Dairy market returns fell by 50 per cent last year on the back of oversupply and weaker demand linked to China's stockpiling of milk powder and Russia's trade embargo, according to Dairygold chief executive Jim Woulfe.
The sharp reversal, coming on the back of six years of steady growth, indicates the potential risks posed to farmers who expand too quickly in the post-quota era.
Mr Woulfe was speaking at the launch of Dairygold’s annual results for 2014 which coincided with the formal ending of Europe’s long-standing milk quota regime.
Despite the erosion of margins, Dairygold, the State’s largest farmer-owned processor, returned an operating profit of €27 million for last year on the back of a turnover of €848 million, which was marginally up on 2013.
Mr Woulfe told The Irish Times the opportunities presented by the lifting of quotas "greatly outweighed" the potential downsides, noting global demand for dairy was underpinned by rising consumption rates across Asia and Africa.
He claimed Irish dairy farmers were better able “to ride the volatility waves” than their European counterparts because costs here were lower.
Nonetheless, he urged farmers to expand cautiously. “Many will have super-levy challenges and significantly higher on-farm investment costs to contend with, so prudence is to be encouraged.”
Last year marked the end of a six-year China-driven boom in milk prices.
Oversupply and weaker-than-expected demand sent the market into a nosedive, with prices, exclusive of VAT, falling from a high of 37 cent a litre to 28 cent.
Irish dairy farmers need to make around 25-26 cents a litre to break even.
Mr Woulfe said price hedging and forward-purchasing arrangements were undoubtedly going to become part of the industry if this sort of volatility was to be managed.
“It will likely take global dairy markets until the autumn to rebalance into a positive recovery for Irish milk prices from its current monthly levels,” he added.
As the single biggest producer of dairy in the country, processing almost 20 per cent of the Irish milk pool on behalf of 3,000 suppliers, Dairygold stands to benefit the most from the abolition of quotas.
Mr Woulfe said the plan was to increase post-quota milk production by 60 per cent, equating to an extra half a billion litres, by 2020.
Some 65 per cent of this extra product would go towards powdered milk ingredients, most of which will be exported to markets in Asia and Africa.
The society’s expansion will be facilitated by a €33 million expansion of its processing campus in Mitchelstown, completed recently, and an €83.5 million investment in the regeneration of its Mallow plant, due to come on stream next year.
