Do dairy farmers get a fair price?
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.