Lakeland Dairies is set to introduce a new milk payment scheme that will see milk produced over a reference volume in April, May and June penalised by 4 c/l in the Republic of Ireland and by 3p/l in Northern Ireland. The move by the board of Lakeland is an attempt to allow continued expansion by Lakeland suppliers but at different prices.

What’s surprising is that apart from ongoing development on existing sites, there is no processing plan to allow the co-op move away from this proposed new pricing structure. In effect, the Irish Farmers Journal’s preliminary analysis suggests, assuming a 3% supply increase continues, there will be €3m to €4m taken out of farmers’ milk cheques because it is going to buy milk cheaper at peak and any new push to the shoulders is relatively small. Suppliers could live with this in the short term if they thought the processing investment would happen but that doesn’t seem to be the case.

From January 2023 a supplier’s reference milk supply pattern will be based on 2021 supply. Some of the money collected by Lakeland from this will go to pay an out of season bonus on January milk supplies over and above January 2021 supplies. According to Lakeland CEO Michael Hanley, the rest of the money collected will go on continued capital development.

New entrants

New entrants to Lakeland Dairies will not be allowed supply milk until 2024 and from January 2024 all new entrants will go through an application process. All milk supplied by that new entrant in April, May and June will be hit with the 4 c/l penalty (3p/l in Northern Ireland). The new milk payment scheme is set to run for five years, with a mid-term review in 2025. Applications to supply milk to Lakeland were suspended in 2021, which means only a limited number of startups in 2022, no new entrants in 2023 and the new scheme starting in 2024.

An appeals committee will be set up which will include board members, independent advisers and Lakeland staff.

The moves come as results of a survey completed by Lakeland suppliers are managed and acted on by co-op management. In the survey, 60% to 70% of suppliers said they wanted to increase supply.

Lakeland has always said it would take more milk and in essence it hasn’t changed this, but it is saying it will pay less at certain times of the year. No vision for developing capacity or an end to this two-tier pricing structure has been outlined by management.

In other changes, the existing lactose bonus scheme will be replaced with an unconditional early calving bonus scheme on all January and February milk supplies. Glanbia and Dairygold have moved on this already. Volume bonuses in Northern Ireland have also been changed.

Net effect

News of this change in pricing policy is just breaking. The Irish Farmers Journal’s preliminary analysis suggests if we assume a 3% increase in milk volume takes place based on the current supply curve then in ROI Lakeland would net maybe €1.9m over the three months in penalty fines and pay out about 10% of this in January based on the new January bonus.

Of course, if no additional milk is produced over 2021 then no penalties are taken from farmers.

In the same way, assuming an annual 3% increase in Northern Ireland, where the supply curve is much flatter, putting a penalty on spring milk will see £1.9m leave farmers’ cheques in April, May and June. However, 25% of this is paid out in the new October bonus as much more milk is produced in October with the flat profile up North.

Lakeland has said that while the peak penalty will definitely apply, if the co-op can’t process the milk over and above the 2021 volume, it will only pay out what they can get from the market. If they can only get 20c/litre from the market then a 4c/l penalty will mean only 16c/l for suppliers.

The challenge according to Lakeland is processing capacity. If so, then the solution the co-op is proposing will not fix the problem long-term. Lakeland is introducing a two-tier pricing system similar to what other private dairy businesses have done in Europe.

For Lakeland suppliers in the Republic, the key peak to trough ratio is 4:1. In the North it is 1.4:1 (almost flat). This is in stark contrast to the 10:1 curve for Dairygold and Glanbia. A flatter profile makes manufacturing more profitable as plant utilisation is better by between 8% and 10%.

That’s not to say flatter is better because ultimately the farmer measures milk price, farm profitability and a sustainable business. The seasonal model has been shown to be better for profitability and the environment.

Environment

If it’s possible and profitable for a farmer to produce feed on farm changing away from this is environmentally poorer and leaves milk suppliers in a riskier situation and more vulnerable long term. If it is a capacity issue at peak, then why continue to take milk.

We don’t know what other options Lakeland considered. Many suppliers are not shareholders. In the South shareholding has been increased to partly fund more capacity. Little or no investment in milk processing has been planned or incentivised up North.

You would have thought Lakeland has options at some existing sites for developing capacity. Maybe NI climate legislation is forcing Lakeland to sit on its hands and take on a wait and see approach to see can the sector cope.