Liquid milk crisis not just a UK phenomenon - Cashman

by Teddy Cashman, IFA Liquid Milk Chairman

by Teddy Cashman, IFA Liquid Milk Chairman

Irish liquid milk producers have followed with interest the crisis unfolding in the UK. A similar situation is developing in Ireland, where margin erosion caused by retailer demands, weak selling and turf wars among dairies threatens this year to leave Irish farmers in a serious loss-making situation.

Unless winter premiums paid by Irish dairies to farmers increase Irish liquid milk producers will be unable to break even. We must learn from the UK experience: dairies and retailers, who set such store in “sustainability”, must set out to return sustainable producer prices for the coming winter, and for the long term.

Liquid milk had always been a good “cash cow” for Irish co-ops, providing regular cash flow off-peak and when commodity returns were poor. In recent years with the increasing prevalence of imports in the private label sector, retailer demands, systematic undercutting and weak selling by dairies have eroded margins, at farmers’ expense.

Teagasc have published a revised income outlook for 2012, in light of the level of change in prices, weather and costs over a short period of time. They say that feed costs would increase by 25%, from higher feed prices and greater usage due to the fodder harvest failure. In addition, Teagasc also flagged a further 10% increase in fixed costs for all dairy farmers, leading to a 30% fall in incomes.

These cost increases, added to the base milk price cuts of up to 6c/l, have eaten into all liquid milk producers’ incomes. Teagasc’s forecasts for 2012 would suggest that dairy farmers’ margins will be lower than those achieved in 2010.

The challenge from higher input prices and feed usage are affecting liquid milk producers more because their costs are higher, and feed is a much higher component of their cost structure. Historically, this has been recognised by the payment of winter premiums which created an annual “differential” with creamery milk prices. This differential has been eroded in recent years, from 5 to 6c/l down to an all-time low of under 2c/l in 2011.

In calculations from a subsample of 75 winter profit monitor farms selected by Teagasc, IFA has shown that 2011 production costs for liquid milk producers had increased by 3.5% over the previous year, and were higher than winter and creamery producers’ by respectively 26% and 36%.

Applying the anticipated increased costs means that liquid producers will need an annualised price of around 40c/l to cover their variable and fixed costs, and to pay themselves the average industrial wage.

Assuming no further adjustments to manufacturing prices or winter premiums, this year’s annualised prices will fall about 8c/l short of that. Without a determined effort by dairies to increase winter payments, liquid milk producers will lose money in 2012.

Traditionally liquid milk returns to dairies have been much higher and much more stable than those from internationally traded commodities. Currently, while there are some small amounts of milk selling slightly cheaper, the lowest retail price at which significant volumes of milk is sold through the private label outlet of multiple retailers is 74.5c/l (€1.49 for 2 litres). Significant quantities of branded milk sell at price above €1/liltre. An estimate of wholesale prices is between 55 and 60 c/l – which allows retailers gross margins of at least 20c/l. This compares with gross international commodity returns to co-ops of between 31 and 35 c/l. So the retail chain has at least 30 c/l more to remunerate each link than the commodity chain. This must mean that there is ample scope to pay liquid milk producers the winter premiums they need to be profitable.

With most liquid milk pricing systems based on manufacturing prices, in time the current recovery in commodity markets will translate into higher prices. This could take several months, and will come too late to stave off massive winter losses. Immediate action for increased winter month remuneration is required.