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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 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
Distribution of Costs 2007 27 21 21 16
Distribution of Costs 2007 27 21 21 16 Difference between high and low cost = €33,000 on 300,000 litres
Net Margin 2006 & 2007 On moderate cost farms - enterprise profit up 85%
Variation in Costs • Most variable items • Purchased feed & other fixed costs • Variability in feed use • Soil type and stocking rate
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
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
Interest Payments High Cost Low Cost Moderate Cost
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
Review of 2008 • Milk price • Input Costs • Margins
Supply Profile Average 2007 price 31.8 cpl
Supply Profile Average 2007 price 31.8 cpl
Supply Profile Average 2007 price 31.8 cpl Average 2008 price 31.2 cpl
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
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%
Margins 2008 • Total input expenditure in 2008 up 13% (21 to 24 CPL) • Milk prices static • Average Net margin decreases by 30%
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
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)
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)
Net Margin 2007,2008 & 2009 On moderate cost farms enterprise profit for 2009 down 35% on 2008 down 54% on 2007
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
Thank – You Papers available from www.tnet.teagasc.ie/rerc