THINGS HAVE not been as bad in the dairy sector as feared at the start of the year.

The market coped reasonably well with an early surge in European milk production. Despite a slump since June in the Fonterra Global Dairy Trade auction in New Zealand, world markets are stable. The EU has even managed to get away with slowly disposing of its 300,000 tonnes stockpile of milk powder, built up during the last dairy crisis.

The EU farm commissioner, Phil Hogan, is however continuing to insist that how the industry operates must change to have a greater market focus. When Hogan speaks on dairy issues he does so from a position of sound knowledge – not just because he is an Irish commissioner, but because his chief adviser in Brussels was a key figure in the Irish dairy industry. Hogan and his team know what they are talking about, so their views cannot be dismissed as the meandering thoughts of yet another bureaucrat.

With or without Brexit – but more so because of it – the dairy industry will inevitably face change. The old era of producing what you want for a fixed price is long gone, but the hangover from that market insulation is still around. The Hogan message at an event in Dublin was that this can no longer be the case. When quotas went he warned then that farmers could not automatically increase production, but was ignored. He warned earlier this year against production increases without considering the consequences. Again he was ignored, although the drought took care of any potential surplus. The unanswered question now is whether the reduced forage supplies will be felt though the winter, acting as a further brake on production.

The creation of the Milk Market Observatory and similar bodies was to ensure farmers had the best possible access to global and EU market information. This has been useful, although it still needs to be faster in publishing information. What will happen in the UK after Brexit with all these observatories and the information they provide is another issue still up in the air. The Hogan message in Dublin was that 'market orientation and an ability to adapt to unforeseen circumstances' was the key to future EU dairy success. However unlike past commissioners, Hogan did not heap responsibility on the shoulders of farmers. He said processors must do more to ensure market signal reach farmers. The dairy sector would then run more like other businesses, with suppliers better matching what they do to the volumes and products the market wants.

Hogan said future increases in EU production would be more moderate, but he warned that volatility would remain a fact of life. He wants to see more hedging on prices to counter volatility. His core message however was that more needs to be done to modernise the relationship between farmers and processors, not least over production decisions and the link between these and markets, rather than to grass availability and feed prices. The terms he wants to see coming to the fore are supply chain contracts, forward contracts, fixed price and margin contracts, and price differentiation according to volumes. This would bring the industry closer to those with integrated supply chains in the intensive sector. That is a trend the dairy and beef sectors have resisted, but if the Hogan approach prevails it will be the way of the future in the dairy sector.

It is good to see a commissioner addressing future challenges for a key sector when things are reasonably good, and not when the industry is in crisis. This creates the conditions for a more rational debate, and for good decision making about the need to change industry structures. In Scotland there is the added twist of the changes Brexit will force on the industry. For now things look positive. China remains a big importer, particularly of high value infant formula where Ireland dominates EU production. European cheese and butter markets are good and powders stable or even improving. At the end of July production was forecast to be up by 1.7%in the EU since the start of the year, but thanks to the drought this was back to less than half that, with winter production likely to be hit by forage shortages. Those are stable conditions in anyone's book, making now the ideal opportunity to talk about the industry's future.