Will the dairy industry rationalise as production declines?

Milk consumption in 2023 was itself lower than in 2022, giving the uneasy feeling that a pattern is emerging. A decidedly difficult spring and less than ideal weather and growing conditions are limiting milk production this year, but historically, milk volumes have increased each year in the decade leading up to 2023 as farmers increased production in a quota-free environment.

The increase in milk production in the past decade occurred despite earlier unfavourable weather conditions in 2013 and 2018, which were called the feed crisis years, as well as other weather events such as Storm Emma and Storm Ophelia.

Milk production has increased steadily as existing farmers have increased cow numbers to match the available grazing platforms and new entrants have added to the milk pool. While annual production may be higher or lower depending on prevailing weather and growing conditions, there have been some structural changes that are currently affecting and will continue to affect the prospects of the Irish dairy industry for the foreseeable future.

These changes can be divided into a number of subcategories: changes in the regulatory environment, changes in farmer demographics, and changes in the financial environment.

Let’s look at each of these in more detail, first, in relation to regulation, the introduction of milk volume banding, the increase in estimated nitrogen excretion per cow, the enforcement of fertiliser application restrictions via the fertiliser database – each of these has the effect of reducing the maximum capacity of a farm both to house livestock and, by extension, limiting the amount of grass and forage that can be obtained from a given area of ​​land.

Fertilizer register

Looking specifically at the fertiliser register; many farmers have failed to meet their fertiliser quota and are not meeting their quota due to fear and lack of knowledge. It is unknown whether fertiliser use will increase in the coming years, which will impact production, but it is likely that farmers will continue to err on the side of caution, given the serious penalties that could apply if these new regulations are breached.

Pending the introduction of the feed register, which is likely to happen next year, it will also affect agricultural production, where the nutritional value of purchased feed is taken into account to limit the amount of fertiliser that can be used. However, more regulation is likely to result from the Nature Restoration regulations, the full implications of which have yet to be revealed as national governments formulate national plans.

In the demographic profile of farmers, the National Farm Survey reveals that the average age of farm operators is 58 and rising, not falling, and in keeping with the notion that Ireland is no country for old men and women when it comes to dairying, the age profile of dairymen suggests that within two decades at most all Irish dairymen will either hand over the farm to the next generation who can take over, or they will abandon dairying altogether.

You might think that this certainly couldn’t happen, but every analysis of the dairy industry in our nearest neighbour, the UK, suggests that it could. In 2000, just over two decades ago, there were 23,286 dairy farmers, and it is now estimated that two-thirds of them have left in that time.

While the British can be criticised for the lack of support for farmers in their system, in my view their decline was not the result of the mass invasion of regulations that we on this side of the pond have had imposed on us in recent years.

One area that offers some hope for the future is that much more can be done to help those already in the industry, as well as those who would like to become dairy farmers, whether through working with retired dairy farmers or as newcomers.

In terms of financing, the volatility of dairy farming profits has increased dramatically over the past few years and what was traditionally considered a conservative and cautious approach in the form of a fixed milk price program has backfired on a massive scale and to such an extent that most dairy farmers will never engage in such programs again.

The breakdown of the perceived safe haven of fixed milk pricing schemes leaves a vacuum for both farmers and lenders who were equally counting on fixed incomes when it came to financing. Unless lenders take a radical approach to the flexibility of new entrant loans that can reflect volatility in profitability, it will be very difficult for new entrants to secure financing to transition to milk production.

It is worth considering whether processors will play a role in offering financial support to new entrants in the coming years as processors try to maintain volume. The truth is that current and committed dairy farmers who are in it for the long haul need others around them.

While at the parish level farmers may compete with each other for available land, if a critical mass of dairy farmers is not maintained, milk processing plants will become inefficient, affecting the price of milk for everyone. If processing volumes collapsed, it would be comparable to trying to run a self-propelled silage harvester to harvest individual eight-foot strips.