Milk prices rising slowly

With a further 1p/litre on the base prices set by most of the main buyers of milk in Northern Ireland, the quality adjusted prices for August supplies have mostly moved above 20p/l. That’s after deduction of transport charges and for milk collected on alternate days from a supplier of 650,000 litres per year, with average NI seasonality of supply and with average milk quality of 4.03% butterfat, 3.35% protein, 4.63% lactose, TBC of 18 and SCC of 205.

The higher average somatic cell count in milk deliveries in August 2016 means that the prices in this league do not include bonuses that are payable by various buyers for SCC below 200.

The leading prices in the league are above 20.5p/l, paid for the relatively small percentages of the milk bought by Strathroy, Glanbia Milk and Fivemiletown Co-op.

At the top of the league, this Strathroy price refers to their standard pricing schedule, with adjustments for butterfat, protein, TBC and SCC outside the base levels and with the deduction of transport costs based on a maximum charge of £10 per collection. Practically all of the milk purchased by Strathroy in NI is collected on alternate days.

Red Tractor

Below the top three places but also over 20p/l are the prices paid for Red Tractor farm-assured milk supplied to Dale Farm, LacPatrick and Glanbia Cheese. The push is on by LacPatrick and Glanbia Cheese to maximise the volume of milk with Red Tractor status. From September, it is anticipated that the base price set by Glanbia Cheese will be for Red Tractor assured milk and there will be a price penalty of 0.5p/l applied on any milk that is not Red Tractor.

Currently, the Red Tractor price at Glanbia Cheese attracts a bonus of 0.4p/l over non-RT milk, while LacPatrick has a bonus of 0.2p/l. Incidentally Strathroy also pays a top-up of 0.2p/l for Red Tractor milk, although not yet marketing any product as Red Tractor assured.

Fixed price contracts

Although among the prices marginally below 20p/l in this league, it should be noted that suppliers to Lakeland Dairies who have 10% of their milk paid for on the basis of the fixed price contract introduced at the beginning of June will have been paid a higher price for those August supplies, equivalent to 20.165p/l average price across all litres supplied. That is calculated from the base price of 20.75p/l payable on the fixed price contract for 10% of the milk supplied, which is 1.75p/l above the base price set for Lakeland’s August milk supply.

Around 40% of Lakeland’s suppliers in NI have milk on the fixed price contract.

Similarly, for approximately 30% of Aurivo suppliers who have 10% of their milk paid for on a fixed price contract that began on 1 August, there is a boost in the price they received. With the base price of 23p/l for the Aurivo fixed contract (4p above their declared August base), that’s equivalent to an extra 0.4p/l across all litres supplied by the contracted producers, making their average price 20.28p/l for milk of the quality referred to in this league table.

The existence of Red Tractor bonuses and fixed price contracts means that there is less uniformity in milk prices paid to producers supplying the same processor and this has added to the challenges for price comparison on a like-for-like basis.

As predicted last month, the rolling average prices for the 12 months to August are all up slightly on the averages for the year to July 2016. This is due to the upward trend in base prices, with all of the main buyers except Strathroy having set a higher base for August 2016 than for the same month of 2015.

Further price improvements are anticipated for the remaining months of this year and these are badly needed as all of the prices paid over the past 12 months for average quality milk remain well below 20p/litre (Tables A and B). These prices are after deduction of transport charges.

Looking at prices across a range of quality levels and for two sizes of supplier, only very good quality milk has made over 20p/l.

The gap between top and bottom prices paid in each of the categories compared is less than 1p/l. There is almost nothing between the top four prices for milk from the supplier of one million litres over the year, with the Red Tractor milk price from Glanbia Cheese just marginally above the prices paid by Lakeland Dairies, Glanbia Milk and Fivemiletown Co-op.

The prices quoted here for Lakeland Dairies do not include the additional amount paid for milk supplied on their fixed price contract that began in June 2016. That was worth an extra 0.41p/l spread over all litres supplied in June and 0.275p/l over their July litres and 0.175p/l over all litres in August, for the 40% of Lakeland suppliers who took up the fixed price option on 10% of their milk.

Similarly, the Aurivo prices quoted do not include the beneficial effect of their fixed price on 10% of milk supplied by around 30% of their producers. For those suppliers, that added 4p/l for 10% of their milk, the equivalent of 0.4p/l across all of their supply for August.

The Glanbia Milk prices shown in Tables A and B do not include top-ups paid to any of their suppliers who are members of Glanbia Co-op.

Tables 2 and 3 show prices paid across a range of milk qualities and for two sizes of supplier in NI. These figures are directly comparable with the same tables published for August 2015 and this comparison reveals that the prices paid for August 2016 were between 1p/l and 1.6p/l above those of a year ago for identical milk.

Those increases are between 5% and 10%. These are small rises relative to the changes seen in official wholesale commodity prices published by the Dutch dairy organisation Zuivel NL for the same months.

The Dutch published prices for August 2016 versus August 2015 show increases of 20% for whole milk powder (WMP), 32% for butter and 10% for skimmed milk powder. These figures are for prices expressed in euro.

On top of that, the movement in the exchange rate of the pound sterling relative to the euro between August 2015 and 2016 is approximately 18%.

At a conservative estimate, the effect of the currency alone should add more than 3p/l and on the basis of the Dutch quoted prices another 3p/l to 4p/l increase could be justified. If fully implemented, this could take milk prices close to 25p/l.

Forward contracts

Processors have stated that dairy products are sold on forward contracts and there is a time lag before price rises can filter back through to the prices paid for milk ex-farm. Some may well have locked in deals at currency exchange rates that applied prior to the Brexit referendum and this has reduced their scope for taking advantage of the way in which the currency exchange rate has moved since 23 June this year.

That may be a problem for some processors but the slow approach to increasing prices for milk ex-farm is adding to the huge frustration among milk producers who have been sustaining huge losses for many months and absolutely need higher returns for milk. The recent increases only scratch the surface of what is needed. Published Dutch prices indicate that more should be available – and further price rises must be in the pipeline for the remainder of 2016. Where prices go in 2017 is another matter.

Bobby Irwin, nutritionist with United Feeds and Professor Finbar Mulligan of UCD School of Veterinary Medicine, have warned of the dire financial consequences that can follow if dairy farmers already under severe cashflow pressures do not provide cows with adequate nutrition and allow cows to become too thin at drying off. Adequate nutrition at its most basic means meeting the energy demand of the cow in terms of calories to maintain a body condition score (BCS) of 2.75 to 3.25 for milking cows and 3 to 3.25 for dry cows. A BCS of 3 to 3.25 at calving is particularly important. Low BCS at drying off leads to a whole series of problems that affect cow health and welfare and reduce profitability. These costly problems include:

Strathroy prices

Although at the top of the league, Strathroy’s prices for August 2016 are actually below those of August 2015. At this time last year, the prices being paid by Strathroy were around 2p/l above the best of the other main buyers. This reflected the effect of weak dairy markets versus the relatively stronger prices attainable for liquid milk at that time – always subject to negotiations between Strathroy and its customers.

‘White water’ contracts for liquid milk

While our recent reports on monthly milk prices have often made reference to prices paid by Strathroy Dairy, the month of August 2016 is the first in which we have published Strathroy prices as part of the league table.

We are reporting the comparable prices paid by Strathroy for identical milk supplied under its standard contract terms, but it should be pointed out that not all Strathroy suppliers in NI are paid on those terms.

The company also offers a ‘‘white water’’ contract, under which there is no adjustment for fat and protein above a base percentage in the milk. This type of contract is also used in some cases in Britain where producers are supplying dairies that specialise in processing milk for retail sale as liquid.

Under such contracts, the processor gains if there is higher butterfat content as it yields additional cream during processing to produce skimmed or semi-skimmed milk for sale as liquid.

Revenue from sales of cream is significant income for the processor.

There is no benefit for such processors in having milk with a high protein content as it does not add to the yield of the product that they are selling.

In fact, high protein milk for which a higher price has to be paid on standard purchase contracts actually leaves less profit margin for the processor of liquid milk.

According to Cormac Cunningham of Strathroy, two of its suppliers have opted for the white water contract. It seems to suit herds that have a very even calving pattern all year round and very good management of nutrition for the cows. These herds are milked three times per day and produce large volumes of milk from cows that are bred specifically for high yields rather than high fat and protein components in milk.

Other Strathroy suppliers have looked at this contract, but believe that it is not the best option for them as it would reduce their cashflow especially during the autumn when their output generally includes higher levels of fat and protein in milk from a majority of the herd as the cows move past peak production.

Obviously, this depends on the price that is being offered on the white water contract. This purchase arrangement is not covered by our league as the milk is not of the same compositional quality.

The league also does not include prices paid for milk supplied on fixed-price contracts to Lakeland Dairies and Aurivo, although our best estimates of the effects of those contracts on the overall price paid are given in the accompanying text.