The announcements by Lakeland and Aurivo have further filled out the picture on what Irish milk producers must do post-2015 to ensure their milk is collected and processed.
As expected when Glanbia announced earlier in the year that it would not charge a processing levy or a minimum share holding, those processors competing in that same general catchment area have also announced no minimum shareholding.
The Lakeland contract seems uncomplicated and there are a couple of interesting points. Similar to Glanbia, it wants to purchase ALL milk produced by suppliers including any NEW milk.
Obviously, they retain the right to introduce or make amendments to specific milk purchasing schemes including out-of-season milk bonus schemes and peak milk management schemes. The seasonality scheme deductions or penalties over peak milk supply are severe for those in a spring production system who do not adhere. The term is for three years with one year’s notice to move, but notice to move will not be accepted until after 1 January 2018.
The Aurivo contract is similar in construction to the Dairygold one which created quite a stir among suppliers down south last year. Similar to Dairygold, there are three types of member funding:
Share standard – a minimum shareholding of 3 c/litre is required by each supplier. Revolving fund – a deduction of 0.5 c/litre will be deducted over 60 months and will be repaid to the supplier with interest (three-month Euribor + 2,5%) from year eight.Deferred payment scheme whereby money will be withheld from summer milk cheques and repaid in January of the following year. For a supplier expanding production post-2015, the cost of the investment in the co-op shares and revolving fund could be close to €50 per cow if we take it that the average shareholding is 0.6 c/litre at the moment. While the co-ops suggest the supplier will get dividends on shares owned, in the past these have been relatively small. The revolving fund money will obviously be returned with interest but the cash call is high for an expanding farmer that has to invest on farm at the same time. The Aurivo Focus 2020 document I have seen does not explain where the money will be spent other than to say there is a long-term plan to invest in operations and competitiveness to protect suppliers’ interests.
We have explained the Dairygold contracts in detail previously and Dairygold will place no limit on milk suppliers’ expansion in the post-quota era. However, to be able to process all of this extra milk, additional processing capacity will be required. Dairygold has asked its members to fund part of this expansion, to the tune of €50m. The remaining cost of expansion will come from bank borrowings and cashflow. In Dairygold Co-op, the year-to-year financial impact of signing milk supply agreements will vary depending on how much your milk supply grows, shareholding owned and what your base milk supply was between 2010 and 2012.
Similar to Aurivo, the total cash call in the early years of expansion could be close to €50 per cow for the revolving fund and shareholding contribution depending on existing shareholding and expansion plans.
Terms and conditions
As explained previously, the terms and conditions of the Arrabawn Co-op milk contracts are dependent on whether you are expanding or not. The short summary is each supplier will require 2,500 shares per 100,000 litres supplied on existing supply, which at €1/share is 2.5 c/litre. If a farmer plans increasing supply to 20% then your share-up requirement lifts to 3,500 shares per 100,000 litres supplied (3.5c/litre) and 5,000 shares per 100,000 litres for supply greater than 20% (5 c/litre). A deduction will be made from milk price to fund the share purchase, up to a maximum of 0.7 c/litre to 2015, but will be extended after this date if share requirement has not been reached.
Each supplier will be asked to forecast milk supply in October for the coming year and suppliers need to supply a minimum of 85% of forecasted volume or there will be penalties. A seasonality scheme is also planned and in 2015 the penalty is 5 c/l for milk supplied greater than 15% of forecasted volume in either May or June and 10c/litre on the oversupply if over 16% in either May or June.
Opinion
While long-term contracts (over five years) offer the processor some
stability, they do reduce the suppliers’ flexibility to move from a processor if management are not delivering on milk price or balance sheet growth.
On the other hand, very short-term contracts might not bring the required stability or investment at processor level.
A happy medium for contracts seems to sit between two and three years.
As we have already explained on numerous occasions, those farmers investing in co-ops have a right to know where shareholders’ money is going to be spent and what the expected return will be. They also need to know the big picture plan for the co-op on proposed investments and marketing in coming years.
There is little point in farmers investing in a sinking ship if they can supply another processor that has a clear vision for the future in terms of processing, investment, sales and projected profits.
There is no doubt that each supplier, if investing in shares and revolving funds etc, should sit down and go through a one-to-one meeting with management to see what the impact will be on their farm for their own investment plan.
The announcements by Lakeland and Aurivo have further filled out the picture on what Irish milk producers must do post-2015 to ensure their milk is collected and processed.
As expected when Glanbia announced earlier in the year that it would not charge a processing levy or a minimum share holding, those processors competing in that same general catchment area have also announced no minimum shareholding.
The Lakeland contract seems uncomplicated and there are a couple of interesting points. Similar to Glanbia, it wants to purchase ALL milk produced by suppliers including any NEW milk.
Obviously, they retain the right to introduce or make amendments to specific milk purchasing schemes including out-of-season milk bonus schemes and peak milk management schemes. The seasonality scheme deductions or penalties over peak milk supply are severe for those in a spring production system who do not adhere. The term is for three years with one year’s notice to move, but notice to move will not be accepted until after 1 January 2018.
The Aurivo contract is similar in construction to the Dairygold one which created quite a stir among suppliers down south last year. Similar to Dairygold, there are three types of member funding:
Share standard – a minimum shareholding of 3 c/litre is required by each supplier. Revolving fund – a deduction of 0.5 c/litre will be deducted over 60 months and will be repaid to the supplier with interest (three-month Euribor + 2,5%) from year eight.Deferred payment scheme whereby money will be withheld from summer milk cheques and repaid in January of the following year. For a supplier expanding production post-2015, the cost of the investment in the co-op shares and revolving fund could be close to €50 per cow if we take it that the average shareholding is 0.6 c/litre at the moment. While the co-ops suggest the supplier will get dividends on shares owned, in the past these have been relatively small. The revolving fund money will obviously be returned with interest but the cash call is high for an expanding farmer that has to invest on farm at the same time. The Aurivo Focus 2020 document I have seen does not explain where the money will be spent other than to say there is a long-term plan to invest in operations and competitiveness to protect suppliers’ interests.
We have explained the Dairygold contracts in detail previously and Dairygold will place no limit on milk suppliers’ expansion in the post-quota era. However, to be able to process all of this extra milk, additional processing capacity will be required. Dairygold has asked its members to fund part of this expansion, to the tune of €50m. The remaining cost of expansion will come from bank borrowings and cashflow. In Dairygold Co-op, the year-to-year financial impact of signing milk supply agreements will vary depending on how much your milk supply grows, shareholding owned and what your base milk supply was between 2010 and 2012.
Similar to Aurivo, the total cash call in the early years of expansion could be close to €50 per cow for the revolving fund and shareholding contribution depending on existing shareholding and expansion plans.
Terms and conditions
As explained previously, the terms and conditions of the Arrabawn Co-op milk contracts are dependent on whether you are expanding or not. The short summary is each supplier will require 2,500 shares per 100,000 litres supplied on existing supply, which at €1/share is 2.5 c/litre. If a farmer plans increasing supply to 20% then your share-up requirement lifts to 3,500 shares per 100,000 litres supplied (3.5c/litre) and 5,000 shares per 100,000 litres for supply greater than 20% (5 c/litre). A deduction will be made from milk price to fund the share purchase, up to a maximum of 0.7 c/litre to 2015, but will be extended after this date if share requirement has not been reached.
Each supplier will be asked to forecast milk supply in October for the coming year and suppliers need to supply a minimum of 85% of forecasted volume or there will be penalties. A seasonality scheme is also planned and in 2015 the penalty is 5 c/l for milk supplied greater than 15% of forecasted volume in either May or June and 10c/litre on the oversupply if over 16% in either May or June.
Opinion
While long-term contracts (over five years) offer the processor some
stability, they do reduce the suppliers’ flexibility to move from a processor if management are not delivering on milk price or balance sheet growth.
On the other hand, very short-term contracts might not bring the required stability or investment at processor level.
A happy medium for contracts seems to sit between two and three years.
As we have already explained on numerous occasions, those farmers investing in co-ops have a right to know where shareholders’ money is going to be spent and what the expected return will be. They also need to know the big picture plan for the co-op on proposed investments and marketing in coming years.
There is little point in farmers investing in a sinking ship if they can supply another processor that has a clear vision for the future in terms of processing, investment, sales and projected profits.
There is no doubt that each supplier, if investing in shares and revolving funds etc, should sit down and go through a one-to-one meeting with management to see what the impact will be on their farm for their own investment plan.
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