Northern Ireland farmers produce a large supply of milk. Last year 1.95bn litres came from the farms and passed down the marketing chain.
In 2012, milk earned £511m for producers. Its market impact, in terms of the final selling value of processed products, would be nearer to £1bn. In terms of farm economics, milk represents about 30% of farming turnover and probably a slightly smaller share of final farm incomes. Production in 2012 sold for £32m less than in 2011, partly caused by a small fall in output (-0.7%) and a worrying fall in realised prices (-5.4%).
Many farmers claim that the prices that they receive for their milk have fallen behind the costs of production. Nevertheless, the trend in recent years has been for an increase in local output.
Over many years, milk production and market prices have been heavily influenced by European regulations and policies. A remaining, but fading, influence on milk production has been the European system of production quotas. For some years Northern Ireland has escaped the impact of a ceiling from quotas because unused quotas have been obtained from the English market.
The end of quotas, in 2015, will fully release local producers to respond to market forces and, coincidentally, in the Republic of Ireland remove their tighter quota constraints and give a large boost to their farm production which in recent years, has seen little growth compared to an expansion of 40%-plus in NI since the industry was deregulated.
The market place for milk producers is changing radically. United Dairy Farmers (UDF) has ceased to sell its farmer members' milk through an auction process. Instead UDF has moved to a direct negotiation with its customers as other dairy companies do. This has reduced the demand for auctions which have come under increasingly critical scrutiny by farmers seeking better prices. UDF says the end of the auction process has attracted no major complaints from its members.
In a response, the Ulster Farmers' Union has launched a statistical formula to suggest where market prices for off-farm milk sales might be, taking account of wider and international influences. The 'milk price indicator' is a guideline for the market, but no direct behavioural leverage.
Producers are concerned milk prices are too low and, at just over 30ppl, below a satisfactory return given increased production costs. The profit margin for farmers has been squeezed recently but the impact of bad weather may be temporary.
Globally, the dairy sector is facing problems of capacity shortages.
In the past decade, milk production in Northern Ireland has expanded by over 40%. Production capacity has increased through investment programmes at a number of dairies.
Now, in the Republic, Glanbia has announced one of the largest investments in processing plant, at Belview, Kilkenny. The Irish Government has endorsed a 50% expansion in milk production and wants to capture an even larger share of other markets.
The dairy sector here now faces an unusual opportunity to expand. This is an opportunity market forces will encourage with only modest Government help. Rather less happily, better production and improved incomes may be linked with only modest extra employment.