With only one major dairy processing co-op reporting for 2023 there is already a picture emerging of the challenges the industry faced in 2023.

The weather, worries about environmental legislation changes and the low milk price all hit milk supplies during the year. With the global dairy market in the doldrums, the price processors could get for the final products from the milk that was coming in the gate was seriously curtailed.

All in all, it's safe to say that 2023 was challenging across the sector.

However, added to these problems for processors was the high cost of borrowing last year.

Mismatch between timings

Dairygold, which reported earnings this week, saw its interest payments rise from €9.9m in 2022 to €22m in 2023. Interim CEO Michael Harte told the Irish Farmers Journal that much of the interest cost rose from the large amount of working capital the processors need during the year because of the mismatch between the timing of payments for milk suppliers and payments received from Dairygold’s customers for finished product.

That €12.1m extra cost equals about 0.9c for every litre of milk delivered to the co-op last year. Considering that Dairygold ran at close to zero profit after tax in 2023 to maximise payments to suppliers, it would be reasonable to think that the co-op would have passed that money on to suppliers if it didn’t have that cost.

So, to put it another way, the higher interest rate environment would have cost a farmer supplying 500,000 litres of milk €4,500 in 2023.

All of which means that for suppliers, the interest rate environment has a direct impact on what they getting paid for their milk.

This week the European Central Bank decided to hold interest rates at their current high level, but did hint quite strongly that it will start to reduce rates at the next meeting in June. That would provide some slight relief for processors, but they are in a position now where they need multiple rate cuts to bring interest costs back into line.

Average rate

The ECB interest rate only reached its current high level of a 4% deposit rate in September of last year having started 2023 at 2% (see figure 1 below). This means that the average rate on loans in 2023 was much lower than it has been so far in 2024 which in turn implies that interest costs for working capital for processors this year will be even higher than in 2023. With the ECB set to only reduce interest rates slowly, rates may only meaningfully fall when processors needs for working capital will be at their lowest towards the end of the year.

All of which in turn will mean higher costs for processors this year and even lower payments for milk suppliers this year.