Glanbia has led the development and innovation of fixed milk price schemes in Ireland for the last 11 years. Often early developers get more of the heat when something goes wrong.

If Glanbia had to hold some of the rules they had in place when these schemes were first introduced, many farmers would be a lot better off today. However, farmers wanted a fixed price that didn’t move at year end, and hence after six or seven years the rules changed.

However, we do have to keep the schemes in context. If you were to pick a point at any time last year and look back over 10 years involvement in the schemes, it was still leaving the farm business in a better place financially and with less risk.

Glanbia says that even including 2021 schemes, the milk suppliers would have beaten the market by 0.3 c/litre. And remember that these schemes are not set up to beat the market. They are to smooth the waves of high and low prices. However, looking back at the past year there were some big losers – and there will be more both this year and next.

Who is involved?

As you can see from the map, Glanbia and North Cork are the two co-ops that we know have a relatively large proportion of the annual volume tied up in fixed milk price schemes.

Glanbia has over 18 schemes introduced since it launched the first one. North Cork Co-op, based out of Kanturk in north Cork, is unusual in that it has over 30% of its volume tied up in fixed milk price schemes.

We understand that it is for no particular reason other than local advice, Brexit was in the news and Newtownsandes suppliers had first time access. The other big players Kerry, Dairygold, Lakeland, Arrabawn and Aurivo don’t have large volumes of milk tied up in fixed milk price schemes.

Carbery made a move last week to compensate some farmers in the west Cork co-ops that are in the fixed milk price schemes. But as you can see 1% or less of the 600m litres processed by Carbery is involved in fixed milk price schemes.

How it works

The majority of fixed milk price schemes are backed into Ornua, which has the relationship with the end customer. Ornua goes to the processors looking for an expression of interest for a maximum volume of product. The processors in turn then go to suppliers with an offer, before going back to Ornua.

Ornua eventually goes back to its customers to try and nail down the deal. Using information on the futures market plus a risk profile for a longer timeframe a price is agreed.

The co-op then goes to the milk suppliers with the core offer as tailored to suit the co-op requirements and suppliers etc. Some processors such as Tipperary Co-op don’t have any engagement on the fixed milk price offer.

Very recently Glanbia had come with an option to buy into a new scheme to alleviate the effect on those with high volumes fixed. In effect what is happening here is it has gone back to Ornua.

My understanding of it is that Ornua is not going back to its customer which backed the deal, but is managing the cost internally from overall returns. Others such as Interfood run forward schemes also.

International comparison

The US is often rolled out as an example of where forward fixing and input hedging are well established. The ground rules for production are very different of course. Most well managed US farms have enough forage either growing or in the bunker for two years in advance.

Most will have purchased a certain amount of protein on futures markets as they know well in advance their cow numbers, requirements etc.

Milk supply is not as variable in the States as it is here. So in effect when a US farmer goes to forward fix milk price they are looking at the margin they are getting and comparing that to historic trends and if the business can carry a slightly lower margin to buy off some of the risk.

Learnings

The allocation of fixed volumes has caught out some suppliers. Suppliers were often asking for twice what they wanted to fix.

Some farmers have told me that they got caught with high volumes in the last fixed milk price offering for three years as they were allocated more milk than they had expected.

Another one of the issues that has come to light is that some farmers had well over 50% of their annual volume in fixed schemes and hence the knock on effect is magnified on individual farms. Only the co-op has visibility on these volumes and maybe some hard and fast rules are also needed here for the co-op, suppliers and the industry.

Comment

So is it just a ‘hard lesson’ for milk suppliers to accept that the market can outperform the fixed price?

For many dairy farmers it is, but one learned at the expense of a huge change in the business that might not have happened unless they had the fixed element in place. That risk might have been doubling the number of cows they were milking.

It wouldn’t come as a shock if a lot of Irish dairy farmers refused to engage with fixed milk price schemes again unless they also get cover on inputs costs.

If not the full basket of farm inputs then particularly the big three, feed, energy and fertiliser.

Also a lower and higher threshold, a cap and collar, which initiates a move in the fixed milk price would really help those afraid of losing out on a high market again, but also comforting those afraid of a really low market.