Presentations & Papers

An Analysis of the Irish Dairy Sector Post Quota

By Laurence Shalloo, Declan O‘Connor, Lungelo Cele and Fiona Thorne

Extracts from the Executive Summary

This research compares the performance of the Irish dairy industry post milk quota removal against a number of leading processors in key EU dairy producing countries – Denmark, Germany, the Netherlands, France, and the United Kingdom (UK), as well as New Zealand with reference to farm gate milk price, investment, seasonality, costs of production and farm profitability. The analysis is based on milk prices published by the LTO international milk price review, costs of production as published by the Farm Accountancy Data Network (FADN), other published studies, and Irish milk processor data.

The research finds Irish dairy farmers enjoy the best net profit margins by a considerable distance, according to the most recent data from FADN for the period 2014–2017. During this period the average net margin (excluding owned labour) in Ireland was 8 cent per litre versus 4.6 cent per litre for the UK, 3.6 cent for the Netherlands, 2.7 cent for Germany, 2.5 cent for France, and minus 1 cent for Danish farmers.
Irish dairy farmers also enjoy the lowest production costs by a wide margin. The FADN data puts Irish production costs (excluding owned labour) at 24 cent per litre as opposed to 38 cent for Denmark, 35 cent for the Netherlands, 33 for France, 32 for German, and 30 for the UK.
Ireland, with the lowest milk price across the European Countries studied, had a net margin that was at least 43% higher per litre, when compared to the next nearest country (UK). When compared against the Netherlands which had the highest milk price, the net margin was over 2.2 times higher in Ireland (excluding owned labour).

Seasonality

There are limitations to the Irish production model which are largely related to its seasonal nature, which mirrors grass production. For example, in the peak production month (May), more than six times the volume of milk is processed than in January. As a result, processing plant utilisation in Ireland is far lower than in its EU counterparts leading to increased processing costs. This seasonality also results in a more limited product portfolio which is highly focused on the production of low margin storable dairy commodities, namely butter, skim milk powder (SMP), whole milk powder (WMP), cheddar, whey, and casein.
Ireland’s capacity utilisation is approximately 62% with other EU countries achieving over 92%. Based on those figures, and the Irish peak milk supply in 2019 in the month of May (1.072 billion litres), Ireland has the potential to process 12.9 billion litres per annum if operating a flat milk supply curve with 100% capacity utilisation.
This under-utilisation of capacity results in higher processing costs/lower product portfolio values which in turn translates into a lower milk price (1.3 c/l lower based on 50%:50% spring autumn versus 100% spring with a bigger difference when spring calving is compared to all year round calving systems). However, the cost savings associated with seasonality at farm level well exceed the reduction in the milk price.
In grass-based systems of milk production, profitability is optimised when grass growth and feed demand are matched through stocking rate and calving date and where the amount of supplementary feed purchased into the system is kept to a minimum.
Systems of milk production built around seasonal calving versus non-seasonal calving are substantially different with differing feed budgets, labour requirements and requirements for facilities on the farm.
An analysis of the Spring versus 50:50 Spring Autumn calving systems including the milk price paid shows a difference in profitability of 1.6 cent per litre in favour of the seasonal system. When this is scaled up to a national scenario with 8 billion litres of milk it corresponds to at least €128 million annually of an advantage to Irish dairy farmers from staying with a seasonal system.
Looking ahead to industry requirements for 2025, the research finds that it is substantially more profitable for the Irish dairy industry to invest in additional processing capacity for expansion rather than trying to flatten the milk supply curve.

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