Since 2008, dairy co-ops operating either side of the Irish border have applied two distinctly different milk payment systems.
In the Republic of Ireland (ROI), the clear message to farmers is to produce higher solids milk, with a payment system (A+B-C) based on protein (A) and fat (B), and a deduction (of around 4c/l) applied to account for the cost of processing milk (C).
In NI, the payment system tells farmers to chase volume. If you have two cows producing the same output of milk solids, but one yields 7,000l, while the other 6,000l, the 7,000l cow will gross around £100 more in milk sales. Farmers respond to price signals, and the average yield per cow in NI is up over 12% in the last 10 years.
In many ways the new incentive for fat and protein recently announced in NI by Glanbia Ireland is a halfway house between the two payment models. It is not an A+B-C system as used in ROI and New Zealand, but effectively an A+B model, as used in some European countries.
To illustrate the change, assume Glanbia Ireland pays farmers 30p/l for average-quality milk. The current value put on the fat and protein in each litre by Glanbia works out at just 18p, leaving water valued at nearly 12p.
Given the environmental challenges coming down the tracks, it makes no sense
For other companies in NI, the same principles apply – the differentials for fat and protein have hardly changed in over 30 years. At a price of 30p/l, most are valuing water between 9p and 10p. Given the environmental challenges coming down the tracks, it makes no sense.
By year four in the new Glanbia payment model, the increased value put on fat and protein means milk solids are valued at 30p/l, not 18p/l. So if Glanbia pays a farmer 30p/l, it is essentially valuing water at zero.
If we apply that back to the example of the two cows with different yields producing the same milk solids, in Year 4, both cows have exactly the same milk sales. The lower yielding cow is grossing £30 more; the higher yielding cow is grossing £90 less.
The message that sends to farmers might not be as clear as A+B-C (go exclusively for milk solids), but it is still obvious that if you improve constituents, you will be rewarded.At the same time, if a farmer at the NI average (4.06% fat; 3.30% protein) or below, does not change, our analysis suggests they will be worse off, and Glanbia will be buying cheaper milk in NI than before.
The challenge to suppliers is to make sure that does not happen. The challenge to the wider industry is to see the Glanbia move as a logical and progressive change, not a threat.