This week Ornua published the restructured Purchasing Price Index (PPI) ratified at its July board meeting. A large proportion (60% plus) of the milk commodities sold by Irish milk processors is sold via Ornua, so what Ornua says it can get from the market is important, and the milk price farmers receive should in some way reflect the Ornua returns.
The issue for farmers is that some processors are struggling to match the PPI with their farmgate price. Co-ops have other non-dairy businesses so whether all the Ornua payment makes its way to the farmer is a matter for co-op board directors.
The ‘new’ equivalent farmgate milk price is 27.8c/l plus the Kerrygold bonus lump sum
The Ornua board has decided to restructure how the index is displayed. It has split out the Kerrygold Premium (now called the Ornua Value Premium) and will pay it out monthly rather than year end. The board said this decision was taken as the index should reflect basic commodity prices – not premium branded products. Hence, the Kerrygold premium is now separated and published separately.
The board also decided to increase the assumed processing costs from 6.5c/l to 7c/l. As Ornua does not process milk, this is the assumed processing cost its members (such as Dairygold, Glanbia and Aurivo) have to pay to process milk (collection, staffing, equipment etc).
So how does it work? Ornua publishes an index and from this an equivalent cent per litre price is derived. The equivalent price is a gross price (34.8c/l) but then we must subtract the cost of processing (assumed now at 7c/l). So in total the ‘new’ equivalent farmgate milk price is 27.8c/l plus the Kerrygold bonus lump sum.
How is this index equivalent price established?
So, for example, this month the PPI for July is 101.7. To get the equivalent price it works out as 34.8c/l (value of products gross) minus 7 c/l (assumed processing costs) which is equal to a farmgate price of 27.8c/l excluding VAT or 29.3c/l including VAT.
However, on top of this is the Kerrygold premium which Ornua said this month it has paid out €3.2m. When we convert this €3.2m to a cent per litre equivalent, and hold the processing cost at 7c/l, the estimated ‘adjusted’ Ornua equivalent price is 28.7c/l (see Table 1).
If you include the 0.5 c/l extra processing cost to compare like for like with the first half of the year the price would be 29.2 c/l.
In the June monthly milk league, the average base price was 29.1c/l excluding VAT, with the big processors paying between 28.5c/l and 29c/l. So, ballpark, the June prices are in line with the adjusted Ornua July price equivalent.
This week, IFA dairy chair Tom Phelan said farmers have always valued the PPI for the transparency it provides in milk pricing. The onus is on Ornua to ensure this value and this transparency are continued into the future. He said: “An important new aspect of the Ornua PPI monthly communication is the Ornua Value Payment, which includes the value from premium, non-commodity products and the monthly trading bonus. This payment is now being made monthly on a pro-rata basis to all member co-ops and is available to them when determining their farmer milk price.”
Background
The Irish Dairy Board – the forerunner to Ornua – had a skim and butter index. In 2010 and 2011, discussions moved to broaden the index to encompass more than just butter and skim to better reflect the output from Irish processors. The change also allowed some cover from competitor market intelligence.
This payment is now being made monthly on a pro-rata basis to all member co-ops and is available to them when determining their farmer milk price
The base index was set at 2010 prices so each month since then the index would either be above or below the 100 base index. So, for example, if the PPI is 105 in month ‘X’, this implies that the market has generated a return 5% higher than the average return in the base year (2010). Similarly, an index level of 95 in month ‘Y’ implies a return 5% below the average for the base year.
Farmers need to be able to compare like with like
The two big changes agreed at the last Ornua board meeting strip out the “Kerrygold bonus” or the “Ornua Value Premium” into a separate payment and increase the assumed processing costs from 6.5c/l to 7c/l.
The Ornua Value Premium is now published as a lump sum (eg €3.2m) and paid out monthly. Ornua is not going to convert this into a cent per litre equivalent to make it easier for farmers to understand. Hence in Table 1 we have adjusted the payment to compare the cent per litre equivalent excluding VAT.
This is the price farmers should look to compare their co-op price
Why do this? Firstly, little has changed on the Ornua Value Premium payout, only its timing. It’s a different way of displaying the index. Also, the assumed processing cost has increased, but there is no basis published for the increase or a future decrease. So, to compare like for like, we need to adjust for it.
Hence, we have adjusted the Ornua equivalent cent per litre price to reflect that situation. This is the price farmers should look to compare their co-op price with when establishing how their co-op is performing in terms of milk price.
There are a couple of issues. I’ve discussed the Ornua changes on PPI with a number of milk processor managers since the change was agreed at Ornua board level. The processors argue that the increased 7c/l assumed processing cost does not reflect the actual cost for many businesses that have invested in processing. They argue the cost could be up to 8c/l, 9c/l and 10c/l.
Given the significance of Ornua as a player in the industry, there should also be an independent review of cost structures available to farmers to show where costs have gone
My argument on the assumed processing cost is not about the specific cost, it’s more about the structure of that cost and how it is calculated. If there is a process or a formula involved then it should be possible to see what has changed and what will change in coming years. For farmers’ sake, given the significance of Ornua as a player in the industry, there should also be an independent review of cost structures available to farmers to show where costs have gone in the industry.
Farmers take on the initial risk and cost structure at farm level and transparency further up the chain is important.
The significance of the Ornua PPI is that co-op members and directors setting milk prices each month at co-op level use the PPI to gauge where the market is and what they can return to milk suppliers. They need to be armed with the right information to compare like with like.
Read more
Ornua overhauls Purchase Price Index
‘Farmers can’t understand increased processing costs’ – IFA
Ornua upgrades Purchase Price Index
PPI margins row central to co-ops' and farmers' futures
Ornua's purchase price index needs a cost formula
This week Ornua published the restructured Purchasing Price Index (PPI) ratified at its July board meeting. A large proportion (60% plus) of the milk commodities sold by Irish milk processors is sold via Ornua, so what Ornua says it can get from the market is important, and the milk price farmers receive should in some way reflect the Ornua returns.
The issue for farmers is that some processors are struggling to match the PPI with their farmgate price. Co-ops have other non-dairy businesses so whether all the Ornua payment makes its way to the farmer is a matter for co-op board directors.
The ‘new’ equivalent farmgate milk price is 27.8c/l plus the Kerrygold bonus lump sum
The Ornua board has decided to restructure how the index is displayed. It has split out the Kerrygold Premium (now called the Ornua Value Premium) and will pay it out monthly rather than year end. The board said this decision was taken as the index should reflect basic commodity prices – not premium branded products. Hence, the Kerrygold premium is now separated and published separately.
The board also decided to increase the assumed processing costs from 6.5c/l to 7c/l. As Ornua does not process milk, this is the assumed processing cost its members (such as Dairygold, Glanbia and Aurivo) have to pay to process milk (collection, staffing, equipment etc).
So how does it work? Ornua publishes an index and from this an equivalent cent per litre price is derived. The equivalent price is a gross price (34.8c/l) but then we must subtract the cost of processing (assumed now at 7c/l). So in total the ‘new’ equivalent farmgate milk price is 27.8c/l plus the Kerrygold bonus lump sum.
How is this index equivalent price established?
So, for example, this month the PPI for July is 101.7. To get the equivalent price it works out as 34.8c/l (value of products gross) minus 7 c/l (assumed processing costs) which is equal to a farmgate price of 27.8c/l excluding VAT or 29.3c/l including VAT.
However, on top of this is the Kerrygold premium which Ornua said this month it has paid out €3.2m. When we convert this €3.2m to a cent per litre equivalent, and hold the processing cost at 7c/l, the estimated ‘adjusted’ Ornua equivalent price is 28.7c/l (see Table 1).
If you include the 0.5 c/l extra processing cost to compare like for like with the first half of the year the price would be 29.2 c/l.
In the June monthly milk league, the average base price was 29.1c/l excluding VAT, with the big processors paying between 28.5c/l and 29c/l. So, ballpark, the June prices are in line with the adjusted Ornua July price equivalent.
This week, IFA dairy chair Tom Phelan said farmers have always valued the PPI for the transparency it provides in milk pricing. The onus is on Ornua to ensure this value and this transparency are continued into the future. He said: “An important new aspect of the Ornua PPI monthly communication is the Ornua Value Payment, which includes the value from premium, non-commodity products and the monthly trading bonus. This payment is now being made monthly on a pro-rata basis to all member co-ops and is available to them when determining their farmer milk price.”
Background
The Irish Dairy Board – the forerunner to Ornua – had a skim and butter index. In 2010 and 2011, discussions moved to broaden the index to encompass more than just butter and skim to better reflect the output from Irish processors. The change also allowed some cover from competitor market intelligence.
This payment is now being made monthly on a pro-rata basis to all member co-ops and is available to them when determining their farmer milk price
The base index was set at 2010 prices so each month since then the index would either be above or below the 100 base index. So, for example, if the PPI is 105 in month ‘X’, this implies that the market has generated a return 5% higher than the average return in the base year (2010). Similarly, an index level of 95 in month ‘Y’ implies a return 5% below the average for the base year.
Farmers need to be able to compare like with like
The two big changes agreed at the last Ornua board meeting strip out the “Kerrygold bonus” or the “Ornua Value Premium” into a separate payment and increase the assumed processing costs from 6.5c/l to 7c/l.
The Ornua Value Premium is now published as a lump sum (eg €3.2m) and paid out monthly. Ornua is not going to convert this into a cent per litre equivalent to make it easier for farmers to understand. Hence in Table 1 we have adjusted the payment to compare the cent per litre equivalent excluding VAT.
This is the price farmers should look to compare their co-op price
Why do this? Firstly, little has changed on the Ornua Value Premium payout, only its timing. It’s a different way of displaying the index. Also, the assumed processing cost has increased, but there is no basis published for the increase or a future decrease. So, to compare like for like, we need to adjust for it.
Hence, we have adjusted the Ornua equivalent cent per litre price to reflect that situation. This is the price farmers should look to compare their co-op price with when establishing how their co-op is performing in terms of milk price.
There are a couple of issues. I’ve discussed the Ornua changes on PPI with a number of milk processor managers since the change was agreed at Ornua board level. The processors argue that the increased 7c/l assumed processing cost does not reflect the actual cost for many businesses that have invested in processing. They argue the cost could be up to 8c/l, 9c/l and 10c/l.
Given the significance of Ornua as a player in the industry, there should also be an independent review of cost structures available to farmers to show where costs have gone
My argument on the assumed processing cost is not about the specific cost, it’s more about the structure of that cost and how it is calculated. If there is a process or a formula involved then it should be possible to see what has changed and what will change in coming years. For farmers’ sake, given the significance of Ornua as a player in the industry, there should also be an independent review of cost structures available to farmers to show where costs have gone in the industry.
Farmers take on the initial risk and cost structure at farm level and transparency further up the chain is important.
The significance of the Ornua PPI is that co-op members and directors setting milk prices each month at co-op level use the PPI to gauge where the market is and what they can return to milk suppliers. They need to be armed with the right information to compare like with like.
Read more
Ornua overhauls Purchase Price Index
‘Farmers can’t understand increased processing costs’ – IFA
Ornua upgrades Purchase Price Index
PPI margins row central to co-ops' and farmers' futures
Ornua's purchase price index needs a cost formula
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