Dairy farmers are starting to see the benefit of improved milk prices and it is fair to say that those improvements came just in time. Although prices have increased, some dairy farmers are still challenged due to the carryover of unpaid invoices or higher debt taken to cover shortfalls in income between 2014 and 2016. Depending on the system of production, the scale, debt levels and cost of production of individual businesses, we believe it could be some years before the industry recovers fully.

As many of you know we run model farms, and our Friesian Farm example indicates prospects are much better for milk in 2017/18 with a projected surplus in excess of 3ppl. This return will be required to offset previous losses, reduce debt and provide for much needed reinvestment.

Milk producers and buyers face a dilemma with significant fluctuations in milk price. For example, many farmers may be tempted to exploit high prices by increasing production. This is a natural tendency when prices are good and indeed many processors are currently encouraging increased production. Ultimately, however, this can lead to oversupply, depressed prices and thus the cycle begins again. It feels like something needs to change, which requires input from both producers and buyers.

There are possible scenarios which could help; firstly, milk buyers could exercise better control over production in relation to demand. If we look at the example of OMSCo (Organic Milk Suppliers Co-operative), prices have been relatively static for a number of years, against significant fluctuations in the rest of the milk market.

OMSCo have been very careful not to encourage increased production or take on new organic suppliers, unless there is demand for the extra milk produced. Clearly the organic milk market is very different, being a niche market with relatively few buyers. In the wider milk market, there are numerous buyers, even more numerous farmers and world production circumstances all influencing prices achieved here.

Perhaps my utopian world, where milk buyers work much more closely with suppliers to avoid fluctuations in supply and demand, is just that, an ‘ideal’ and not an achievable reality.

An alternative option is some form of forward pricing for a proportion, or all, of milk produced. We are seeing tentative signs of milk buyers offering longer term, fixed-price contracts. Glanbia has indicated that they will offer a milk price in the region of 33 eurocents (28ppl) for 5 years. Yew Tree Dairy Ltd has also offered forward pricing options and some milk producers are now selling a proportion of their milk on fixed-price contracts. This has to be welcome news. Will other milk buyers follow suit?

The reality is that for many, milk prices will continue to fluctuate, even if some of the issues seen over the last few years are addressed and the range of fluctuation reduced. In essence, and this message is not new, producers need the lowest cost of production possible, allowing them to generate good profits when milk prices are high, and minimise damage when prices fall. Cost of production is therefore paramount for producers in good times, as well as bad.