Since Kerry Co-op formally submitted a €480m bid for 60% of Kerry Group’s dairy business in January, one point that has been repeatedly raised by some Kerry milk suppliers is why there is any need for this joint venture to go ahead when farmers have a milk supply contract that states they are entitled to the ‘leading milk price’.

They argue that Kerry milk suppliers would be better off staying out of any joint venture as they have a legally binding contract in their hands. Instead, they would prefer to see Kerry Co-op continue to disperse the dividends it receives from Kerry Group to shareholders and hold Kerry Group to its commitments in the milk supply contract.

For many farmers, the Kerry milk supply contract was further bolstered when an independent arbitrator ruled in September 2019 that the four west Cork co-ops must be included as comparators when agreeing the ‘leading milk price’.

These are all fair points but it is important that farmers understand the full context of the 2013 milk supply contract as well as the exact ruling of the arbitrator when considering the joint venture proposal.

In the beginning: what did the 2013 milk supply contract say?

The current milk supply contract between milk suppliers and Kerry Group was agreed in 2013. Its genesis is rooted in the impending removal of EU milk quotas and the need for shareholder approval to reduce Kerry Co-op’s stake in Kerry Group below 20%.

The ‘leading milk price’ commitment was set out in a letter to Kerry milk suppliers as far back as 2011 and, after intense negotiations between both sides, the ‘leading milk price’ clause was formally written into Kerry’s milk supply contract in 2013.

However, it’s important to understand how the leading milk price is arrived at every year. Firstly, there is an acceptance on both sides that the Kerry milk price is different to other co-ops.

The Kerry milk supply contract states the ‘leading milk price on a like-for-like basis’ shall be paid after taking account of certain differences with other Irish co-ops, including:

1. Milk volumes and supply curve.

2. Milk quality (SCC, fat, protein etc).

3. Dividends or other income used to support milk prices.

4. Seasonal bonuses.

5. Unique markets, which may skew market returns.

6. Levies paid to the Irish Dairy Board (now Ornua).

So, the ‘leading milk price’ is not simply the highest milk price based on the Irish Farmers Journal/KPMG annual milk price review. Instead, it is calculated based on including appropriate deductions/increases for the six points set out above.

As such, the ‘leading milk price’ for Kerry could match or even be slightly lower than those topping the milk price review when compared on a like-for-like basis. Further details of the ‘leading milk price’ commitment were set out in a Memorandum of Understanding (MoU) between Kerry Group and its suppliers but this was never sent to suppliers.

The dispute: how we got to where we are now

For the first number of years, the ‘leading milk price’ contract worked well, with both sides able to agree on a 13th payment each year to finalise the leading milk price in Ireland. It was only in 2015 when a significant gap in prices began to open up between the four west Cork co-ops and the rest of the Irish dairy industry that a dispute arose.

Kerry Group argued that the four west Cork co-ops should not be included in the comparison, while Kerry Co-op insisted they should be. This dispute was ultimately passed to an independent arbitrator to rule on.

This process took some time, with verbal evidence given by both sides. However, in September 2019, the independent arbitrator published his report stating that the four west Cork co-ops must be included as comparators when calculating the leading milk price.

The arbitration report, which has been seen by the Irish Farmers Journal, was never made public but Kerry milk suppliers considered it a vindication of their stance on the issue. Ultimately, the arbitrator instructed both sides to re-engage on negotiating the ‘leading milk price’ for each year with his ruling in mind.

Joint venture

And this is how both sides have arrived at the point where they currently find themselves negotiating a joint venture.

The view of the senior management team at Kerry Group, now led by Edmond Scanlon, is that in order for the ‘leading milk price’ contract to continue, farmers must share some of the financial risk of guaranteeing the leading milk price by investing in the primary dairy business.

If Kerry milk suppliers decide to pass on the joint venture proposal, Kerry Group plans to sell the dairy business and exit milk processing altogether.

Kerry milk suppliers have their destiny in their own hands. There is no obligation on them to go ahead with this joint venture deal. Indeed, if the finances do not add up in terms of higher milk prices for farmers, then there may be little point in it proceeding.

However, it is important for Kerry milk suppliers to know that there is an option for the ‘leading milk price’ contract to be terminated with five years notice. Whether Kerry Group retains the business or sells it to an outside party, the current milk supply contract with the ‘leading milk price’ clause is likely to be terminated with five years’ notice.

Leading milk price: is there an obligation to stick to it?

Some in Kerry have claimed the ‘leading milk price’ must be included in any future milk supply contracts. However, this is not true.

The Irish Farmers Journal has obtained legal opinions from two separate sources which states there is no obligation on Kerry Group, or any outside buyer, to include the ‘leading milk price’ clause in future supply agreements.

Indeed, given the conflict it has caused, it’s quite likely the line will be deleted in future supply contracts.

So while Kerry milk suppliers have a very attractive milk supply contract in their hands right now, it is worth considering that the clearest avenue to retaining the ‘leading milk price’ clause is via the joint venture.

The option to pass on the deal may still appeal to many Kerry milk suppliers but it is crucial that farmers have all the information to hand when weighing up this crucial decision.