Sales of fresh milk in Ireland under supermarkets’ own brands (private labels) account for an estimated 64% of the volume of sales to Irish consumers (source: National Milk Agency). These are retailed at a circa 20% discount to branded 2l products. We in IFA believe that retailers are actually paying too little for this milk relative to the costs of producing and processing it.

Two well-documented studies carried out in recent years, by the IFA (with Teagasc) and Fresh Milk Producers (with FDC Accountants), have clearly established that the average cost of producing fresh milk year-round, covering all costs and allowing for a very modest wage for the farmers’ own labour is around 40c/l. It doesn’t cost any less to produce milk for supermarket private labels than for the dairy’s brand – but private-label sales account for the bulk of returns to dairies, and ultimately to farmers.

Processing liquid milk for retail costs far more than for commodities for three main reasons. Firstly, the yield from raw milk to finished product (UHT or fresh pasteurised milk) is one-to-one, much less than for just about any other dairy product. Secondly, packaging is very costly on a per-litre basis. Thirdly, Irish consumers favour fresh, pasteurised milk which requires refrigeration all along the chain.

German figures compiled in May 2016 by Professor Holger Thiele of the Kiel-based Institute for the Food Economy suggests that it costs over 21c/l to assemble, process, package and transport milk for the drinking market. This is in Germany, in the context of larger, more efficient milk processing plants, and is UHT milk which does not require refrigerated storage or transport.

Irish costs would be slightly higher due to fresh milk logistics and also these figures do not factor in a profit margin for the dairy.

Assuming lower economies of scale in Irish plants due to lower throughput, higher refrigeration costs and factoring in a modest profit margin for the dairy and a total increase on the German processing costs of even just 10%, this would bring the Irish production plus processing costs to a total of 40c/l + 23c/l = 63c/l.

Were retailers to pay dairies at least 63c/l, this would leave them, at current private label retail price levels, a gross margin of 12c/l or 16% of the retail price – not bad bearing in mind that retailers face the lowest costs in the chain.

So what are retailers actually paying dairies for milk? Well, while farmer production costs are well analysed, there is no transparency on wholesale prices and no official reporting, but our understanding is that it is less than 63c/l.

This means that the value in the up-stream end of the chain is less than it should be to remunerate fairly all its components, especially farmers who are the last and most vulnerable link in that chain.

French initiative Ireland can learn from

Around 15%, or 3.7bn litres of the milk produced by French dairy farmers winds up in the drinking milk trade, most of that in the form of UHT milk (stable at ambient temperature for up to six months).

Over 70% of France’s drinking milk sells under retailers’ own brands (private labels). The Irish fresh milk market is heading in the same direction, with already 64% or so of milk sales through supermarket private labels, so it is interesting to see what the French liquid milk sector has been up to.

The global dairy downturn which began in 2014 ushered a major crisis of economic sustainability for French dairy farmers which they have yet to recover from. The sector has responded with a number of initiatives.

Some of the most interesting and positive of these have focused on finding methods to ensure that the farmers producing the milk are paid a fair, economically sustainable price for it secured through the entire food chain – “le lait equitable”.

Some of those equitable milk projects were embraced by retailers, though possibly not for entirely altruistic reasons. The fact that many of them captured the imagination of the public through clever social media campaigns meant retailers simply had to have them on their shelves, and at least be seen to play ball with the concept of fairness and equity.

One of those milk initiatives, under the “C’est qui le patron” (Who’s the boss?) brand has been as successful as it is unusual.

This initiative was launched by a consumer organisation called “la marque du consommateur” (the consumer’s brand). The organisation set out an online consumer consultation process to determine milk specification. The voters chose milk produced in France, sustainably, by cows grazing between three and six months, with locally produced fodder, and decided that the price should remunerate the farmer fairly, including holidays.

Each element that the voters chose came with implications for the final recommended retail price, which finished up at 99c/l – between 20 and 30c/l higher than the lowest market prices.

Since its inception around a year ago, it continues to ensure the 80 or so farm families supplying it receive 39c/l for their milk – this since a time 12 months ago when the “going rate” in France was in the low 20s. Volumes have gone from zero to 17m litres in a year, but this is still only a small portion of the whole pool. Carrefour was the first big retailer to come on board with the brand, but Leclerc, Intermarche, Auchan and Casino, as well as some smaller names, now also stock it.

A leaf out of the French book

The Irish retail chain continues to appear unconcerned with the viability of the ever-decreasing prices it squeezes out of dairies. It shows little interest in the impact of its pricing or sourcing actions on farmers’ livelihoods, even if this will affect the sustainability of the fresh milk supplies they expect to reach their shelves consistently year-round.

We also have dairies who think too little before undercutting one another in a short-term bid for market share, insensitive to the implications of their profligacy on farmers’ liquid milk contracts and their winter remuneration.