Co-ops should not be judged on their milk price according to Dairy Policy Executive with ICOS TJ Flanagan.
He said in light of the recent announcement by First Milk in the UK to defer payments to farmers by two weeks, there is a lesson for Ireland in this.
He said that the scale of the challenges facing the market this year could put everyone, farmers and co-ops, under pressure. “Co-ops supporting farmers could be damaging to co-ops’ balance sheets.”
There is more to judging a milk processor than just the monthly price, he said, and that the co-op is in a strong position is more important.
“If there is a lesson for Ireland (with the First Milk situation), it is that farmers need to consider more than just the milk price when judging their co-op.
“The strength of the balance sheet, and the security of knowing that issues like First Milk’s won’t arise, ought to be considered as well. Maybe financial criteria related to the strength of the co-op ought to be integrated into milk leagues.
“What happened in the UK in recent years where geographical sectors went out the window, I’d hope we could learn from that and see there is no benefit in splitting milk pools.”
Last week’s announcement by First Milk, Britain’s last remaining large dairy co-op, that they were suffering from a ‘cash deficit’ and that they were going to delay milk payments by two weeks, this month, and going forward, puts into sharp focus the fact that farmers need to remain focused on more than the milk price, he said.
First Milk’s announcement means that farmers will be asked to carry an additional two weeks of the co-op’s cash flow burden, as well as having to increase their capital investment in the co-op by 2p/L.
In Irish terms, that would mean a typical Irish farmer (with, say 320,000L) having to fund additional €4,300 cash flow from the delayed payment, plus an additional €8,200 in shares. That’s a direct cash hit of €12,500 to a typical supplier, on top of a potential milk price hit of about €30,000 (if various market projections materialise).
First Milk, he says, say that their problems arose from a loss making position caused by weak markets in early 2014, coupled with an inability to drop milk prices in time; apparently they “didn’t want to be the first to cut the milk price”.
“The significant drop in market sentiment, caused by global supply demand imbalance, exacerbated by the Russian ban resulted in loss in stock values, and the fact that loans were secured against those stocks reduced the co-ops ability to borrow.”
First Milk has said that the problems are purely of a cash flow nature and they “will not have this problem again”. They guarantee that all members’ milk will be picked up and paid for.