Fixed price milk schemes have been offered to dairy farmers in various formats over the past six years. Some have worked in the farmers’ favour, while others have not.
There are currently four NI processors with fixed price schemes in operation, most of which pay a guaranteed base price around 27p/l to 28p/l when averaged out over the year.
However, while these base prices may have reflected dairy markets last autumn, they fall well short of where the market is now. Given the current flux in markets, Northern Ireland Agricultural Producers’ Association (NIAPA) chair James Lowe has suggested that processors should terminate the current fixed schemes citing force majeure.
Excluding winter bonus payments, base prices for October milk ranged from 30.5p/l at Lakeland Dairies up to 31.8p/l at Dale Farm.
This means conventional milk is 2.5p/l and 3p/l ahead of the guaranteed base price in each processor’s fixed price scheme. Adding in winter bonus payments, the price differential widens to 5p/l.
Based on current trends, there is a positive outlook for dairy markets through the remainder of 2021 and into next year.
Last week, the Ulster Farmers’ Union (UFU) milk price indicator (MPI) increased by a further 1.14p/l to record levels at 37.3p/l.
Allowing for a conservative 3p/l deduction to cover processor margins, the MPI points to a base price around 34p/l during the early stages of 2022.
This would see the conventional milk price 7p/l ahead of milk committed under fixed price schemes.
Given the rise in milk price during 2021, what is the impact on farm income for a producer that has locked into a fixed price contract at the maximum volume available, compared to one who remained outside the scheme?
Our calculations assume that two suppliers both produce 1m litres per annum, with a supply profile similar to the NI average. Bonus payments on milk solids and cell counts are excluded, as these top-ups are available on both conventional and fixed price milk.
Each processor’s monthly base price from January to October has been included in the calculations, while for November and December, it is assumed that each processor increases its conventional base price by 0.5p/l in each month.
Aurivo’s fixed price milk scheme pays a guaranteed base of 27p/l on a maximum 15% of annual supply.
The scheme runs for three years from 1 January 2021 and winter bonus payments are excluded on the percentage of milk committed under the scheme. In the case of Farmer A, with no milk committed under the fixed price scheme, annual milk sales come to £299,795.
For Farmer B, with 15% of annual supply in the scheme, milk sales for 2021 are £296,076.
This means Farmer B is losing out on £3,719, the majority of which is incurred during the second half of the year when base price crossed the 30p/l mark.
Dale Farm’s three year fixed price scheme pays a guaranteed base of 29p/l from October to March and 26p/l from April to September.Producers could commit a maximum of 15% of annual supply and again, winter bonus payments are excluded. Farmer A ends up with an annual income of £306,016 for 100% of milk sold at conventional base price.
Farmer B’s annual milk sales come to £301,291, which is a deficit of £4,725.
Lakeland’s three year scheme pays a guaranteed base of 28p/l from October to March, reducing to 26p/l from April to September on a maximum 10% of annual supply.
The co-op’s 3p/l winter bonus, payable in November and December, is not eligible under the contract.
Comparing the difference at the 10% supply threshold, Farmer A’s annual income is £299,086, while Farmer B’s annual income is £296,145, giving a difference of £2,941.
This leaves Glanbia Ireland as the final processor with a fixed price scheme in place, which pays a base price of 27p/l on approximately 15% of annual supply.
However, in the Glanbia scheme, its 1.5p/l winter bonus is payable from November to February on all milk, whether in the fixed scheme or not.
In the case of Farmer A, annual milk sales come to £304,209 for 2021.
Farmer B has annual milk sales of £299,645, a difference of £4,564.
There will always be winners and losers with fixed price milk schemes and farmers should only commit to such contracts if the guaranteed base price offered exceeds costs of production.
However, no-one could have foreseen the unprecedented increase in input costs farmers currently face, and going forward, they cannot be expected to produce milk well below the cost of production.
In 2022, if base milk price averages around 33p/l, the difference between those in or outside of fixed price schemes will be nearly double what we calculated for 2021.