Kerry versus west Cork in the battle for milk price

I was down in Tralee talking to a group of farmers before Christmas and an argument ensued about the differences in milk price between farmers supplying Kerry Group (the global dairy ingredients giant) and other Irish farmers supplying other Irish processors.

The farmers argued they were promised a leading milk price by Kerry Group and if you looked at the Irish Farmers Journal monthly milk league, they were not getting “a leading price”. They were also arguing that big is not always better. I argued about the scale issue and said I’d come back to them on the price difference.

This week I listened to Stan McCarthy describe the double digit growth of Kerry Group and the fantastic success story in taste, innovation and nutrition. I fear the success will fall on deaf ears for those farmers dependent for income on milk price for 2016 and beyond.

Anyway, the farmers asked me to publish the annual difference between what the smaller west Cork co-ops paid and what Kerry will have paid in 2015. I told them once all the figures were in for 2015 that would be possible, but to remember that milk league prices only take into account milk prices – and no other dividends, bonuses, capital payments, processor profitability, etc.

Number crunching

With this in mind and armed with milk league prices for January to December 2015, I crunched the numbers. To compare both companies, I’m using the base price excluding VAT at 3.3% protein and 3.6% fat.

Why? Each month, the Irish Farmers Journal monthly milk league is ranked on milk solids at national average figures (3.43% protein and 3.99% fat). However, some will suggest that Kerry has lower solids due to land quality and higher rainfall issues so it’s better to take the milk solids variable out of the equation and compare at 3.3% protein and 3.6% fat, which suppliers to both processors are delivering.

This figure is also published monthly in the league table in c/litre. For the west Cork co-ops I’m taking the average price paid by Barryroe, Drinagh, Lisavaird and Bandon.

To get a fair comparison and allow for annual supply variations and milk price changes throughout the year (2015), I have taken a milk supplier delivering 400,000 litres in a spring milk profile. This essentially means the farmer is supplying 2% of the 400,000 litres in January, 4% in February, 9% in March and so on for each month.

Milk league figures suggest that both the Kerry and west Cork price were close in April 2015, when west Cork was ahead by only 0.4 c/litre. However, in May and June the west Cork co-ops paid out on average 1.24c/l more for every litre, and this went as high as 2.1c/l of a difference for every litre in July, August and September (see table below).

Table showing the difference in cents/litre for each month of 2015 at 3.3% protein and 3.6% fat between an average of the West Cork price and Kerry Group. In all months West Cork co-ops were higher

December	1.21
November	1.21
October	1.09
September	2.09
August	2.09
July	2.09
June	1.24
May	1.24
April	0.40
March	1.15
February	1.15
January	1.15

When you multiply the differences by the typical supply volumes for a farmer with 80 cows, I get to a net difference of €5,540 between what a west Cork farmer would have got as a base price for milk in 2015 compared with a Kerry milk supplier. It means for a farmer supplying 400,000 litres over the year and assuming 5,000 litres per cow delivered, a west Cork supplier would have got €70 per cow or 1.4c/l on average more for the milk supplied in 2015. If you complete the figures at 3.43% protein and 3.99% fat, the gap widens and you get €6,400 of a difference between the two processors, or almost €80/cow.

Bonuses

Now I must be clear that what I have detailed above is the base price difference. In west Cork, there are additional milk quality bonuses of 0.5 c/litre through the main summer months if a farmer supplies milk less than 200,000 cells/ml. This bonus is 0.88c/l through the winter bonus.

There is also a trading bonus available depending on a threshold of purchased inputs a west Cork supplier buys from his/her local co-op merchant. So in effect, some west Cork farmers will get a lot more than the base price.

In Kerry, of course, there is also a recently introduced milk quality bonus of 0.3c/l for milk supplied under 200,000 cells/ml. Kerry Co-op suppliers also get a share dividend on co-op shares held – in 2015 this amounted to €2/share. Since 2013, there have been no shares issued relative to deliveries (ie, there is no relationship between milk supplied and shares).

So that’s fine on milk price, but are the processors affecting business profitability to deliver higher milk prices? From looking at the financial accounts of both processors, both made good profits in 2014. Kerry Group is obviously a much bigger business and is working in higher-margin ingredients for 75% of its output.

What does all this mean? Kerry suppliers argue that they signed up to an agreement where Kerry Group committed to paying “a leading milk price”. It is clear the price paid so far for milk in 2015 is not “leading” and hence I presume the farmers on the Kerry co-op board will be looking for an additional retrospective top-up on 2015 supplies. It is up to suppliers to discuss this with their elected co-op board member.

Our annual price review comparing processors will be available in June in the KPMG/Irish Farmers Journal annual milk price review. This is not possible to complete until all processor payments have been audited following publication of annual accounts for each processor. The KPMG/IFJ review is different to the exercise above in that it takes into account all the additional bonuses that have been paid out to suppliers for the year in question divided by the litres of manufacturing milk delivered to the processor to get a cent/l figure.