So there have been lots of questions coming in since Thursday on why the change to the Ornua purchase price index (PPI) and really what good is it if the goalposts keep changing.

So, let’s be clear, the Ornua index, even if changing, is still worthwhile in my books.

Information that shows what Ornua is getting back from the market is a service to farmers and the industry.

So, what has happened the PPI? Essentially, the basket of goods that are used to develop an ‘assumed’ processing cost has got more expensive in the last few years.

Update

In July 2020, Ornua updated the assumed processing cost from 6.5c to 7.0c/litre. This week, it announced that it was going to further update the Ornua estimation of processing cost to reflect the higher energy cost for processors drying milk.

How the PPI works is a gross milk price is established from product sold by Ornua. Then the processing cost (now adjusted for energy costs) is taken off to get you a price net of processing cost for the basic basket of goods sold.

This month, it means an extra 1.5c/litre on top of the 7c/litre, given the extra energy costs at the moment for processors. So, in total, that's an 8.5c/litre assumed processing cost for February.

Then a separate Ornua value payment (the Kerrygold premium payment) is calculated (from actual sales) and this is added on to the base price to give you the ‘all-in’ milk price.

This price can then be compared to the average farmgate milk price that a milk supplier gets each month.

Argument

The argument from the processors is why just adjust for increasing energy costs when labour, packaging, raw materials, etc, are all going up. That's a fair request.

However, the flip side is that all processors are after getting more milk and are working factories harder, so there are benefits of scale when estimating the cost to process a litre of milk.

Obviously, like any business, this is going to vary through the year. It might be very high cost processing in November at low volumes, but much lower in May when plants are full to capacity.

The real energy price spike didn’t come until the backend of last year

Long term, I think it is better to go full index-related guide from the Ornua PPI - it would be fairer and more transparent.

For example, the real energy price spike didn’t come until the backend of last year, so energy costs were not excessive in the first half of 2021 when most of the milk was processed.

The good side of the energy index is that it should reduce the processing cost if and when energy costs fell below the 2018/19 energy cost.

Difference

So, while there is still a difference between the farmgate price from the co-op and the Ornua equivalent, maybe there should be a difference - the co-op has to make a margin, it may not have sent all product to Ornua and it might have other businesses that are drawing on co-op funds so it can't return all to milk suppliers.

That discussion is for board members and farmer shareholders to have with local co-op management. The index still has a role and, for me, a full index-related cost of processing basket would be another step in the right direction.