

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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-----so what is ICOS planning to do for the people it is in contract with? Would there be merit in a round-table conversation with the entire chain? People are making money on the backs of the livelihoods of others. Mr. O'Gorman has rightly said that the co-operatives will not be served well if some of these farmers are forced out of business because that will have a bigger impact in the long term. Is there merit in that and has ICOS or its member organisations engaged up the chain in order to get this issue resolved?

Mr. John O'Gorman:

Yes we certainly have. We have engaged heavily. As a co-operative we hold the contract between the farmer and the processor. Equally, we hold the contract between the processor, the co-operative and our customer. We have engaged substantially and heavily with that customer to try to get some movement but as the Deputy said in his opening remarks, contracts cannot be changed unilaterally and it needs positive engagement from all sides.

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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But they can be changed. That was the emphasis of the point I made.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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They can be changed collectively with agreement.

Mr. John O'Gorman:

I agree with the Deputy; they can be changed with agreement. Everything is possible with goodwill on all sides but there is a need for that in order to change a contract.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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I want to make a point that will help Deputy Carthy in his question. Can Mr. O'Gorman give Deputy Carthy the breakdown in the line of customers? Is there one customer that takes 90% and one that takes 10% or what?

Mr. John O'Gorman:

I would not be able to do that; it depends on each individual co-operative.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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We do not want to know their names; I am just asking about the percentage.

Mr. John O'Gorman:

I would imagine there is one major customer on the island of Ireland.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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That is all I wanted to know.

Photo of Matt CarthyMatt Carthy (Cavan-Monaghan, Sinn Fein)
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Mr. O'Gorman touched on the following point. The first interaction I ever had with ICOS was when I was in Brussels in 2014 and the problem then was price depression and a lot of these measures became much more popular as a result of trying to protect against volatility. The entire European milk strategy is based on the expectation that there will be periods of extreme volatility. The one area that has been spoken about ever since then is some mechanism of a rainy day fund so that the dairy sector does not end up in a situation like the one we were talking about in the pig sector earlier.

I know that ICOS has been an advocate of that type of fund. How do the witnesses see that working, considering that every time an emergency measure is utilised, it is always a dollar short and a day late? How do we ensure that such measures can be utilised quickly to address anomalies? This is an anomaly. Someone described it as like being in a fixed-term mortgage for a number of years and then interest rates collapsing and the homeowner being caught. Of course, the homeowner can get out of that mortgage and pay some sort of a penalty. They can get out of it. That option is not available for these people in this particular circumstance.

Mr. John O'Gorman:

Mr. Flanagan might go through the intricacies of it.

Mr. T.J. Flanagan:

Going forward, there are taxation-based solutions but they do not solve this problem. That is the problem we have. I also wish to make the point that we export 90% of our milk. It leaves the island. The ultimate customer or beneficiary of this, and the person who is making a product - whether it is a piece of confectionary or whatever - that is being sold around the world, is not an Irish customer. It is an international customer. It is being sold by Irish co-operatives through another co-operative but an international customer is the beneficiary of this. They are somewhere in the supply chain. We do not know whether they pocket the €100,000 that the Deputy mentioned or whether they pass it on to the retailer. To be honest, we should not over-expect the result we can get here with an international customer. That is the problem. While individual co-operatives and our federal co-operative have had lots of tough conversations with them, the movement thus far has been limited. The Deputy stated that a contract can be renegotiated. A new contract could probably be issued at a different rate but that just has not happened. However, there is the capacity, within the Oireachtas and the Government, to put in place revenue tools that would allow farmers to equalise their milk income average out over a number of years. We have been talking about one for the last number of years. However, the Government, the Department of Finance and Revenue have chosen not to do that. At every budget, we have failed to see it over the line. It is not too late. We could still do it, but it will not solve this problem.

From what we are being told by our co-operative representatives and our board, a relatively small number of people have the really critical problem. They are being dealt with one by one. One co-operative has amended the terms of the milk supply agreement in terms of the fixed-price scheme and has managed to increase the price on offer but most of that is coming out of the general pot. It is coming out of the other farmers' milk cheque. That is the reality. The problem has been socialised. There is no extra money to fund this.

Photo of Martin BrowneMartin Browne (Tipperary, Sinn Fein)
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I want to go back to something the Chairman said earlier about how many farmers are locked into the contracts. If stabilisation measures for those dairy farmers were taken, would there have to be a level of parity for the dairy farmers who are not locked into these contracts, but who are also facing higher input costs?

Mr. John O'Gorman:

Forgive me if I am wrong, but I think the Deputy was asking if there is a willingness among the members who are not impacted by the fixed milk price contracts to support the members in the fixed milk price contracts. Am I correct in saying that?

Photo of Martin BrowneMartin Browne (Tipperary, Sinn Fein)
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Yes. I was referring to measures being brought in to stabilise it for the dairy farmers who are being discussed here and who are locked into those contracts. Are there measures that can be brought in to level it out for farmers who are not in these contracts, but who are also facing the same higher input costs?

Mr. John O'Gorman:

I think as an industry, dairy has its problems. There is no doubt about it. However, we are probably in a more fortunate position than the pig and poultry industries. I am aware that the committee discussed them earlier today. We have been very fortunate that the milk price thus far has managed to keep step with the inflation that is coming in in the production costs for those who are not in the fixed milk price contracts. I must stress that I am referring to those who are in the variable price contracts. The variable price has gone up somewhere in the region of 8 cent to 9 cent per litre. The costs of producing that milk are front-loaded, and the farmer will not receive the benefit for it for a period of time. According to a Teagasc survey released today, the costs in producing that milk have gone up by about 8 cent per litre. While the farmer on the variable milk price contract is receiving a much enhanced milk cheque at the end of every month, equally, he has a much higher cost of production to meet at the other end. As I have said, fortunately from a dairy industry point of view, the variable milk price guy, please God, will not be any worse off at the end of this very volatile period because milk markets have been so strong. We are fortunate that milk markets have been so strong in that regard. Some co-operatives have put together stability funds over a period of time. Indeed, there was an announcement yesterday that another co-operative is going to start putting together a stability fund here. That stability fund comes out of the milk price. For the vast majority of co-operatives, there is only one income stream, namely, the milk processing side of the business and the margin they make from whatever trade they do with their members, from an input point of view, on the feed, the fertiliser and so forth. I certainly would not have the mandate from my milk suppliers to bail out those who find themselves in trouble individually. It is something that I can bring back to my board and there can be discussion on it, but I certainly could not say that I have a mandate to do that at the moment.

Mr. T.J. Flanagan:

To add to that, as we mentioned earlier and the Chairman acknowledged, the greatest single driver for the high level of adoption of fixed milk price schemes was pressure from financial institutions, without wishing to generalise. Certainly, that is the case from the anecdotes that we have heard. The farmers that have been talking to us and those we have met through farmer organisations are people who have expanded fairly substantially. They were quite heavily leveraged and were put under fairly significant pressure by the banks to de-risk the lending. I think it is probably unfair that the banks are not in here to be part of the solution as well, given that they drove the adoption of these schemes. My understanding is that the biggest concern for the farmers who are unfortunately caught in this cost price squeeze at the moment is bank repayments. Certainly, the banks can be part of the solution as well.

Photo of Martin BrowneMartin Browne (Tipperary, Sinn Fein)
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We probably should get the banks in here. ICOS also supported a rainy day fund or stabilisation measures to address the problems that farmers have in this situation. It has also said that successive governments have failed to act, which is disappointing. Does the ICOS have any proposals on how the rainy day fund would work?

Mr. T.J. Flanagan:

We put our name to a scheme six or seven years ago that was called 555. The idea was that a farmer, in agreement with his co-operative, could effectively defer up to 5% of his milk income in any particular year in a five-year rotating cycle. At the end of the five years, the money would have to be drawn down and tax paid in full across that period. We felt that that would allow farmers to leave a little bit of the money behind and build up some sort of a fund in good years that could then be used in leaner years. Certainly, given the cycles that were coming at the time, we felt five years was a reasonable period. In any case, the money would have to be drawn down and the tax paid on it. Again, it will not solve this problem today, but hindsight is a wonderful thing. If the scheme had been in place for the last number of years, there would have been less dependence on fixed milk price schemes, certainly to the extent that the people who jumped on them did so. It is not too late. Something of this nature - and all the farm organisations have been looking for them - should still be supported in the budget process. It would reduce our dependence on fixed-price schemes.

Photo of Tim LombardTim Lombard (Fine Gael)
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Deputy Browne?

Photo of Martin BrowneMartin Browne (Tipperary, Sinn Fein)
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That is all.

Photo of Tim LombardTim Lombard (Fine Gael)
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Deputy Fitzmaurice has a supplementary question.

Photo of Michael FitzmauriceMichael Fitzmaurice (Roscommon-Galway, Independent)
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First, I agree with Mr. Flanagan on the rainy day fund. There should be some sort of a tax system to work with that that could help the farmer.

To put it simply, you will go through hills and hollows in order to get to a level playing field. I agree with that 100%. I do not agree with has been said about the banks for one simple reason. Above all men, I am no fan of them, given some of the stuff I saw happening, but the reason I say this is because a business plan had to be done if somebody was getting into milk. It was based on 28 cent a litre for someone borrowing fairly heavily. When the banks saw that 31 cent or 32 cent was guaranteed, they knew this person was fairly sound. To be frank about it, they had to do it to get the money but, as Mr. O'Gorman has pointed out, the cost of producing the milk has gone up by at least 8 cent and it is probably 10 cent or 12 cent more than what it was then, especially with the price of meal and everything else. If it is okay with the Vice Chairman, I am going to write to the committee to propose that at the next private meeting, we bring in the people who are buying the biggest volume of milk from the co-operatives. That is still a part of the whole system in Ireland. We must find a solution to this for the farmers. I thank the witnesses for coming in.

Photo of Tim LombardTim Lombard (Fine Gael)
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I call Deputy Collins.

Photo of Michael CollinsMichael Collins (Cork South West, Independent)
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I thank the Vice Chairman but all the questions I had have been asked already.

Photo of Tim LombardTim Lombard (Fine Gael)
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I thank the witnesses for their contributions. This is a very important issue and we will probably have more hearings on it. We have a list of other witnesses we will invite in. I thank the witnesses for accepting our invitation and for being so forthright with their information. I also thank members for their contributions. The next public meeting of the committee will be held on Wednesday, 27 April when the committee will examine agricultural issues. I wish all members a happy Easter.

The joint committee adjourned at 4.52 p.m. until 5.30 p.m. on Wednesday, 27 April 2022.