The IFA’s Milk Wise 2025 strategy highlighted the issues in the current liquid milk contract/pricing systems which affect the sustainability of fresh milk supplies.

The first problem is that farmer contracts with dairies, registered by the National Milk Agency (NMA), are out of sync with the two- to three-year breeding cycle for dairy cows.

Fresh milk to be produced next winter will come from cows inseminated nine months previously, which were then at least two years old. One-year contracts between farmers and dairies with no price visibility do not make sense and are unfair to farmers, especially when there is no certainty of retail outlet.

The second problem is that some of the large retailers manage their sourcing through annual price-based tenders to optimise their margins, and those are also incompatible with the breeding cycle.

In recent years, this has led to massive volume swings, with one dairy pressured to undercut another, with clear implications for farmers’ milk price and contracts as the “losing” dairies seek to replace the volumes by tendering at knockdown prices with other retailers. This domino effect has eroded the value in the milk chain, and led to lower prices for farmers.

A more general concern is the failure of the retail trade to give due regard to the economic realities of farmers, and their need to secure a fair price from the retail chain. This is particularly galling for farmers when they see the public claims of community responsibility and care about producers made by retailers.

So, what could be done to secure long-term supplies of locally produced fresh milk?

All contracts in the chain must reflect the length of the breeding cycle. Farmers must have visibility not only of the volume they will be supplying, but also of the price which will be paid for it.

This would require putting an end to the current, price-based one-year competitive tenders which some retailers have been using to pit one dairy against another.

These tenders are all about optimising retail margins. They feed into a downward spiral of wholesale and farmer prices, and we in IFA consider them to be unfair trading practices (UTP) .

Multi-annual contracts would have to be underpinned by longer-term multi-annual commercial relationships between dairies and retailers.

Retailers repeatedly emphasise their responsibilities to the local community and sustainability. A more engaged type of commercial relationship with dairies and farmers would be a tangible, credible statement of this commitment from retailers.

Pricing systems must cover costs, reflect stable returns and compensate for volatility of base price.

Most liquid milk producers are paid a base price equal to their dairies’ creamery milk price, to which a winter liquid milk payment/premium is added. In recent years, their milk price has reflected the extreme volatility of creamery milk prices, and less so the much greater stability of retail returns.

Farmers currently sign annual (supplemental) contracts for registration with the NMA in June, months before they know what the milk payment for the following winter will be.

This leaves them uncertain about whether the price will cover their costs and hampers their ability to negotiate effectively.

Multi-annual agreements with clear winter price commitments, with the flexibility to make up for weak creamery base prices in a bad year, are desirable.

Creamery milk producers now have access to fixed milk price contract options, despite volatile dairy commodity returns. With stable retail returns, dairies and retailers should be able to come together to offer similar options for specialist liquid milk farmers.

Adequate compensation

In addition to a base price, liquid milk producers receive a winter payment or premium to recompense them for the higher costs of producing milk over the winter months – mainly in labour, energy and feed.

The Milk Supply (Act) 1994, which establishes the NMA, requires that “adequate compensation” is paid by dairies to farmers.

However, the guidelines used by the NMA to determine this issue rely on whether milk suppliers actually supply enough fresh milk year round to cover current demand, including over the winter months. By the time the shortages show that the compensation is not adequate, it is too late to do anything about it.

We believe the NMA, in conjunction with Teagasc, must monitor production costs and flag ahead when feed, energy, labour or other costs are rising, as a signal that farmer payments need to be adjusted. This could then be integrated into the negotiation process between dairies and producers, and, together with the volatility cycle of creamery prices, into the calculation of the multi-annual farmer price commitments, reviews and commercial arrangements between dairies and retailers.

Current structures must be challenged

The current structures are not fit for purpose. They encourage young farmers to move away from liquid milk specialisation, and leave those who have no such choice stuck with unprofitable liquid milk contracts. They also devalue a substantial section of Ireland’s dairy sector, currently valued at €531m at retail price level.

Everyone may not agree with the proposals we have outlined, but with them, we want to start a conversation within the industry on how to secure the supplies of fresh, locally produced milk Irish consumers value so much.

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Full series: liquid milk