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Milk Prices: How to Deal With Volatility

21 October 2014

Current market trends mean mistakes now could be very costly, Ireland's dairy farmers are being warned.

Pat Clarke, dairy specialist for The Agriculture and Food Development Authority, has urged farmers to sort out cash flow budgets for the coming year.

Extra emphasis has been put on warning farmers not to break quota, as it is something farmers 'cannot afford'.

Economic Context 

The Irish Dairy Board (IDB) PPI (Purchase Price Index) has dropped from 133.5 in February 2014 to 114.8 in August 2014. Different global events, including an increased global supply of milk and the Russian ban on EU imports, have contributed to this trend.

According to the IDB “the market situation looks challenging in the short to medium term”. The recent ICOS Dairy Digest concurs with this view: “there is no let-up in the recent weakening in European and world dairy markets”.

This market weakness has led to a number of milk processors dropping their August milk price. Notwithstanding this, the long-term outlook is still positive: global population growth coupled with increasing incomes and a focus on nutrition continue to drive demand for dairy products.

Dairy farmers must keep these market developments in mind when making both long and short-term decisions concerning their farm business.

What Actions Must You Take in Light of this Development?

  • You cannot afford a Super Levy bill next year. With milk price under pressure, you cannot afford to pay a penalty. If you are over quota, you must take action now to minimise your bill.
  • Plan to have a cash reserve built up at year end to carry you through the early part of next year. A figure of €250 per cow was suggested at the recent Irish Grassland Association (IGA) Summer Dairy Tour. So for a 100-cow herd, you should have €25,000 in the bank at the end of the year. Can you achieve this?
  • Avoid funding capital investments from cash flow. Your business may run short of cash in the future as a result.
  • Complete your Autumn Grassland Management Plan now to ensure that you have plenty of grass on the farm next spring.
  • Complete a monthly cash flow budget for 2015. Set the time aside over the next two to three months to do this.

Involve other family members and your local Teagasc adviser. For further details, see http://www.teagasc.ie/ advisory/farm_management/monitor_budget_ cashflow/.

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