Co-ops can buffer milk price from difficult global market

Scenes from the US of farmers dumping milk and a collapse in the spot price for milk in the UK has unnerved markets and farmers. The dumping of milk is an extremely emotional action and quick to create negative sentiment in the market. The US has moved quickly to take milk off the market but unfortunately the European Commission continues to sit tight.

From an Irish perspective, it is important to recognise that the markets for which this milk was intended are very different to the market for Irish milk. The impact of a collapse in the food service sector across the EU and US immediately affected the fresh milk market on which many UK and US dairy farmers rely. Irish co-ops do not have the same exposure with the vast majority of milk processed into longer-life products.

While still exposed to the negative sentiment in global dairy markets, the export profile and structure of our industry provides processors with an opportunity to insulate milk price in the short term. The extent to which individual processors have the capacity to do so will depend on cash reserves, investment payback and product portfolio – with some more reliant on the food service sector.

It is important to recognise the difficulties in global markets, with some commodity prices heading for levels not seen since 2009. But unlike 2009, demand is not a reflection of consumer confidence, rather reflecting a major and sudden shift in buying habits.

The export profile and structure of our industry provides processors with an opportunity to insulate milk price

Although increased retail sales plus a spike in home baking have seen demand for butter and hard cheese increase, a 70-80% collapse in the food service sector was always going to rock markets.

This change in consumer buying habits is due to movement restrictions imposed by governments in the fight against coronavirus. Although timing is unclear, it is widely expected that an easing of restrictions will see consumption trends quickly realign.

Against this backdrop, the focus of Irish co-ops should be on weathering the immediate storm. The fact that product will have been forward-sold to at least the end of April certainly provides breathing space.

As was the case at the end of 2018, Ornua will play an important role in supporting processors and milk price. As Lorcan Allen reports, Ornua is in a strong financial position with increasing profits and a cash surplus in the bank.

The strong performance of the Kerrygold brand plus the fact that 12% of product purchased from processors is now under fixed milk price contracts provides additional protection from global markets. The €26m returned to processors recently in member bonuses – an increase of 37% on the year before – is also significant.

On a separate note, it is worth highlighting that despite not having access to what is viewed as the high-margin infant formula business, the equivalent price Ornua returned to processors for milk in 2019 was higher than the price processors returned to farmers in 11 out of the 12 months – and that is before the member dividend. A debate on who is really creating value is required at some point in the future.

Meanwhile, at processing level, there also has to be a commitment to support price. Most have a strong track record in this regard but some have more scope than others. For some, there is the option of pausing the need to continue with maintaining fixed processing margins in such exceptional circumstances.

The industry has rightly sought assistance from Europe in the form of financial support for storing product. But unfortunately the European Commission appears once again to be waiting for the car to crash before applying the brakes.

Meanwhile, Minister for Agriculture Michael Creed has been slow to engage at any level in helping the industry take on the coronavirus challenges across any of the sectors. As highlighted by Jack Kennedy, the EU and national response is some way behind actions being taken in the US.

In the absence of market intervention, recovery in dairy markets could be slower and farmers should still be planning for a more prolonged downturn. Detailed analysis of cashflows should be well under way, major investment projects scrutinised and financing structures reviewed.

News that the ABP Food Group supplied UK supermarkets with Polish beef may have angered British and Irish farmers but it should not have surprised them. Press releases deriding the decision to introduce Polish beef focused on a lack of commitment being shown to farmers. But history has repeatedly shown that the commitment of ABP and its retail partners is to increasing their profit margins with any commitment to farmers falling a long way behind this.

Supermarkets were never going to simply forget about the disruption caused to the supply of Irish beef by the protests last summer. They were always going to look to introduce a plan B that reduced their exposure should Irish supplies be disrupted into the future. With this came the ideal opportunity for ABP to present Polish beef as a solution to their supermarket customers.

Since the day ABP acquired its first beef processing plant in Poland in 2011, their “beef plan” was obvious – increase profits by securing access to one of the cheapest supplies of beef within the EU and use their route to market to sell it into higher value outlets. The jewel in the crown was securing access for Polish beef into UK supermarket chains –ironically, the opportunity was handed to them last summer following the ongoing beef protests initiated by the Beef Plan Movement.

ABP has been quick to highlight the volume of Polish beef supplied to Asda and Sainsbury’s as extremely low and in response to panic-buying. The volumes involved are irrelevant and the surge in demand is a smokescreen. The move was an attempt to test the market.

What is far more relevant is the fact that, in the background, ABP along with its retail partners has been developing a third supply source to sit alongside Irish beef. The farm assurance standards and supply chains that allowed ABP place Polish mince on to retailers’ shelves were not developed overnight. They have been months in the planning and, now in place, we can be sure they will be used at some point again.

The UK retail sector is not unique, as evident in the increase in Polish beef price now standing at 88% of the Irish price, up from 76% when protests commenced last July.

The uncomfortable truth is that a share of the responsibility for the chain of events that has led to Polish beef emerging on UK supermarket shelves arguably lies with those who led farmers to the gates of meat processors last summer. They motivated these farmers on the back of what we know were false promises and without appearing to have any regard as to the long-term impact on farm incomes.

In addition, those who piggy-backed off protesting farmers by running to the gates of meat factories for political gain and by ignoring the long-term consequences have also helped create the market opportunity for Polish beef at the expense of Irish farmers. Unfortunately, one of the legacies of last summer’s beef protests has been to hand ABP even more influence over our beef markets and create a new competitor for Irish beef.

It is with deep sadness that we report on a number of tragic deaths on farms in recent days. We offer the families involved our deepest sympathies. It is an extremely busy time on farms and with children off school for a prolonged period and many older farmers cocooning, risks are increased. We would urge all farm families to sit down over the Easter period and discuss the potential risks on the farm and look at how best they can either be eliminated or reduced.

It is amazing how quickly the abnormal becomes the norm, but waiting each evening to learn of number of people that have died from coronavirus in our country must never be normalised.

Behind every number there is a life and a heartbroken family. There is no room for complacency as we continue to battle this virus and we encourage all our readers to continue to adhere to Government restrictions and HSE guidelines.