Milk prices rise but recognition of 0.5c per litre rise in co-ops’ costs worries farmers

Big co-ops go over 30c per litre for June milk
Milk prices rise but recognition of 0.5c per litre rise in co-ops’ costs worries farmers
The price for June milk rose to over 30c per litre at the biggest co-ops this week, despite fears of global Covid-19 recessions, and a 0.5c rise in the cost of assembling and processing milk which has come as a surprise to farmers.

Milk price trends continue to defy fears of global Covid-19 recessions, with farmers welcoming significant gains taking June milk prices over 30 cent per litre (including VAT) at Glanbia, Kerry, and Lakeland.

However, the rise has not prevented an argument over milk processing costs, with farmers being told it is costing co-ops 0.5cpl more than previously estimated to assemble and to process milk.

Therefore, 0.5cpl is taken off the indicative milk price derived from the Purchase Price Index (PPI), the monthly indicator of market returns on dairy products purchased by Ornua, Ireland’s largest exporter of dairy products.

Ornua has been told by member co-ops that investment has facilitated significant milk output growth (from 4.93bn litres in 2009 to nearly 8bn now), delivering scale benefits and fixed cost recovery. However, co-ops highlighted that it has not contained new and increased costs incurred over the past ten years, such as seasonality inflated depreciation, maintenance, and compliance costs. Also, customers demand greater standards in quality and traceability, leading to new regulatory, environmental and sustainability costs.

Therefore the cost when converting the PPI for the Ornua base commodity portfolio of products to a net cent per litre indicative milk price now moves from 6.5cpl to 7cpl. This has been validated by an independent review.

The estimated processing cost at 7cpl does not include a member co-op’s profit margin.

IFA president Tim Cullinan said farmers are disappointed with the decision by Ornua to amend its PPI.

“In particular, farmers can’t understand the increased allocation for processing costs, despite the investments made in modern processing facilities,” he said.

“With over 50% more milk going through more modern plants, farmers cannot understand how costs are increasing, when increased throughput should reduce them,” he said.

IFA national dairy chairman Tom Phelan stated: “The onus is now firmly on Ornua to prove to farmers that this new format will continue to serve them as well as the previous version.

“Farmers fear that today’s changes may undermine the transparency of the index and its relevance to their milk price.

“In the interim, and in the interest of transparency, Ornua should continue to publish the index in the old format alongside the proposed new format,” said Mr Phelan.

Meanwhile, Government interventions and the tentative re-opening of some foodservice outlets were welcomed by Glanbia chairman Martin Keane as he announced a June creamery base milk price of 30.1cpl including VAT, up 1.48cpl from May’s 28.62cpl which included a 0.2cpl weather-related payment.

Both prices include a 0.42cpl share of Glanbia Ireland profits.

Mr Keane said: “However, given the weak economic data and high rates of coronavirus in many key importing regions, the short and medium-term market direction remains uncertain.”

A Lakeland Dairies spokesperson said an element of stability had returned to dairy markets, enabling them to increase the base price for June milk price by 1cpl, to 30c.

“While sentiment has improved, there continues to be significant market uncertainty around issues such as a second wave of Covid-19, what the shape of a trade deal between the EU and the UK will look like, increasing milk supply in Europe, and currency fluctuations..”

Rabobank dairy analysts have warned when government supports and market interventions slow, fundamentals will take hold in global dairy markets, depressing prices due to slower economies, reduced import demand, and stocks build-up.

Rabobank predicts 2020 Chinese dairy imports will be down 15% from 2019.

Australian milk production expanding by 3.4% is also noted.

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