1st published in the Farming Independent April 8th 2021
Michael Brady. Agricultural Consultant and managing director at:
Brady Group: Agricultural Consultants & Land Agents.
It is often said that ‘a week is a long time in politics’.
The recent revelations of processing capacity limiting the intake of milk from dairy farmers by processors has turned the dairy world upside down in the space of a few days.
As an agricultural consultant specialising in advising dairy farmers, I cannot remember a more tumultuous event since the announcement of the removal of milk quotas by the EU in 2007.
Our phones are still hopping with concerned dairy farmer clients and asking a myriad of questions pertinent to their own individual situations.
Those in the early stages of ambitious expansion plans are those with the greatest concerns. You cannot take down and resell a recently constructed cubicle shed, milking parlour or slurry store, most of these farm businesses have 15year term loans drawn down to repay on such dairy units, all based on increasing cow numbers up to the numbers on the developed plan in the coming years.
New entrants who have been weighing up the pros and cons of converting to or entering dairying have had their confidence shaken. Life is all about risk and return, the early adapter new entrants to dairying are now up and running but there are a number of risk averse beef and arable farmers waiting to see how the early ones got on before they took the plunge. I expect many of these will now shelve their conversion plans.
I worked as a dairying advisor in England in the early part of my career. One significant difference between Ireland and the UK is the first question you ask when you meet for the first time;
In Ireland the first question you ask a dairy farmer is, ‘how man acres are there in the grazing block?’.
In the UK the first question you ask a dairy farmer is, ‘where do you sell your milk?’.
This week for the first time in my career the first question I asked an Irish farmer from the midlands planning on getting into dairying was, where will you sell your milk?
I had no answer to this question, the reality is, there is no point in this potential new entrant going any further with planning his new enterprise until a Milk Supply Contract (MSC) is secured with a milk processor.
I remember at the removal of milk quotas, some milk processors worrying about being able to fund capital investment in new stainless steel (processing plants). This problem was resolved by creating revolving funds and shareholders lending money to the processers to enable bank finance to flow.
As a country we expanded milk production by over 50% between 2011 and 2018, with minimal concern about processing capacity. Yes, there are a lot more dairy cows in the country now, and the milk is flowing but the growth rate in cow numbers has slowed significantly, so it is difficult to see how this has become such a major issue all of a sudden, planning issues aside.
The question is, does it reflect a lack of ambition at board and management level in the various processors to invest in more processing capacity? There are soundings of the profit margin being too low to construct new driers, was it not always a low margin business.
Taking the beef processing industry as an example, a low margin business has an advantage in that it acts as a barrier to new entities/investors getting into the sector, this surely adds protection to the profit margin of those already in the business and allows them to benefit from scale. Couple this with growing world demand for dairy products and the developed nature and competitive advantage of our dairy industry, it suggests we should continue to make hay while the sun is shining.
Yes, the Climate Action Bill will present a huge challenge to the industry with the recent announcement that Ireland will be carbon neutral by 2050. I believe in Ireland we can turn this challenge into a competitive advantage by being the first country have a Net Zero Carbon dairy industry. I don’t know how soon we can achieve such a status for the industry, but I am confident we have the people with the necessary drive, ambition and expertise to get there sooner rather than later, let’s get on with it.
So, is dairying on the last lap?
Absolutely, not in my opinion, the peak milk processing challenge is only a temporary blip in The Irish Dairy Industry’s journey. Developing and implementing a plan to be Net Zero Carbon in the fastest possible time scale.
To continue the athletics example, the industry will upgrade from competing in middle distance events to the marathon.