Fixed-price milk contracts have become established within the dairy industry in NI.
Currently, there are contracts in place for suppliers of Aurivo, Dale Farm, Glanbia Ireland and Lakeland Dairies.
The latest Aurivo scheme started on 1 January and runs for 36 months. It pays a guaranteed base of 27.5p/l on 15% of annual supply, plus the usual top ups on milk quality. However, winter bonus payments are not applicable under the contract.
Dale Farm and Lakeland also launched new three-year contracts on 1 January and again, no winter bonus payments are applicable in each scheme.
The Dale Farm contract pays a guaranteed base of 29p/l from October to March, reducing to 26p/l from April to September. The maximum volume that could be committed is approximately 15% of annual supply.
The Lakeland scheme was a continuation of its last offering, and pays a minimum base of 28p/l from October to March and 26p/l from April to September on either 5% or 10% of annual supply.
Glanbia Ireland’s fixed-price contract pays a base of 27p/l and ends in December 2022. Suppliers typically committed 15% of annual supply. Unlike the other schemes, volumes supplied under the scheme are eligible for winter bonus payments.
As fixed-price contracts offer some degree of price stability, there has been relatively good uptake by farmers, with the latest offerings more or less fully subscribed.
Banks and other financial institutions also like fixed price contracts as they help insulate farm income against market volatility.
In general, the price set in the contract is after negotiation between a processor and customer, and a compromise between both on where they think the market will land over the next three years. History would suggest that their estimates are often not far off.
Rising base prices
From January to March of 2021, standard base prices have been broadly in line with the guaranteed prices offered under fixed-price contracts.
But during April, base prices are currently running ahead of those offered by fixed price contracts, just as production hits peak levels on most farms.
With market analysts forecasting that base prices should hold relatively steady at current levels, it is possible that those outside of fixed price deals will be better off this year.
To illustrate the potential extent of that, take the example of a dairy farmer producing 1m litres of milk annually in line with the NI average supply curve.
The farmer has committed 15% of their annual supply (150,000l) to a fixed price scheme paying 29p/l from October to March and 26p/l from April to September.
This means the milk sold under the fixed price scheme is worth approximately £41,167 over the course of this year.
In January, monthly production is taken as 84,921 litres. Using the average NI base price of 27.94p/l, the share of milk sold at the standard base price is worth £20,168, excluding top ups for milk solids and volume. When combined with the fixed price allocation, total milk sales for the month is £23,862.
If 100% of January milk had been sold outside of a fixed price scheme, then milk sales would have been £23,727, excluding premiums on milk quality and any potential winter bonus.
For February, monthly production was 79,211l, with a standard base milk price of 28.9p/l. Where 15% is sold at a fixed price, total sales for the month are £22,904, excluding top ups on milk quality.
In contrast, 100% of milk sold at the standard base price would have been worth £22,892, excluding these milk quality premiums.
For March, the combination of milk sold under contract and at an average base of 29.01p/l is worth £26,278 for 90,588l. Under the 100% standard base pricing option, milk sales are £26,279.
In April, monthly volume equates to 92,300l with a standard base price of 29.1p/l.
Up to this point, the farmer who was in a fixed price scheme had a slightly higher income, but this has now switched around. Where all milk is sold outside of the contract, the total income is £26,859 versus £26,430 if 15% is supplied under the fixed price scheme.
Cost of production
It is possible that this scenario persists throughout the rest of the year, and a farmer outside of a contract will be better off.
But the differences are likely to be relatively small, and the bigger issue for dairy farmers is the increase in production costs over the last few months.