Volatility and supports seem to be the language of farming at the moment. Volatility is not new and has been a feature of dairy and grain markets for more than a decade, but the frequency and velocity seems much greater.

For example, Glanbia’s base manufacturing price for milk has ranged from 21 to 39c/litre (incl VAT) over the past 10 years, while its green harvest wheat price has ranged from €91 to €215/t over the same period.

To overcome this volatility, Glanbia, it must be said, has been leading the way by offering innovative solutions to support members, including fixed-milk-price schemes and competitively priced flexible loans (MilkFlex) along with supports arising from the PLC dividends.

The latest initiative is called the Glanbia Advance Payment (GAP) scheme, a €55m fund planned to operate over five years that will be used to offer interest-free loans to grain and dairy farmers who are members of the co-op.

If there is 100% uptake of this offer, based on May to December 2016 milk supply and assuming current market prices, an estimated €31m would be required for milk in 2016.

Similarly, assuming 100% uptake and current grain market prices, €2m would be required for grain in 2016.

Dairy farmers

Up to €50m of the fund will be allocated to co-op members supplying milk to Glanbia. In effect, the supplier, who has the option to sign up to the scheme, is getting an advance payment for the milk that must be repaid. Its drawdown and repayment is triggered based on the market price.

The first tranche will operate based on May to December 2016 milk supplies (excluding milk in fixed-price schemes). It will see up to 2c/l loaned to a farmer once the GII base price falls below 24c/l (incl VAT).

A typical supplier could have 75% of milk supply in months May to December inclusive. For example, 400,000 litre supplier x 75% = 300,000 litres eligible for GAP. If GII base price is 22c for rest of the year, then GAP pay out would be 300,000 litres x 2c/l = €6,000.

This €6,000 will automatically be paid back interest free when milk price exceeds 30c/l (with a maximum of 2c/l per month, excluding winter months). If not repaid due to market price, it will be paid back January to December 2020.

Grain farmers

Up to €5m is being set aside for farmers with grain and only open to co-op members who supplied grain in 2015. The amount will be available on 2016 supply of green and dried grain, capped at 2015 supply.

A sum of €20 per tonne is advanced (loaned) to the farmer when the dried wheat price (Matif) for December falls below €180/t. This is equivalent to €135 green.

Should this price rise above €205/t, the monies must be repaid. This is the equivalent of €160/t for green wheat.

Again if market prices don’t return to these levels over the years, the monies will be recovered by December 2020.

This would mean that a farmer growing 100 acres of spring barley yielding 3t/acre would receive an interest-free loan of €6,000, for up to a maximum of five years.

Funding

Glanbia co-op has leveraged the strength of its shareholding in the plc. It has issued a €100m, five-year bond that can be exchangeable into approximately 1.45% of its existing 36.5% shareholding in the plc.

In all, €55m of this will be used initially as a new support fund for its milk and grain supplying members, designed to smooth out the effects of commodity price volatility. The balance, €45m, will provide cash in the co-op for deployment at the discretion of the board. It could in theory be used for further advanced payments or be loaned to GII.

The bond is effectively a regular loan raised by the co-op at a low interest rate of around 1.5%, with the right to exchange repayment of the loan amount for a (1.45%) shareholding in the plc should the share price reach €23.26, 40% above last Thursday’s share price.