Learning to operate with price/income volatility in the dairy sector.

Cork is a Dairy Hub

Cork is a significant hub for the Irish and international dairy industry with leadership in both products and services for the domestic and international dairy sector. Within the county approximately 4,500 dairy farmers supply in excess of one quarter of the rapidly growing national milk pool. Employment in both processing and the many related services is significant and growing, further emphasising the importance of the sector to the County.

Price/Income Volatility is an established challenge for the Dairy Sector

It is now accepted that the significant increase in the level of price and income volatility experienced by the EU dairy sector in recent years is expected to persist, and perhaps even increase, as EU dairy policy continues to become more market focused. This volatility manifests itself all points along the supply chain.

Figure 1: Family farm income (€/farm) on specialist dairy farms in Ireland 1997 to 2016

Source: Teagasc National Farm Survey

Figure 2: Three month percentage price change in EU SMP prices

Source European Energy Exchange

There are consequences associated with Price/Income Volatility

Extremely low dairy product prices cause many financial problems for dairies and farmers (e.g. low margins, cashflow management, and financing) and ultimately threaten solvency, while extremely high prices result in product substitution which can subsequently be difficult or impossible to reverse. Dairy product buyers also suffer from volatility as they much prefer stability for planning and customer relationship purposes and hence, if alternatives are available, will prefer to conduct business with more price stable sectors. To avoid this situation, buyers, in particular, favour fixed price contracts or materials which display lower levels of price variability. Finally, extreme volatility can also inhibit innovation and R and D while appropriate tools and solutions will enhance sustainability and competitiveness.

There are tools to manage Volatility

Each actor in the supply chain will respond to volatility based on their own unique circumstances. As such, no one tool is suitable to all members in the supply chain and thus a suite of tools and mechanisms have developed. These range from diversification, forward contracts, dairy derivative contracts and insurance to policy initiatives such as voluntary supply management.

There is an Education Gap

The use and growth of these tools is conditional on those in the sector understanding their use and role in managing price and income volatility. This will require the sector to acquire a new skillset which would be best achieved through a dedicated education program which covers the topic of price volatility and the tools used to manage it.

How can Cork Institute of Technology address this Gap?

As a leading education provider, CIT, working together with Cork County Council, is positioned to develop and deliver bespoke offerings in this area. We are particularly interested in seeking stakeholders’ views on the best means of delivering these offerings and their content.

To this end, we are inviting County Cork based dairy farmers to attend one of these information and consultation events:

• Wednesday, 29 November 2017, Fernhill House Hotel,  Clonakilty, 7.30-9.30 pm
• Wednesday, 6 December 2017, Hibernian Hotel, Mallow , 7.30-9.30 pm
• Monday, 11 December 2017, Radisson Blu Hotel, Little Island, 7.30-9.30 pm

Should you have any further queries, please email mathematics@cit.ie or phone 021-432 6187.

If you are interested in being kept updated in relation to possible education offerings in this area, please click here.