Milk Agency may reject cut price contracts

Fresh milk was traditionally positioned as the best value-added product of the Irish dairy sector. Now it is being devalued in the market and repositioned as a low priced commodity, retailing at less than the price of bottled water. What has gone wrong and what are the prospects?

Paul Mooney and Pat O' Keeffe examine the issues

New types of liquid milk contracts paying only manufacturing milk price - an idea floated last week by prominent dairies - could run foul of the National Milk Agency.

Its remit under law is to ensure supply of drinking milk in the more expensive off season and liquid milk can only be produced and processed under contracts that have got its blessing.

Its remit would prevent it from approving contracts if it doubted these contracts would ensure that the producers would milk cows through the winter.

But a number of dairies have indicated to producer groups that they are thinking of offering farmers such contracts.

This, they claim, is necessary if they are to keep supplying Tesco and other multiples with low cost own-label milk for sale at the latest cut price of 99c per two litre pack.

Last week Glanbia met with its Fresh Milk Producer (FMP) group and advised it that it was considering a price cut for 10% of their contract volumes, this being the share of their production now going to own label. The suggestion was rejected by FMP.

The National Milk Agency was unwilling this week to discuss the issue of new contracts.

It stated that to date it had accepted the supplier contracts submitted to it by processors as they had given acceptable supplier returns and therefore ensured year round supply of fresh milk.

Meanwhile, the annual report of the National Milk Agency for 2002 showed that milk imports had reached a market penetration of 14%, 67% of this in bulk for packaging and 33% already packed for retail.

The report entitled ‘Issues Facing the Irish Liquid Milk Sector' was prepared for submission to Minister for Agriculture Joe Walsh.

The structure of the fresh milk sector has become highly concentrated at retail and processing levels but less so at the production level.

Four retail multiples control more than 70% of the retail market and the multiples continue to gain economic power in relation to processors and producers.

The market entry of two discount multiples, who source all their own label packed milk supplies from Northern Ireland, has intensified competitive rivalry between retailers.

Own label milk, sold at discount prices, continues to win market share from milk sold under processors' brands.

National Milk Agency cannot control price

The National Milk Agency is meeting its obligations under Irish law - as far as is possible - it said this week. This was in response to queries over its effectiveness in last week's Journal.

Pointing out that its role is essentially to ensure year round supply of fresh milk for consumers, the agency's chief executive Muiris O Ceidigh said: "Supply for the winter period is at an all time high now."

Total milk supply from registered liquid milk producers in the designated winter months (October to February) is now 123% of milk sales, this at a time when seasonality of national milk supply has got even worse.

The Agency cannot set liquid milk price at either wholesale or retail level, he said.

Producers meanwhile would like to gain more power to match the growing muscle of retailers. Under European Competition law farmer owned co-ops can centrally negotiate to deliver a better price for their members.

However, the bigger players on the Irish liquid milk market Glanbia and Kerry p.l.c.s.

The IFA say that with 26 liquid milk processing plants, the Irish liquid milk industry is fragmented, inefficient and consequently all the more vulnerable to increasing imports.

Liquid milk producers are carrying the cost of this inefficiency, they believe. However, the reality is that even if the southern industry were more efficient, or even organised in a legally acceptable way, milk imports from Northern Ireland would continue to put pressure on the market in the Republic.

A centralised selling agency, unless it had control over Northern Ireland, would not influence the market.

The retail milk pricing strategy now being followed by the multiples in the Republic is deliberately aimed at growing market share.

Milk as a key part of every shopping basket is an obvious target to attract customers.

The nature of the competion in the south at present is illustrated by the fact that Northern Ireland milk is currently sold at lower prices in the Republic than it is sold in NI.

Tesco and Dunnes Stores sell their own label milk in NI at the equivalent of €1.47 per two litres. Here they are selling it at 99c in recent weeks. Aldi and Lidl are charging the equivalent of €1.27 in NI, €1.14 here. Their milk comes from Northern Ireland.

The liquid milk market in Ireland

• 562m litres (124m gallons)

• Retail now accounts for 63% of market, doorstep deliveries down to 20%. Catering a growing sector, at 17%

• Per capita consumption 0.4 litres/head/day (2nd highest in the EU and double the average)

• Since 1995 milk retail price has only increased by 10% (Consumer price index has increased by 24% in same period)

• Producers share of price has fallen from 42% in 1995 to 38% in 2002.

Source: 2002 annual report of the National Milk Agency

Northern supply a key factor in southern prices

The market for liquid milk in Ireland is now hugely influenced by the availability of milk from Northern Ireland.

Imports of quota from Britain have seen their total milk pool grow from 1,308 million litres (288m gallons) in 1993 to close to 1,779m litres (392m gallons) in 2002/2003.

This 36% increase has not adversely affected the year round nature of their supply curve - at just 1.6 to one, their peak to trough ratio is far superior from a processor point of view.

In actual fact, the peak to trough ratio for the entire Northern Ireland dairy industry of around 5,000 dairy herds is actually better than that of the Republic's 2,720 specialised liquid milk producers (ratio of 1.9 to one).

The other major difference is that, unlike the Republic, northern producers are not paid a premium price for maintaining year round supply, hence the ability of northern processors to supply southern retailers at lower cost.

According to the National Milk Agency the price paid to the producers of this NI milk was 20% below the prices paid to producers in the Republic.

However, one possible chink of light for southern producers comes from the latest milk auction results in Northern Ireland.

The average auction price for May/June/July milk this year was 16.5p stg (23.4 cents/litre), while the Oct/Nov/Dec supply was forward sold at 22.96p stg (33.2 cents/litre). In addition, this seasonal 6.5p stg gap was well up on last year's level of 5p/litre.

Some northern processors supplying southern outlets with own label milk retailing at 99c for two litres are buying milk through the auction system, hence their cost advantage over southern buyers is now somewhat reduced, at least for the winter months.