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Situation and Outlook for the Dairy Sector

Situation and Outlook for the Dairy Sector. T. Donnellan and T. Hennessy. Outline. Review of 2007 (NFS data) Estimates for 2008 Outlook for 2009. Review of 2007. 2007 was a bumper year for dairy farmers Milk prices were high and margins were up Review Costs Margins.

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Situation and Outlook for the Dairy Sector

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  1. Situation and Outlook for the Dairy Sector T. Donnellan and T. Hennessy

  2. Outline • Review of 2007 (NFS data) • Estimates for 2008 • Outlook for 2009

  3. Review of 2007 • 2007 was a bumper year for dairy farmers • Milk prices were high and margins were up • Review • Costs • Margins

  4. Distribution of Costs 2007 27 21 21 16

  5. Distribution of Costs 2007 27 21 21 16 Difference between high and low cost = €33,000 on 300,000 litres

  6. Net Margin 2006 & 2007

  7. Net Margin 2006 & 2007 On moderate cost farms - enterprise profit up 85%

  8. Variation in Costs • Most variable items • Purchased feed & other fixed costs • Variability in feed use • Soil type and stocking rate

  9. Influence of Soil Type 2007 Soil Type Poor Fair Good Production Litres / Ha 6,500 8,500 9,500 Concentrate cent / litre 5 4 3.5 Costs cent / litre 24 22 20 Net Margin €/Ha 775 1153 1365

  10. Purchased Feed

  11. Purchased Feed

  12. Exposure to Debt • Variability in fixed costs • Exposure to debt and cost of interest repayment • Interest payments – typically 1cpl but varies from 6 to 0 cpl • Investment levels may be driving cost variation • Investment required to be sustainable

  13. Interest Payments

  14. Interest Payments High Cost Low Cost Moderate Cost

  15. Cost Variation • Significant cost variation exists • Some factors beyond farmers’ control • Investment may be required to be sustainable • Management issues still prevail – efficiency of feed use contributes to cost variation

  16. Estimates for 2008

  17. Review of 2008 • Milk price • Input Costs • Margins

  18. Irish Dairy Board Butter/SMP equivalent price 2005 to 2008

  19. Milk Prices – 2006 - 2008

  20. Supply Profile

  21. Supply Profile

  22. Supply Profile Average 2007 price 31.8 cpl

  23. Supply Profile Average 2007 price 31.8 cpl

  24. Supply Profile Average 2007 price 31.8 cpl Average 2008 price 31.2 cpl

  25. Milk Price • Average price for 2008 down just 2% on 2009 • Forecasted an annual average of 30c per litre • Fall at co-op level came later than return on dairy product markets

  26. Inputs in 2008 • Expenditure on • Feed up 22% • Pasture and forage up 28% • Energy and fuel up 13% • Labour up 6% • All others up 6%

  27. Margins 2008 • Total input expenditure in 2008 up 13% (21 to 24 CPL) • Milk prices static • Average Net margin decreases by 30%

  28. Net Margin 2008

  29. Net Margin 2006, 2007 & 2008

  30. Outlook for 2009

  31. Outlook 2009 – Milk price • Short-term outlook not good • If current Irish milk prices prevail for 2009 • Annual average price down 10% in 2009 • But current prices do not yet reflect market situation • If current dairy export market prices prevail through 2009 • Then annual price down 15% in 2009

  32. Outlook 2009 – Milk price • Short-term: slowdown in global consumption growth • Consumption adjusting to higher prices • Global recession – especially developing markets • Buyers staying out of market to bring prices down • Global Supply increased following high 2007 prices • Exports from NZ still growing • Exports from the US contracting but still present • Increases in EU quota • Annual average 2009 price down 15% (27 CPL)

  33. Outlook 2009 – Input Expenditure • Expenditure • Feed down 25% • Fertiliser down 12% • Fuel down 15% & Electricity unchanged • Other costs up 2% • Total Expenditure down 7% (24 to 22 CPL)

  34. Forecasted Net Margin 2009

  35. Net Margin 2007,2008 & 2009

  36. Net Margin 2007,2008 & 2009 On moderate cost farms enterprise profit for 2009 down 35% on 2008 down 54% on 2007

  37. Net Margin 2006, 2007, 2008 & 2009

  38. Gross Margin per Hectare Various Enterprises

  39. Take Home Message • Average annual milk price remained up in 2008 • But input price inflation hit margins • Although some input prices to decline in 2009 • Outlook for dairy markets not positive • Price forecast to fall to approx. 27 cent per litre • Margins forecasted to be 35% lower than 2008 and over 50% lower than 2007

  40. Thank – You Papers available from www.tnet.teagasc.ie/rerc

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