Irish Examiner

Do dairy farm­ers get a fair price?

- De­clan O’Con­nor Business · Food Industry · Consumer Goods · Agriculture · Industries · Biology · United Kingdom · Protein · Irish Dairy Board · Purchase, New York · Agriculture and Horticulture Development Board

The im­por­tance of the Ir­ish dairy sec­tor is well es­tab­lished. Based on CSO data, from Jan­uary 2011 to Septem­ber 2019, do­mes­tic milk in­take was 56.3bn litres gen­er­at­ing €19.3bn in sales, an av­er­age of 34.3c per litre.

As milk solids have steadily in­creased dur­ing this pe­riod, it is worth not­ing the av­er­age price per litre of milk at stan­dard­ised solids of 3.7% fat and 3.3% pro­tein was 32.45c per litre. This val­ues the ad­di­tional solids above this base at ap­prox­i­mately €1.03bn for this pe­riod. Whether these milk prices rep­re­sent a fair re­turn to farm­ers is open to de­bate.

Farm­ing rep­re­sen­ta­tive bod­ies of­ten state com­mod­ity price re­duc­tions are trans­mit­ted to farm prices faster than com­mod­ity price in­creases.

These bod­ies will also state that de­creases are passed on in full, while in­creases are not fully passed on to farm prices.

On the other side, milk pro­ces­sors claim that dur­ing pe­ri­ods of pro­longed lower com­mod­ity prices, they sub­side far­m­gate prices.

The fol­low­ing anal­y­sis, which com­pares far­m­gate price with a milk equiv­a­lent based on Or­nua Pur­chase Price In­dex sheds light on this de­bate.

As stated by Or­nua “The Or­nua Pur­chase Price In­dex (PPI) is a monthly in­di­ca­tor of mar­ket re­turns on dairy prod­ucts pur­chased by Or­nua (typ­i­cally but­ter, cheese, whole milk pow­der and pro­tein prod­ucts), rel­a­tive to com­pa­ra­ble re­turns gen­er­ated in a base year (2010). For ex­am­ple, if the PPI is 105 in month ‘X’, this im­plies that the mar­ket has gen­er­ated a re­turn 5% higher than the av­er­age re­turn in the base year (2010)”.

Based on these guide­lines, it is pos­si­ble to cal­cu­late a farm milk equiv­a­lent price based on the PPI.

While the two se­ries ap­pear to track each other, in gen­eral there are pe­ri­ods where they drift apart.

For ex­am­ple, in 2013 the mar­ket re­turns do not ap­pear to have been fully passed on to farm­ers, a pat­tern which ap­pears to have re­peated in re­cent months.

How­ever, there are also pe­ri­ods such as late 2011 and early 2016 when the farm prices are above the mar­ket re­turns. In or­der to de­ter­mine if the re­turns are passed on in full, we need to al­low for the sea­sonal na­ture of Ir­ish milk pro­duc­tion.

From a sec­toral perspectiv­e a cent a litre in May (our peak month) is worth more to an Ir­ish farmer’s pay check than a cent in Jan­uary when pro­duc­tion is typ­i­cally at its low­est. When this sea­sonal weight­ing is fac­tored in, we see that to­tal re­turns at stan­dard­ised con­stituents was €18.27bn while the equiv­a­lent mar­ket re­turns based on the PPI were €18.18bn. This €90m dif­fer­ence, which rep­re­sent about one sixth of a cent per litre over the pe­riod, sug­gests that mar­kets re­turns, plus a lit­tle more, were passed on to farm­ers.

If this anal­y­sis was lim­ited to the pe­riod from Jan­uary to Septem­ber 2019 in­clu­sive, the farm re­turns are al­most €55m be­low the PPI re­turn. How­ever, this anal­y­sis also shows pro­ces­sors sub­sidised farm in­come to the tune of al­most €83m dur­ing 2016.

So, this type of anal­y­sis is time de­pen­dent. Sec­ond, this anal­y­sis is based on na­tional re­turns and as such care should be taken in ex­tend­ing this anal­y­sis to re­turns at in­di­vid­ual pro­ces­sor level.

This later anal­y­sis would re­quire that an In­dex suit­able to in­di­vid­ual pro­ces­sors should be con­sid­ered and such an in­dex should mir­ror the port­fo­lio of that spe­cific pro­ces­sor. This point ex­plains why bod­ies such as the Agri­cul­ture and Hor­ti­cul­ture De­vel­op­ment Board in the UK pub­lish a num­ber of indices in­clud­ing a Milk for Cheese Value Equiv­a­lent.

Third, the price smooth­ing per­formed by the milk pro­ces­sors should also be con­sid­ered. While the peak re­turn of Septem­ber 2013 was not fully re­flected in the farm price at that time, nei­ther were the ex­treme lows of the sum­mer of 2016. In essence, the farm price was less vari­able than the mar­ket re­turns, with the pro­ces­sors prov­ing some risk man­age­ment ser­vices to their farm­ers.

Fi­nally, it should be noted that the CSO price re­flects both the spot price paid to farm­ers for that par­tic­u­lar month along with any fixed price con­tract com­mit­ments.

 ??  ?? Source CSO and writer’s cal­cu­la­tions.
Source CSO and writer’s cal­cu­la­tions.
 ??  ?? De­clan O’Con­nor of the Depart­ment of Math­e­mat­ics, CIT.
De­clan O’Con­nor of the Depart­ment of Math­e­mat­ics, CIT.

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