The recent dairy market weaknesses, now exacerbated by geopolitical issues in the East, brings volatility to the forefront of our minds again. Irish milk producers will have gotten through 2014 reasonably well, with exceptionally good prices having been paid for the majority of their annual production, but the outlook for 2015 is less certain.

We could possibly be facing the third great price decline since supports were undermined in the 2003 Luxembourg Agreement, and we should ask ourselves have we learned anything from the two previous events (2008/9 and 2012). The EU has been too divided over the milk quota soft landing issue to develop any serious volatility management tools, and aside from Intervention and Export Refunds (which kick in at 20c per litre), we have very little in our armoury to help farmers to deal with the market rollercoaster.

The European Milk Market Observatory, established last April, has been undermined by concerns that it could be used as a Trojan horse to introduce the Dantin style supply restrictions in times of “market crisis”. In reality, the EMMO has no power to curb volatility, and at best, even when it is fully up and running and delivering all it promises to do, it can only act as an official indicatory of where markets are currently, and it will be up to someone else to use that information to the benefit of producers.

What can be done if EU price supports are too low to be effective?

There are currently three tools which are either available or in development; fixed price contracts, taxation reliefs, and dairy futures.

Much work has been done by a number of processors, and the IDB, to develop and make available to farmers, the option of locking in a portion of their production at fixed prices, across a period. Farmers need to take these options very seriously, and not focus on trying to beat the market. In reality, over the past year or so, farmers (and almost everyone else) took a bullish attitude, and in many cases, were reluctant to lock in at some prices on offer. Today, on the other hand, it would be difficult to get a customer to lock in at the same price level.

On taxation reliefs, the entire industry have worked together to promote the development of volatility management deposit schemes, as seen in Australia and New Zealand. Minister Coveney has received the proposals positively, but it remains to be seen if he can persuade Revenue that they are sensible and legal.

The third leg of the stool is Dairy Futures. There is currently a working dairy futures market in Europe, and a number of Irish Co-ops are using futures contracts, or similar tools, to hedge their position in physical dairy markets. There are two problems, however. The first is the low level of liquidity in dairy futures markets. This is caused, in part, by the absence of 3^rd party financial “speculators” in the market. These entities are actually vital to the operation of a derivatives market, and contrary to the frequently held view that they distort the market and cause volatility, in reality; they create liquidity, and allow physical traders on both the buy and sell sides of the equation to find counter parties to their position. These 3^rd parties, however, are reluctant to take positions on dairy markets because of the lack of hard timely data on milk supply, outlook, and price levels. The second problem is the lack of an objective, transparent, respected indicatory of the current state of the market. Without that, Irish or other interests who want to hedge a position by entering into cash settled futures contracts are taking on additional risk. The index at which you settle futures contracts needs to be an accurate reflection of your current market position.

Both of the above problems could be solved with the development of an objective index of what milk is worth. Perhaps we should go and do it.