Ornua is changing the way it calculates the costs of processing milk within its product price index (PPI) calculation.

The PPI is issued monthly and sets out the market returns for dairy products within the Ornua product mix.

Under the new methodology, the processor cost element of the PPI has increased by 1.9c/l from 7.5c/l in January to 9.4c/l in February.

As a result, while the PPI increased by 6.4 points in February to 131.5, which is up from 125.1 in January, the indicative milk price return after processing costs are deducted only increased by 0.19c/l, excluding VAT.

Irish base milk prices have been trailing the PPI for most of 2023 with the largest gaps emerging in October and November, with a difference of over 4.2c/l between the average of base milk price, as per the Irish Farmers Journal monthly milk league and the PPI indicative price inclusive of the Ornua value payment.

Ornua said that the new methodology uses an initial estimate of processing costs from 2020 as a base and indexes the variable cost elements in processing milk to an external cost index.

Within the PPI, processing costs were fixed at 7c/l in 2020, but the energy cost element became variable in February 2022 after gas prices increased substantially after the Russian invasion of Ukraine and this was adjusted monthly.

Other costs

A spokesperson for Ornua said that the new method makes other costs variable also, such as labour, packaging and transport costs.

It says that the new methodology will be updated every three months and that processing costs will rise and fall in line with variable costs in the new external index, most notably energy costs.

ICMSA hits out at PPI change

The ICMSA has hit out at the changes and has written to Ornua chair Aidan O’Driscoll seeking the baseline and source of data used in the calculation for the PPI.

It has also called for confirmation that the data has been “independently verified by a reputable third party organisation as accurate and correct”.

ICMSA dairy chair Noel Murphy said that to introduce such a change at a time when farmers are under enormous pressure due to weather, costs, low milk prices and the ongoing negative impact of changes to the nitrates regulations shows a “frankly alarming” disconnect between Ornua and the dairy farmers.

“The reality of the pressures facing farmers seems to be lost on Ornua.

“Do they even know or care that many are still producing milk below the cost of production?” he said.