Kerry v Kerry on milk price top up

Last Friday, the arbitrator ruled that the west Cork co-op milk prices should be included in any calculations for Kerry’s leading milk price. On the face of it, the ruling suggests the farmers got the right result and are in for a milk price top-up.

In effect, the arbitrator did not make a final call on the price and bring an end to the debate. Instead, he went back to both sides suggesting they return to the drawing board with this ruling in mind and negotiate the price.

The starting point in the negotiation will be to bridge the gap between a €20m annual milk price top-up (approximately 2c/l on about 1bn litres) for all of five or 10 years. The alternative is a much lower figure that Kerry Group will argue maybe closer to €5m per year of a top-up if you exclude top-ups already made, standardisation and product mix, etc.

The 2017 offer by Kerry Group of 1.75c/l was for one year and one year only. The ruling by the arbitrator that the west Cork co-ops should be included surely will have implications for calculating this price for other years. Whether that’s five or 10 years we’ll have to wait and see.

The Irish Farmers Journal also understands the arbitrator opened the door for Kerry Group management to prove why the price difference might be different for Kerry based on product mix, subsidisation, etc. If this can be proven in negotiation, then the difference could be chipped away. This argument is still far from an endgame. Kerry Group still has a couple of levers it can use to limit the milk price top-up or indeed claw back some money. The rolling 10-year contract is up for a five-year review next year.

Kerry Group no doubt will look at what’s included or changed in that. The farmers will argue that it is rolling and no material changes are allowed in the contract.

Part of the original contract is that suppliers can deliver 20% additional milk over the base year. Some farmers are delivering a lot more milk than this. Will they continue to get the same milk price for all milk?

The arbitrator’s decision last Friday has not brought any finality to the matter. Potentially, there is an upside for suppliers but given the 2017 1.75c/l offer it’s fair to say that was always there. You would wonder if the arbitrator should have called it and brought an end to the matter. As it stands, I can see this running for another while.

At the core of this debate over ‘leading milk price’ is the dysfunctionality of the structure in Kerry. Kerry Co-op hasn’t traded since 1986. The co-op owns approximately 13% of Kerry Group. Essentially, it is a large shareholder and operates as a holding company. The board of Kerry Co-op is made up of farmers from a representative structure covering electoral areas. Some areas or regions have very few active dairy farmers. The co-op board has no influence on milk price, quality, or future supplier issues. It deals mostly with high-value historical issues.

The farmer representation on the Kerry Group PLC board is now down to two farmers and neither sit on the Co-op board. Kerry Group sets the price and tells the co-op what money is available. The bridge between the two sides that used to be there was that the Kerry Group CEO was also hired by the co-op board as CEO of Kerry Co-op. That ended in May 2016. Since then, the communication and working relationship between Kerry Group and the farmers is very limited.

The ‘leading milk price’ matter needs to be brought to a conclusion. If both sides can now negotiate a middle ground internally, it’s by far the best solution. Bringing back in the arbitrator is an option, but ultimately it’s up to both sides to finalise the price difference and draw a line in the sand. There is a long-term relationship to be continued and both sides have more to gain by moving on from this and making the future a win-win for both sides in this debate.