Ladies and gentlemen,
This morning I propose to give an overview of recent market developments and tell you about some of the work we are doing at the European Commission to boost market resilience and build a stronger future for our dairy farmers.
Let me first turn to the market situation.
Drought Impact on Markets
The severe drought across Europe this summer has tempered the increase in milk production, but it has also given us a timely reminder of the urgency of the climate challenge. I will return to this point later.
From a business point of view, adverse weather conditions in the Northern and Central part of Europe had a negative impact on the availability and the quality of pastures, and may lead to lower forage resources for the winter.
Production growth in July 2018 was only +0.9%, adding up to a cumulative January to July increase of +1.7%.
Here in Ireland, deliveries for January to July are slightly below last year's levels, down -0.3%.
Key factors for milk production in the last months of the year will be weather developments, but also milk and feed prices which will determine the ability of farmers to buy animal feed to compensate for lower forage availability.
In addition, the situation across Europe is very diverse and the southern part of Europe benefitted from abundant rainfall in the Spring, which resulted in an above-average grass growth.
We forecast a +1.2% increase in growth in EU milk production for the year in our forecast at the beginning of July. Global milk collections continue to grow but the rate of growth has fallen. As a result of the recent weather difficulties, the full outcome will not become evident until this winter.
Milk prices started to increase seasonally in June up to 32.4 c/kg. Estimates point to a further improvement in July. Trade activity is low but even in a thin market, as we have seen through August, prices have gone up.
EU butter prices have been well above 5000 €/t for 4 months now, though they might not reach the record figures of last year.
EU SMP prices have improved in recent weeks, increasing by close on 8% since June to reach a year high of 1550 €/t.
Cheese seems to be offering better returns and EU production is expected to increase by over 2 % this year, driven by both domestic and global demand. On the domestic market, this development is mainly driven by industrial use, although retail sales are also strong. Here in Ireland, cheese is of particular concern in the context of Brexit, as exports to the UK account for more than half of total Irish cheese production.
Particular factors affecting EU trade competitiveness in the coming months will be the exchange rate developments, and the availability of milk in the coming season in New Zealand and other competitors. In addition, it remains to be seen whether further opportunities for the EU will arise from the introduction of tariffs on US dairy products.
EU exports of SMP, cheese and wheypowder are stable when compared with last year. Butter and WMP are well below 2017 volumes.
Medium Term Outlook
Looking to the medium term, the EU should remain very well-positioned on world dairy markets despite higher production cost compared to competitors. Milk production growth should be sustained by increasing domestic demand, as well as an increase in global trade.
China is the largest world importer of dairy products. There are concerns regarding Chinese buying in the context of trade wars, which have had a damaging effect on the economy and business sentiment. Infant formula remains the most important product imported by China in terms of value, and the EU represents around three quarters of this market.
The other Asian countries will keep importing increasing volumes of dairy products too. In addition, there is strong potential for increasing exports to Africa, where population growth is driving demand.
Concerning our main competitors, environmental and resource restrictions may play an important role in New Zealand.
The dairy sector accounts for more than half of our current EU agri-trade surplus – a fact which confirms the importance of the sector.
But trade hast to be seen both as an opportunity and as a challenge for the dairy sector: we need to export some 13% EU milk production to preserve the domestic balance. This means we have to remain competitive in the world markets.
But having good prospects does not mean there won't be ups and downs along the road. During the next decade, global and EU production growth is expected to be more moderate, driven by a sustained increase in world demand, albeit at a slower pace than in the past decade. Further short-term imbalance between global supply and demand cannot be excluded and could contribute to price volatility.
Market orientation and the capacity to adapt to new and unforeseen circumstances will therefore be key in the future.
Industry has a substantial role to play in adapting to this evolving scenario, including sharing clear market signals with farmers.
An integrated and professional approach between producers and processors is needed. Farmers cannot be expected to adjust to changing conditions on their own. They need market signals from their clients, and reasonable prospects for outlets.
It is all about market orientation, joint planning, and setting reasonable and sustainable growth objectives.
In parallel, the sector needs to explore and develop private-initiative tools for risk hedging, such as:
integrated supply chain contracts;
fixed price and margin contracts; and
price differentiation according to volumes.
The future CAP will contain a clear menu of tools to help Member States address volatility issues.
And of course, Ireland is already leading the way in addressing volatility. Back in 2016 I launched the Milk Flex scheme which was the brainchild of Cathal Fitzgerald of the Ireland Strategic Investment Fund and Sean Molloy of Glanbia.
Today the application rate from individual Irish Farmers is running ahead of expectations and the typical application is around €100,000. Finance Ireland is managing the scheme with funding from the Strategic Investment Fund and Rabobank. To date Finance Ireland has signed agreements with 14 Irish co-ops which provides access to half the nation's dairy farmers.
This is phenomenal progress in a very short period of time and shows dairy farmers' appetite for the product. As you know the dairy processor deducts repayments from milk cheques with bigger payments during the summer and none in the winter. This clearly demonstrates the value of innovation.
I am continuing my efforts to promote this type of innovation at European level, particularly with the EIB.
The role of Public Intervention
Intervention played an important role in stabilising markets in 2015 and 2016, helping to remove surpluses in an extraordinarily imbalanced scenario.
People quickly forget that we have had the Russian embargo in place since August 2014, depriving the EU of a huge dairy market.
However, in addition to the financial cost of this mechanism, the ongoing management of public stocks can be burdensome, as we are experiencing now.
On the one hand, releasing the product on the market might create disturbances; but on the other hand, keeping it in the stores also weighs on market sentiment.
This shows that, in Aviva Stadium terminology, public intervention is like an up-and-under kick: it momentarily removes the pressure, but does not make it disappear.
As you know, last week we sold over 31,000 tonnes of skim milk powder out of intervention. This year to date we have sold over 130,000 tonnes of intervention stock. Skim milk powder has performed very well this year to date with prices for feed grade up 12 per cent and food grade over 17 per cent. The EU is currently the least expensive origin which provides opportunity to continue to clear intervention stocks.
We will continue to manage the disposal of stocks in a prudent manner.
Dairy Markets and Environment/Sustainability
Broadly speaking, the European dairy sector has a good story to tell, and good prospects for the future. But we have to be honest about the potential pitfalls that lie ahead.
Our good news story is based on our strong reputation for high quality dairy products, produced to the highest standards of safety and sustainability.
The appealing image of dairy cows eating grass in wide open fields is a very successful selling point for Irish products.
However, if that reputation for quality and sustainability is compromised in any way, there is a clear and present danger of a negative market impact.
I have used the Netherlands as a cautionary example in Ireland before, and for good reason. The Dutch dairy industry has been dealing with an ongoing phosphate problem which has resulted in the reduction of the Dutch dairy herd by around 122,000 cows over 9 months, with a consequent reduction in phosphate and nitrates production. Currently, Dutch milk supply has fallen by 1.5%.
Building a more sustainable foundation in relation to inputs is not a choice: it is a must. Ireland and all other EU MS need to get the balance right under the Nitrates Directive and the Water Framework Directive. Failure to act now will lead to negative consequences in the near future – potentially very negative consequences.
The good news is that the Commission is here to help.
Future CAP: Dairy Dimension
We have made a proposal which I believe gets the balance right.
Despite the difficult budgetary context of Brexit and other new EU challenges such as security and migration, the Commission has proposed a strong budget for agriculture.
Direct payments to farmers are cut moderately by no more than 4%. This reduction is complemented with a proposal to achieve greater equity in direct payments per hectare, by means of continued convergence, degressivity and capping.
The direct payments envelope for Ireland in the next budget is 8.15 billion, a reduction of 3.9% compared to the 2020 baseline allocation.
For rural development, the Commission proposes to rebalance EU and national support, so that public support to European rural areas remains largely unchanged.
Sectoral interventions (formerly called operational programmes) are integrated in the CAP plan Regulation for fruit and vegetables, wine, olive oil, hops and apiculture.
The possibility to provide support for other sectors (including dairy) is an important new element introduced by this proposal.
Member States will have the option to set up schemes for the support of specific sectors.
The support will be implemented via operational programmes prepared by producer organisations or associations thereof (as is currently the case with Fruit and Vegetables).
If MS choose to implement these schemes, EU funding will be provided directly to producer organisations, with a similar approach to Fruit & Vegetables funding today. It will be funded from pillar I money - up to 3 per cent of their direct payments envelope.
This will make farmers stronger and more effective. It will be an important contribution to one of our principal objectives, which is "improving the farmer's position in the food chain".
We have already introduced a short blacklist to outlaw certain UTPs, namely:
late payments for perishable food products, last minute order cancellations, unilateral or retroactive changes to contracts and forcing the supplier to pay for wasted products.
I expect that this new directive regarding UTPs will be effective from 1st January 2021. As well as this, we are currently working on proposals to address market transparency.
Future CAP: Climate & Environment Dimension
The Commission's proposal will also provide the tools to make real progress on the climate and environment. We are moving from a compliance and rules based approach to one focused on performance and results.
The key innovation is a new delivery model in which each MS must provide a detailed national CAP strategic plan in order to:
explain their specific needs; spell out the targets they want to achieve with CAP support; develop adequate tailor-made support schemes chosen from a menu of measures; and monitor progress in view of reaching the targets, based on common indicators defined at EU level.
This will deliver better results for our farmers, who will have clearer instructions adapted to national needs and less red tape in their daily work.
Better results for administrators, who will have greater flexibility to design schemes appropriate to local conditions.
Better results for our citizens, who will still enjoy access to the best, safest food products in the world.
And better results for our climate, for biodiversity and for the environment, which benefits every single one of us.
We have decided to discontinue the existing greening architecture and replace it with measures which we believe are both more appropriate and will deliver a higher level of ambition.
All of these changes will lead to a simpler policy for farmers and MS administrations.
There will be an increased focus on research, innovation and technology, with an additional €10 billion funding available through the EU’s Horizon Europe research programme to support specific research and innovation in food, agriculture, rural development and the bioeconomy.
The proposals presented on 1 June are ambitious and balanced and aim to achieve a number of important policy objectives: – greater simplification and subsidiarity; increased environmental and climate ambition; enhanced farm resilience, including the protection of farm income; modernisation and the use of innovation, research and technology; and a stronger emphasis on ensuring generational renewal.
In conclusion, let me say a few quick words on Brexit. I have addressed audiences up and down the country on this topic over the last two years.
Like you, I am concerned about the fluctuations in exchange rates between sterling and the euro. The uncertainty around Brexit has been a key factor here.
The current exchange rates are creating difficult conditions for Irish companies exporting to the UK.
The UK is of course a net importer of cheese and butter from the EU, totalling 480, 000 tonnes in 2017. I mentioned earlier the importance of the UK market for Irish cheese producers – exports to the UK account for a quarter of Irish butter production.
We must aim to diversify to new markets, taking advantage of the market access the EU has negotiated with Japan, Mexico, Vietnam and Singapore for dairy products. It is important to note that the EU will put financial support behind this effort.
Our chief negotiator Michel Barnier has been very clear that there will be no deal on withdrawal, the transition period or the future relationship unless there is a clear agreement on the backstop to avoid a hard border on the island of Ireland.
I am confident that Ireland's interests are safe in his very capable hands. Thank you.