Fixed milk-price contracts (FMPCs) have garnered a great deal of attention this year – and not for the positive.
The rising costs of inputs, along with the impact of the Ukraine war, have served to highlight the shortcomings of such contracts.
There is now an acknowledgement on all sides – farmers, co-ops/processors, even some major purchasers of our dairy products – that FMPCs in their current form are not fit for purpose.
Agriland spoke to founder of Irish agri-fintech start-up, Concept Dairy, Diarmaid Mac Colgáín, about the current fixed-price contract situation, the company’s alternative to the traditional milk-price contract and why it might be one solution to the current quandary.
According to the Irish Farmers’ Association, most fixed-price schemes allow farmers to commit between 5-15% of their overall supplies, but some farmers who have availed of the longest-running schemes may have significantly more than that committed.
Without exact confirmation of figures, it has come to light that a number of farmers across a number of co-ops have, indeed, significantly more than that committed – in some instances, up to 80-90% of their milk – across several consecutive contracts.
These farmers are now losing out substantially as the gap between contracted and non-contracted milk prices widen – by more than 20c/L in some cases.
While the majority of commentators believe that milk-price contracts will play a role in future milk production and supply, the consensus is that their current design will have to change.
But what is the alternative?
FMPCs were introduced in 2011, offering farmers the opportunity to sell a percentage of their milk at an agreed price for an agreed period of time.
They are not for everyone, but they can offer a level of income security and certainty, especially for farmers who have large loans due to investment and expansion after the abolition of quotas in 2015.
But they only work, really, when the input costs on the other end are not crippling farmers, as is currently the case.
A new concept
As with most start-ups, Concept Dairy’s impetus was to provide a solution to a problem; to do something better when it came to milk price, transparency of price, and farmers’ control of same.
After 15 years’ working in energy and trading markets in London, Mac Colgáin was head hunted by Ornua where he established a trading and risk-management arm of the dairy co-operative.
His grandparents on both sides were dairy farmers so although he was no stranger to farming, this kind of in-depth exposure to the dairy sector gave him great insight into the ‘business’ of dairy production, buying, and selling.
“I would have learned a lot about the dairy sector and how it all worked from my time there. I could see that there was a better way to do things so the farmer doesn’t always have to be the price taker,” he told Agriland.
He co-founded Concept Dairy with his partner – in life and in business – Jacqueline Fitzgerald, with the aim “making the dairy industry better for everyone”.
Price control
“We saw that there was an opening to give farmers more visibility on their prices, allowing them to lock in their milk prices when they want to,” he said.
“With the [current] fixed-price schemes, these are only offered once a year. But when the markets ‘go bananas’ for maybe a few weeks in the year, farmers don’t have the opportunity to sell into that,” Mac Colgáin said.
“So, we are giving farmers the ability to sell when the markets go high, at any point in time, when they choose.”
In simple terms, the farmer ends up having more control over what volume of milk they sell, when they sell it, and at what price.
No more waiting until the end of the month for the milk cheque to arrive, something referred to by Mac Colgáin as a “milk-price casino”.
“It’s like someone saying your salary is €30,000/year, but then the following month that drops to €20,000, then maybe it drops again to €15,000, and then up to €40,000. Nobody would work like that. The milk price is the farmer’s salary,” he said.
So, this new concept in dairy allows farmers to control that salary, to lock into a milk price for a period of one month to two years – or anywhere in between – based on the industry knowledge that Concept Dairy provides.
Mac Colgáin explained that these prices are based on detailed analysis of global markets for products such as cheese, butter, and powders, etc.
The company has developed an app, which, following the provision of some key dairy details – herd size, litres produced, protein and fat content – will give farmers access to current live-market prices, on a monthly basis for two years.
Minimum-price contracts
In addition, the company has devised a minimum-price contract, which guarantees a price to farmers for their milk, below which it will not drop.
However, if the price does increase – as has happened this year – the farmer is guaranteed to receive the higher price.
Minimum price – how does it work?
At the moment, a fixed-price contract might lock a farmer into 45c/L for the next year, for example. In a minimum-price scenario, you can lock in that same price but by paying a premium, if the price goes up to 70c/L, you are guaranteed that price, but if the market crashes to 20c/L, your original 45c/L is safe.
The farmer will have to pay a premium for this, Mac Colgáin explained, but it is a case of a little going a long way – especially when input costs are subject to such volatility.
Working with co-ops/processors
Concept Dairy works with co-ops/processors too – helping them to understand and manage the risk on their end.
The relationship between farmers, co-ops/processors and their customers has been a source of great interest, confusion, and the spotlight recently as the FMPC conversation rumbles on.
Some Irish co-ops/processors have moved to alleviate some of the financial strain that their contracted farmer suppliers are experiencing this year, but they are in a tricky situation too.
To be able to offer farmers a fixed-price contract in the first place, they must enter into a fixed-product contract with their customers for a certain volume of dairy product such as cheese, butter or powders, for example, at a certain price.
These ‘back-to-back’ contracts, as they are known, add to the complexity of farmers’ current situation.
“A lot of the co-ops are locked into prices on the other side, but there are tools that the co-ops could be using so that they are not always locked in at the bottom.
“There are certain risk-management measures that co-ops can take – some are doing it and some are not,” he said.
This is an area where Concept Dairy hopes to make inroads – working with the co-ops/processors to get the best deal for their products by helping them to understand and manage their risk better.
“Probably the most fractious part of the relationship between co-op and farmer is price. So, if you can give more choice to farmers, the better,” Mac Colgáin said.
“But milk processors are absorbing and taking so much risk – sometimes they may not even be aware of. They are buying products from other companies, and selling them to big multinationals, and these multinationals all have risk-management teams [in place].
“The dairy processors seem to absorb a lot of shocks and they are then pushed down the line to farmers.”
The three Fs
At a recent meeting of the Joint Oireachtas Committee on Agriculture, Food and the Marine, Irish Co-operative Organisation Society (ICOS) Dairy Committee chair, John O’Gorman, said that new options need to be built into the FMPCs to deal with risk of inflation, and to avoid the kind of scenario that is ongoing currently.
Doing so would allow farmers to lock in the costs of inputs as well as the output prices, securing a margin, regardless.
This option should be explored, said Mac Colgáin, and there are tools that can help with this.
“There needs to be a mechanism there to allow for extreme market volatility – which is what is happening now. We can learn from this and we can start embracing risk-management and using the tools that already exist to do this,” he said.
In the future, he said, Concept Dairy will be looking at the three Fs – fertiliser, feed, and fuel – those input costs that are causing such disruption to farmers’ bottom lines right now.
“You have to look at everything, you can’t just look at one side of it. It is all about controlling the controllables,” he said.
“When farmers locked in those [milk] prices, their three Fs weren’t moving. They were pretty constant. They were essentially locking in a margin, but without locking in those input costs also.
“That is why a lot of the farmers are hurting now,” he said.
“What has happened has shown a need for our [Concept Dairy] solution. There are fixed-price contracts [in existence], but why not minimum-price ones? It is not that difficult to do, we can make it happen,” he said.
He said Ireland is particularly exposed to price volatility due to the large quantity of dairy products we export.
“We don’t have a natural insulation on the retail side like exists in the UK where 56% of milk production goes into liquid milk, and the rest goes into cheese. It is a very different market to ours.
“We are exporting into Africa, into the Middle East, the US and when we export to those countries, we are competing with the likes of South America for example, which is increasing exports all the time. And we are also competing with Australia and New Zealand. All of this contributes to the volatility associated with our milk prices,” he said.