What is the national farm gate milk price?
One might expect a simple answer to such a simple question. In many supply chains the cost of the raw material is normally considered an essential piece of information. However in this country there are a number of different prices used when discussing the farm gate price of milk and none are ideal at present.
The farm gate price for milk varies from farm to farm due to a number of factors. These include different solids content, different milk quality, seasonal bonuses, and participation in fixed price contracts to name a few of these factors.
In order to determine the overall trend in these disparate prices a number of national prices are published. Three of these are presented in Figure 1. Two are published by the Central Statistics Office, with one reporting the actual average price paid to farmers while the second is standardised to reflect milk solids at 3.7% milkfat and 3.3% protein.
The third price is published by the
Milk Market Observatory (MMO) and is meant to report the average actual price paid for all milk.
It is clear that there is also a significant gap between these prices at times, being most noticeable in October 2017. The seasonal nature of our milk production leads to a seasonal pattern of milkfat and milk protein content in the raw milk.
As a result the actual solids rarely matches the standardised solid content and this divergence continues to grow thus reducing the relevance of the current standardised price. For 2017 the CSO reports an annual average milkfat content of 4.09% and an annual average protein content of 3.48%. Furthermore the monthly average fat content exceeded 3.7% in each of the 12 months, and exceeded 3.3% protein on 11 months, of that year. The relevance of a 3.7/3.3 standardised price is questionable in such circumstances. Furthermore it may incorrectly give some farmers the impression that they are at, or above, average in terms of milk solids when in fact they are producing solids well below the national average.
While one might expect a direct comparison between the CSO actual price and the MMO as both are considered actual prices paid, the graph
(below), however, again shows divergence. This can in large part be explained by the fact that the MMO price is quoted per KG while the CSO is per litre. However even allowing for this, there are still differences in these prices. The MMO price has assumed a far greater significance in recent months with the launch of the European Liquid Milk Futures contract on the European Energy exchange (EEX). This milk price now forms a 25% share of the index to which this contract now settles. As such it is vital that the price reported to the MMO should mirror the national prices as closely as possible. This will then reduce the basis risk for those Irish customers who wish to use this contract to hedge their exposure to volatile farm gate milk prices. This includes milk processors and their customers and most importantly, Irish dairy farmers.
As well as providing a valuable risk management tool the EEX milk futures contract should also act as a valuable forecasting tool in future as the volume of contracts traded grows. As the contract is traded up to 18 months into the future it will provide a valuable insight into market sentiment regarding future milk prices. Again the closer our reported MMO national price is to actual milk prices the easier it will be to derive forecasts.
At present the UK-based Agriculture and Horticulture Development Board publishes several market indicators for the dairy sector which provide broad, general estimates of market returns. These include an Actual Milk Price Equivalent and the Milk for Cheese Value Equivalent and closely reflect the now dated Intervention Milk Price Equivalent. Such indicators provide a valuable insight regarding markets trends and are worthy of consideration in an Irish context.
In essence, now would appear to be an appropriate time to begin a discussion regarding our reported national prices and how they may be adapted to respond to current industry needs. As we ask those beyond the farm gate to share in the additional risk associated with increased dairy price volatility it is essential that they too have access to the most relevant and accurate farm gate price for raw milk.