Dale Farm has announced details of its first fixed-price milk contract offer to members.

The contract is set at a guaranteed base price of 27p/litre over a three-year period starting from 1 January 2018.

Signing up to the contract is voluntary, with senior management stressing they are simply brokering a deal between farmers and customers, and not telling farmers what to do. Members have until 6 October to decide if they wish to take up the offer. Contracts will issue on 20 October and must be returned by 30 October to allow Dale Farm to confirm volumes with customers by 31 October.

The amount of milk that can avail of the fixed price is calculated on the basis of the last 12 months of production to August 2017. The trough month is taken, and a producer can then lock in anywhere between 10% and 60% of production in that month.

For example, if a member’s lowest monthly supply over the last 12 months was 60,000l, and they decided to lock in at 30%, this works out at 18,000l. So, for the next three years, 18,000l of milk each month would be paid at a fixed price of 27p/l before quality adjustments (normally on average worth 0.6p/l).

Bonus payments

However, the 0.3p/l loyalty bonus is not payable under the contract. Nor is the winter bonus which currently applies during the October to December period.

New entrants to dairying inside the past year, or suppliers who have moved to Dale Farm, are also eligible to sign up, although they might have to agree a figure with Dale Farm for the trough month.

However, any new producers who start supplying Dale Farm after the closing date for the fixed-price agreement are excluded for now. Depending on uptake etc, it is possible that future schemes could emerge.

Background

Dale Farm has been developing a fixed pricing model since March, and in response to a growing interest among suppliers for a scheme.

One overriding principle is that the co-op did not want to lock in farmers to a fixed-price contract below the cost of production. The c0-op estimates current average costs of production to be in the region of 24p/l to 25p/l.

While the fixed-price contract is open to all co-op members, by using a trough month as a baseline, it is not suitable to farmers who operate tight spring- or autumn-calving systems (and in many cases follow best practice technical advice), given that their trough month of supply is often close to zero.

Suppliers who are considering retirement or downsizing their current operation within the next three years are also advised to consider carefully the implications of signing up to the fixed-price arrangement.

Once the contract is signed by the farmer and returned to Dale Farm, they are locked in to the contract for the full three years.

Only in exceptional circumstances (eg a major animal disease outbreak) can the contract be broken.

While dairy markets are currently returning a higher milk price than the 27p/l base on offer, dairy farmers should carefully consider how milk prices will move in the years ahead.

Analysis of our monthly milk league data shows that the average five-year (2012 to 2016) base price across all processors in NI (before adjustments for quality, volume or any other bonuses) is 24.79p/l. The three-year average from 2014 to 2016 is 22.38p/l.

Increases in volume rebates

In addition to its fixed-price milk contract, Dale Farm has also revamped the rebate it pays to suppliers based on annual supply volumes.

Previously, a rebate was paid to suppliers who delivered more than 750,000 litres per annum, starting at 0.1p/l and rising to 0.3p/l for suppliers above 2 million litres.

Under the new rebate terms, suppliers who produce 650,000l to 1m litres will be eligible for a rebate of 0.3p/l.

Suppliers producing 1m to 2m litres will receive 0.4p/l, rising to 0.5p/l for suppliers producing up to 2.5m litres annually. Between 2.5m and 3m litres is eligible for a rebate of 0.75p/l, with a maximum payment of 0.9p/l to those who supply over 3m litres annually. The new payments are eligible from 1 August 2017 and paid as normal after accounts have been finalised after each financial year.

Under the new payment structure, a dairy farmer producing 650,000 litres per annum would receive an additional £1,950 per annum, while a 1 million litre producer will receive an additional £3,000.