Currency advance boosts LacPatrick price

LacPatrick Co-op has jumped from bottom to top of the monthly price league following the introduction of a currency advance payment of 1p/l for June supplies. The move has provided a much needed boost to LacPatrick’s prices, which have been at the bottom end of the league table in recent months. It puts their prices well clear of the others for this month. Their Red Tractor farm-assured milk price is 18.7p/l for June and, according to the co-op, around 60% of LacPatrick’s supplies now qualify for the Red Tractor top-up of 0.2p/l.

On enquiry by the Irish Farmers Journal, Aidan McCabe of LacPatrick said that the currency advance payment is a gesture being made by the co-op to its suppliers in Northern Ireland in recognition of the fact that milk prices have been on the floor for such a prolonged period. It follows the slide in the exchange rate of the pound sterling immediately after the Brexit referendum and reflects an expectation that the weaker exchange rate of the UK currency will lead to a rise in returns expressed in sterling in due course provided that there is no rebound in the exchange rate.

LacPatrick and other processors maintain that the reduction in the rate during the final week of June was too late to affect prices payable for June milk supplies. Sales of dairy products by the processors are generally on contracts with prices and exchange rates fixed a few months ahead of product delivery. With LacPatrick selling substantial volumes of milk powder on global markets priced in US dollars, there is potential for around 13% price improvement in sterling terms if the recent shift in exchange rate is maintained, which would be equivalent to more than 2p/l on the price of ex-farm milk.

Prices paid by Glanbia Milk and Fivemiletown Co-op were also above 18p/l for June supplies collected on alternate days. These prices are after deduction of transport charges for a supplier of 650,000 litres per year, with average NI seasonality of supply and with average milk quality of 3.96% butterfat, 3.28% protein, 4.70% lactose, TBC of 18 and SCC of 185.

Any suppliers to Glanbia Milk, who are also members of the Glanbia Co-operative Society, will have benefitted from the co-op’s allocation of funds as a milk price top-up, which was worth 2c/litre.

Lakeland fixed-price kicks in

Also benefitting from an enhanced price for June milk are suppliers to Lakeland Dairies who signed up for 10 per cent of their milk to be on the fixed-price contract that commenced on 1 June. With that portion of their milk on a base price of 20.75p/l, these suppliers had the equivalent of an extra 0.41p/l on all milk supplied by them in June. That would put their price in this league at 18.13p/l for milk collected on alternate days, which is next best after LacPatrick.

The fixed price scheme also provides a boost of 0.41p/l to all other Lakeland prices shown here for differing qualities and volumes of milk (tables 2 and 3).

According to Lakeland Dairies, around 40% of their NI suppliers have signed up for the fixed price scheme. The extra 0.41p/l is a welcome addition for these producers at this time as Lakeland’s base price for June milk not included in the fixed price contract was down by 1p/l from the April level. That reduction in base price was largely offset in May by an exceptional bonus of 0.75p/l.

Looking at prices in this league and across the range of milk qualities and differing sizes of supplier (tables 2 and 3), the addition of 0.41p/l would make a significant difference to the ranking position achieved by Lakeland in most categories, excluding the milk of below average quality.

LacPatrick’s prices are the best available across all the comparisons here, although they are around 0.5p/l below those paid by Strathroy Dairy for June milk in NI (Strathroy, Green Pastures, Linwoods and Farm View Dairy are not included in the league).

Inclusion of a ‘currency advance payment’ produced a relatively strong price for ex-farm milk bought by LacPatrick Co-op in June but it was not sufficient to lift their 12 months rolling average prices out of the low ranking positions for the year to June 2016 (tables A and B).

The LacPatrick prices reported are based on the past ten months as LacPatrick together with the Town of Monaghan prices paid for July and August 2015.

The gaps between bottom and top prices in these comparisons are no more than 0.75p/litre. Dale Farm Red Tractor milk prices were within 0.2p/l of the top prices paid for milk from producers of 1 million litres per year.

However, the prices quoted for Lakeland Dairies do not include the additional amount paid for milk supplied on their fixed price contract in June 2016, worth an extra 0.41p/l for all litres supplied by any producer who took up that option.

Just around 40% of Lakeland suppliers have taken up this option. Our calculations of 12 months rolling average prices do not fully reflect their returns, nor the milk prices paid to the former suppliers to Fane Valley Co-op who now supply Lakeland.

The top payers across most of the quality categories compared over 12 months have been Lakeland Dairies, Glanbia Milk and Fivemiletown (the prices paid by Fivemiletown being set by Glanbia Ingredients Ireland Ltd). The Glanbia Milk prices do not include top-ups paid to any suppliers who are members of Glanbia Co-op.

With prices in Britain being announced in advance, it is interesting to note that Glanbia Cheese has set its price at 18.5p/litre for August milk. That is 1.5p/l more than its June milk price in Britain, but it is 1p/l below its price paid for June milk in NI.

The prices in Britain are based on a manufacturing milk standard litre, with 4.2% butterfat and 3.4% protein, with somatic cell count below 250,000 and bactoscan under 50,000.

The Glanbia Cheese price is for a supplier of one million litres per year of Red Tractor farm-assured milk.

The company’s June milk price in NI for milk at that specification was 19.5p/l, including its 0.4p/l bonus for Red Tractor and 0.5p/l supplement for the million litres per year producer.

The prices paid by Glanbia Cheese in Britain are to rise by 0.5p/l for July and 1p/l for August milk.

Approximately 3.5% of the milk collected by Aurivo Co-op in Northern Ireland will be purchased under the fixed-price contract that operates from 1 August this year until the end of 2018. On enquiry by the Irish Farmers Journal, Eoghan Sweeney of Aurivo said that the uptake of the voluntary scheme is almost exactly the same in Northern Ireland as in the Republic of Ireland, where 30% of suppliers have signed up.

In the North, 30% of producers signed up to the scheme account for 35% of the milk supplied and practically all have assigned 10% of their milk to the fixed-price contract.

The base price for that milk is fixed at 23p/litre. That’s 0.5p/l more than originally stated as a guide to producers when the scheme was first offered. It is also well above the base set for the fixed-price contract at Lakeland Dairies earlier this year, which runs from 1 June for 31 months to the end of 2018. Lakeland’s fixed base price is 20.75p/l supplied from April to September and 21.75p/l supplied from October to March each year of the scheme.

Aurivo’s higher price is largely due to the change in exchange rate of the pound sterling between May and July. This meant that Aurivo locked in the currency rate and price for the long-term deal on 11 July, so they were able to set a base price of 23p/l.

It is a back-to-back deal in which Aurivo and the buyers of the dairy products involved in the deal have locked in a deal on currency to cover the 29-month period of the scheme.

It shows the major effect that currency exchange rate has on prices obtainable for milk and other farm products.

Brexit effect

The Brexit referendum result prompted a sharp drop in the value of the pound, which initially enabled Aurivo to propose a price of 22.5p/l, based on an exchange rate of €1 equal to 83p. On 11 July, the euro exchange rate was slightly over 85p, which was close to the highest point it has reached since the Brexit vote.

On Tuesday of this week, it had dropped back to 83.7p equal to €1. These movements affect the prices payable throughout the year, but they won’t change the fixed price deal because it is locked in.

Meanwhile, the Lakeland fixed price was set at the end of May, when the euro was valued at around 77p.

You win some, you lose some. In the case of the fixed-price schemes, the producers participating in the Lakeland scheme at present are gaining and those who have signed up for the Aurivo scheme look likely to enjoy a price boost in the short term. No one can be sure if that will still be the case in 2017 or 2018. It will depend on the extent to which dairy markets improve and the movement in exchange value of currency.

The milk processors are not in the business of currency speculation. It is the milk producer who is ultimately exposed to currency movements in so far as these affect the price payable for milk. That can be good or bad, depending on whether the pound is weak or not.

Most dairy processors are unable to assess what will be the effect of the UK exit from the European Union as it all depends on the detail of the deal arrived at during the exit negotiations. In the meantime, it is business as usual.

Strathroy Dairy, with a major part of its liquid milk sales business serving outlets in the Republic of Ireland, has particular reason to wonder what Brexit negotiations will bring. In recent years, the business has been increasing its purchases of milk in the Republic of Ireland and that has provided a means of hedging against shifts in the exchange rate of the pound against the euro (in addition to helping satisfy the demands of some customers in the Republic for the milk to be sourced there).

On enquiry by the Irish Farmers Journal, Cormac Cunningham of Strathroy said that there are bound to be changes and with change comes opportunity.

Cunningham expects that trade will not change much for at least two years but he anticipates that exit from the EU ‘‘will create an awful lot of work’’.

He thinks that a Norway scenario would suit best as the model for the future EU-UK relationship so far as Strathroy is concerned. This means becoming part of the European Economic Area (EEA) and enables a non-EU member to avail of all the free-trade arrangements to and from EU member states without membership. But, in practice, it also means accepting all EU legislation automatically into domestic law, without the opportunity to shape or influence policy as a member state of the EU can do. This is not likely to be an attractive option to the UK government.

So the business has to continue without certainty as to how the Brexit vote will ultimately affect it.

Of more immediate interest, the 1p/l reduction in Strathroy’s base price to 18p/l for May milk and the same for June is a reflection of the overall market, said Cunningham. He acknowledged that the spot prices for cream have been stronger recently, up by 50% in some cases. But he stressed that spot markets by their very nature reflect short-term demand and supply and are not the outlet for the majority of product sales.

Most recent figures available from the Agriculture and Horticulture Development Board (AHDB) show that milk production across the UK dropped by 10.2% in the two weeks ending 16 July compared with the same period in 2015.

In Northern Ireland, provisional figures from AHDB suggest that milk production was down 7.1% in the two-week period ending 16 July compared with 2015 levels. Daily milk deliveries in the UK for this period were 2.4m litres or 6% lower compared with the three-year average.

For June, UK production fell by 7.8% to 1,200m litres whereas in NI, supply again fell less sharply by 5.5% to 204m litres.

This means that milk production in NI for the first half of the year has fallen for the first time since 2013. Production in 2016 to the end of June in NI stands at 1,204m litres, down by 0.2% compared with the 1,206m litres produced in the first half of 2015.

Reports suggest that reduction in milk production in the UK has been mainly down to reduced concentrates being fed to dairy cows as well as increased culling.

Figures from Defra indicate that total deliveries of dairy compounds and dairy blends in the first four months of the year in the UK were down by 4.8% and 6.2% compared with 2015 levels.

Although milk supply across the EU is forecast to decrease in the second half of 2016, most recent figures show that EU milk production was up 4.5% in the first five months of the year.

Across the EU’s main milk-producing countries, aside from the UK, up to the end of May 2016, production increased by 0.6% in France, by 4.8% in Germany and by 14.3% in the Netherlands compared with the first five months of 2015.