Board is milking deal for all its worth

Farmers are far from pleased with Dairygold’s milk supply plans, writes Catherine O’Brien

Serious question marks remain over the milk supply and purchase agreement which Dairygold is trying to have its some 2,900 milk suppliers sign before Mar 31.

The agreement obliges suppliers to commit to the financing of a €120m expansion plan at Dairygold the co-op says is necessary to process post-quota milk volumes.

Dairygold requested all suppliers to forecast future milk production in 2012 and announced a €120m expansion project based on these forecasts.

Some suppliers fear many results are wildly over-estimated, while others query Dairygold’s costings and borrowings, which they say are excessive.

Suppliers must commit to financing expansion in a combination of three different ways:

*Payments into a seven-year revolving fund with the first payments in 2013 being returned in 2020;

*Minimum payment for shares (suppliers must now hold 4,000 shares for every 100,000 litres of milk supplied);

*Deferred payment for some milk in excess of agreed baselines from 2015 onwards.

The Milk Supply Agreement was sent out with the proviso that a 2c per litre penalty on future milk supplied would be levied on suppliers who did not sign before the Mar 31 deadline.

Dairygold backtracked on this early in January but not before many suppliers had signed, mindful of the consequences of the proposed penalty. Suppliers are now being encouraged to sign by the offer of prompt payment of a bonus on all milk supplied in 2012 once the agreement is signed.

Many suppliers feel the co-op cannot and should not retrospectively discriminate between members in respect of bonus payments for 2012.

The Milk Supply Agreement itself is not as simple, as it appears the key detail is in a separate document titled ‘The Milk Purchasing Terms and Conditions. The terms and conditions are circulated annually, but the 2013 version has a new section containing onerous financial obligations.

The terms and conditions can and are changed by the society annually, which, in itself, is cause for huge concern, as suppliers are effectively being asked to enter an agreement that can change at any time.

The Milk Supply Agreement (1.4) now asks farmers to agree to allow the Dairygold board impose minimum levels of shareholding on suppliers and to deduct payments for shares from milk cheques.

The power to allow the co-op deduct payments for shares is significant, as it is not clear what that share price might be in the future. This is a substantial amendment to the rules of the co-op, which, according to Rule 74, appears to require that any alteration to the rules be passed by a two-thirds majority of members entitled to vote. This has not happened to date.

Suppliers must commit to supply their milk to the co-op for a seven-year period at a price to be set by the co-op. The agreement does not expire until Dec 31, 2019, and also requires two years’ advance notice of intention to exit, with some exceptions.

Money will not begin to be returned from the revolving fund until 2020. Around 50% of farmers are over 55 years old. Many suppliers query what happens to their contributions on their death and whether it is fair to oblige a 65-year-old farmer to enter into an obligation where he cannot exit or be repaid until he is aged 72?

It is also unclear where suppliers come in the pecking order of creditors in the event of an examinership or insolvency.

The Milk Supply Agreement is seeking guaranteed financial contributions from its milk suppliers. Penalties will be applied to suppliers who supply either significantly over or significantly under their forecasted volumes.

It is worth noting that the board alone controls the price of the milk and that the terms and conditions can change without the supplier’s consent.

The only assurance offered to suppliers, that the contributions required will not increase, is in a separate clarification document but is not in the agreement itself.

There appears to be a complete breakdown in trust between ordinary members of Dairygold and its management. It remains to be seen how matters will be resolved.

*Catherine O’Brien is a solicitor with O’Brien & Co, Market Square, Dunmanway, Co Cork