Legendary investor Warren Buffett famously stated in his 2001 letter to shareholders that “you only find out who is swimming naked when the tide goes out”.

As global dairy markets enter a serious dip in prices, his quote is very apt for milk prices in Ireland. Next spring will test the strength in depth of our dairy processors in an unprecedented way. During the last serious downturn in 2009, some processors were able to deplete cash reserves. Many had dividends from Celtic Tiger-related property plays. Furthermore, IAWS was in the process of spinning out significant value to co-op shareholders.

As we head into 2015, dairy processors appear to be in a healthy state, but in most cases their balance sheets are more stretched due to significant capital investment in preparation for milk quota abolition.

There are no Celtic Tiger dividends. The milk price they pay next year will be a function of market returns minus processing costs. The cream should, in theory, rise to the top.

Pressure

The data from the October league would suggest that the pressure is starting to show. There is a gap of 9% (€0.38 per kg of milk solids) between the best and worst price paid for October milk on a milk league basis.

It is not yet large, but remember that, back in April, when markets were peaking, the gap between processors was just 2%. What will the gap be next April when milk volumes ramp up?

For October, the four west Cork co-ops are on top of division 1, with Barryroe just marginally ahead of its fellow Carbery shareholers, Bandon, Drinagh and Lisavaird. Monaghan is a creditable fifth, while Dairygold completes the division 1 line-up. All six paid over €4.30 per kg of milk solids in October.

Division 2, a price between €4.15 and €4.30, contains Boherbue, Kerry, Tipperary, Arrabawn and Lakeland.

Division 3, for processors who paid under €4.15/kg, contains Glanbia, Centenary Thurles, Aurivo and North Cork.

Glanbia has committed to paying 0.5c/litre for all 2014 supply to farmers who sign the milk supply agreement. Even if this conditional 0.5c/litre top-up was included in its October price, it would still have been in division 3, with a price of €4.117 per kg.

Average

The simple average milk price for October was €4.224 per kg of milk solids, a drop of 1.6% from the September average of €4.291/kg.

In order to compare prices on a fair and accurate basis, the Irish Farmers Journal milk league uses the average solids for Irish milk supplied in 2013 – 3.39% protein and 3.94% butterfat. It appears that average butterfat for milk supplied in 2014 will be close to 4.00%, while protein is likely to be over 3.40%.

This leaves the base prices quoted at 3.6% fat and 3.3% protein significantly out of line with the milk now being delivered by Irish farmers.