Last week, Lakeland Dairies announced a major shift in policy around how it pays for milk.
The co-op has introduced a two-tier pricing structure from 2023 to 2027, with all additional milk produced in the summer months subject to a 4c/l cut in the Republic of Ireland and a 3p/l cut in the North.
A 4c/l top-up is set to be paid for all new milk supplied in January in the Republic, while suppliers in the North will get a 3p/l top-up for all new milk supplied during October.
Monthly volume bonus payments for Northern suppliers will also be reduced by 50% from April to June on all litres, while volume bonuses will be increased by 50% for all milk supplied in October.
Volume bonuses for a one-million litre supplier are typically 0.3p/l to 0.4p/l.
This bonus rewards larger farmers where the co-op can collect more milk in one visit.
The following scenarios take a look at the implications of the move by Lakeland for a typical supplier in both jurisdictions.
Gradual increase in output
The average milk supply profile for a Lakeland supplier in the Republic is to supply 11% of total annual volume in April, 13% in May and 12% in June.
In total, 36% of their annual supply is produced during these peak months.
For a typical supplier with 100 cows and a total annual supply of 500,000l who is increasing milk output by 3% per year due to better genetics and management, the total extra milk produced during peak will be 5,400l.
This milk is now subject to a 4c/l penalty, which will cost the farmer €216 in lost milk sales.
The typical supplier produces 3% of their annual volume in January, which means in this gradual expansion scenario an additional 450l of milk is produced for which the supplier will get an additional €18.
Over the course of the five years, the supplier will be penalised €1,147 on peak supplies and will get an additional €116 on January supplies, meaning the net cost of the scheme will be €1,031.
James is milking 100 cows on 100 acres with a typical Lakeland supply profile. He gets an opportunity to lease 40 acres next to his milking platform and decides to increase to 140 cows, or 200,000 additional litres per year.
Thirty-six per cent of this extra milk will be produced at peak and subject to a 4c/l penalty, which will cost him €2,880 per year. His January top-up for additional supplies will be worth €240. Over the five years, the scheme will cost James €13,200.
Change to calving date
Teagasc research has shown that split calving (50% of herd calving in spring and 50% calving in autumn) can reduce the peak supply by 2.8% compared to spring calving.
Teagasc analysis shows that split or spread-out calving patterns increase workload on farms by four hours per cow per year
Calving 100% of cows in autumn reduces peak production by 5.4%. This is because cows that calve in the autumn and winter are still milking well in early summer.
Teagasc analysis also shows that split or spread-out calving patterns increase workload on farms by four hours per cow per year.
Furthermore, the direct profitability of these systems is less than spring-calving systems to the tune of 1.6c/l.
Drastic changes to the calving patterns of extra cows will not negate a herd from producing more milk at peak. It will increase workload, increase costs and reduce profitability.
Let’s say our example farmer James decides to calve his 40 extra cows in the autumn and they produce 26l per cow per day in January and 18l per cow per day during April, May and June. His January top-up will be worth €1,290, while the peak reduction will cost him €2,592, meaning the net cost to the farm will be €1,302 or €6,510 over the five years.
The new measures are crippling for new entrants. The co-op has decided not to accept any new entrants next year and any farmer interested in supplying milk in 2024 will be required to go through an application process.
The selection criteria for qualifying new entrants has not been defined. A new entrant supplying 500,000l annually will be hit with a peak milk price cut of €7,200 annually.
The January top-up will be worth €600, meaning the net cost of the new scheme will be €6,600 or €33,000 over the five years.
Existing 1m litre supplier increasing milk pool
The first scenario looks at an existing supplier producing 1m litres annually with a supply profile in line with the NI average.
The farmer has a modest annual yield increase of 1% annually in 2022 and 2023 as cows mature and from efficiency gains in herd management.
This means milk supplied during April to June 2023 amounts to 287,882 litres, an additional 5,672 litres on the 2021 baseline.
Overall, the farmer has a net loss of £272 (€324) in year one of the scheme
Including a 50% reduction in volume bonus, the 3p/l penalty on new milk shaves £652 (€780) off the value of the milk cheque.
October 2023 supply is 1,470 litres above the baseline volume in 2021.
Factoring in a 50% increase in volume bonus, the extra income is worth £379 (€451). Overall, the farmer has a net loss of £272 (€324) in year one of the scheme.
New entrant in 2024
Scenario two looks at a new entrant in 2024 supplying 750,000 litres from 100 cows, matching the NI average herd yield with the same supply profile.
Milk produced from April to June is 211,658 litres. The 3p/l penalty now applies to 100% of this volume, plus the 50% reduction in volume bonus. Combined, this reduces milk sales by £6,667 (€7,937).
October supply of 54,846 litres qualifies for a 3p/l premium, plus the increase volume bonus. Combined, this is worth £1,892 (€2,252).
Net loss for 2024 is £4,775 (€5,684) and over the duration of the scheme, assuming static supply, a new entrant is losing out on £19,100 (€22,738).
New entrant with 100% autumn calving
If the new entrant went for a 100% autumn-calving herd, pulling peak supply forward to February milk supplied from April to June falls to 175,711 litres.
October supply increases to 62,385. The penalty on April to June milk is worth £5,534 (€6,588), while bonus payments on October supply is £2,152 (€2,561). This means a net deficit of £3,054 (€3,635)/year, or just over £12,000 (€14,286) over the lifespan of the scheme.
The move by Lakeland represents the first real signal by an Irish milk processor that it is going to penalise its suppliers for producing milk over the summer months.
Comparisons with the Glanbia peak milk scheme are null and void as Glanbia has a plan in place to increase processing capacity to handle peak milk. No such plans to cater for peak milk have been presented by Lakeland. They will take all the peak milk they are given, but will just pay less for it. Farmer shareholders are right to be angry at this move. It represents a lack of vision by the co-op in that its first move was to penalise its members – many of whom have already invested for additional growth.
In Northern Ireland, the supply management scheme will significantly deter new entrants from signing up with Lakeland as the financial penalties are severe.
With base price currently around 35p/l, the 3p/l penalty on peak supply during April to June is a 9% reduction in milk price. But should milk price fall back to 25p/l, the 3p/l penalty rises to a 12% cut to milk price.
It may see a move by existing suppliers to bring autumn calving forward to starting in early August and target the October bonuses, along with the co-op’s winter bonus payments in November and December.