Glanbia Milk has announced details of a new fixed price milk contract available to its NI-based suppliers from 1 November, running to the end of 2022.

The new scheme, which is Glanbia’s third fixed price scheme, will pay a guaranteed base price of 27p/l during the lifetime of the contract.

On top of the 27p/l base price, farmers that sign up to the agreement will receive all the normal premiums on milk quality.

Previously, Glanbia Milk offered fixed price contracts at a base of 28p/l

Unlike previous Glanbia Milk schemes, the 1.5p/l winter bonus payment from October to February is payable on milk supplied under the fixed price scheme.

However, the scheme does not include an adjustment element. Previously, Glanbia Milk offered fixed price contracts at a base of 28p/l.

But if conventional base price increased beyond 28p/l, for every extra 1p/l Glanbia would add 0.5p/l to the fixed contract base price.

Volumes

There is no minimum or maximum volume that suppliers can commit. Instead, farmers can decide what amount they wish to supply under the scheme.

Glanbia have a set volume of milk forward sold at a guaranteed price. Once all applications have been received, the processor will tally up the volume suppliers have committed.

Should this exceed the total amount of milk forward sold, Glanbia will scale back supplier’s volumes as necessary.

With the new scheme coming into effect from 1 November, farmers wishing to sign up should reply by 30 October, although there is a possibility this deadline will be extended to next week.

Outlook

The latest Glanbia fixed price contract is the first significant commitment on milk pricing made by any company for 2021 and beyond.

Sources in other processors indicate they have been in negotiations on forward milk sales with customers, but economic uncertainty caused by Brexit and exacerbated by COVID-19 has made it difficult to lock-in at a level that would return a viable milk price for farmers.

Fixed price contracts

Over the past few years, various fixed price contracts have been offered to NI dairy farmers with mixed success.

Perhaps the most important lesson from the first schemes in 2015 and 2016 was not to lock in at prices significantly below the cost of production. Once markets turned, farmers in these schemes were at a significant disadvantage.

In more recent years, fixed price schemes have offered guaranteed base prices from 26p to 29p/l for a fixed percentage of annual supply, usually in the region of 10% to 20%.

Contracts ending

As of autumn 2020, there are still several of these fixed price contracts in place. However, most are set to expire on 31 December.

Dale Farm’s first fixed price contract paid a guaranteed base of 27p/l and is set to end on 31 December. The co-op does have a second scheme that still has another 12 months to run.

Lakeland has just one scheme running, which also expires at the end of the current year. It paid a base of 26p/l for April to September and 28p/l over the remaining six months.

Aurivo has two contracts in operation, both of which terminate at the end of the year. The first scheme pays 29p/l. with the second scheme paying 26p/l.

The latest scheme to be announced by Glanbia Milk will replace its current contract, which finishes on 31 December.

Cost benefit

Over the past three years, dairy farmers that committed a percentage of their annual supply under a fixed price contract have generally been better off.

Take the example of a 1m litre producer pledging 40% of annual supply under a fixed price scheme, paying a guaranteed base of 27p/l from 1 January 2018 to 31 December 2020.

In the example, the fixed contract price is compared to the average monthly base price paid across all NI processors.

Assuming a steady market over the final three months of the year, plus the usual winter bonus payments, price is likely to average 25.6p/l

During 2018, conventional base prices averaged 27.53p/l across the year, so the farmer was £1,953 worse off that year.

But in 2019, conventional base price averaged 25.8p/l, so annual milk sales were £5,072 higher due to the fixed price scheme.

In 2020, milk prices have averaged 24.8p/l up to September. Assuming a steady market over the final three months of the year, plus the usual winter bonus payments, price is likely to average 25.6p/l.

So, the fixed price scheme increases farm income by £6,281 in 2020. Across the three years, in this example, the farmer is £9,415 better off.

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