Fixed milk-price contracts (FMPCs), in their current form, will have to be reviewed and amended in future, a meeting of the Joint Oireachtas Committee on Agriculture, Food and the Marine has heard.

CEO of the Irish Co-operative Organisation Society (ICOS), TJ Flanagan, and ICOS Dairy Committee chair, John O’Gorman, appeared before the committee this week to discuss the serious challenges that some farmers who are tied into such contracts are currently facing amid rising inputs costs.

O’Gorman, who is also chair of Dairygold Co-op, told the committee that new options need to be built into the FPMCs in order to deal with risk of inflation, and to avoid a scenario that is ongoing currently.

Doing so, would allow farmers to lock in both inputs costs and output prices, thereby, securing a margin regardless of the cost of a litre of milk, he said.

“This would involve, for example, a financial transaction through the futures markets for feed, fertiliser, and energy,” he said.

“However, these are complex financial instruments and are not without risk but this is something that we need to look at for the future from a fixed-price contract point of view.”

The committee heard that early versions of fixed-price milk schemes were linked to input costs but there was little uptake among farmers of these particular contracts at that time.

O’Gorman explained:

“The early iterations of the FMPCs did have a ratchet in them that was linked to major input costs at farm level – the feed, the fertiliser, and so on. But they were removed because farmers didn’t like them, they felt they were tied into doing business with the co-op as a result. And, they could have had a valid argument there,” he said.

“The co-ops did not have the wherewithal to lock down a third party from a supply point of view, so we were unable to continue with them them,” he said.

The FMPCs – in its current form – became the only option available to farmers.

Not a good idea

Asked directly by Senator Tim Lombard if there is any confidence in these contracts within the industry at the moment, and if amendments would be required for the future, O’Gorman said:

“Fixed milk price contracts, in their current form, are not a good idea, particularly from what we have learned over the last six months, or so.

“If you ‘fix in’ above a certain level of your income – which is your milk price – well then you need to be locking in a corresponding element of your costs as well.

“If they [FMPCs] have a future, going forward, and if farmers demand them – and remember, it is not the co-ops that are forcing these on farmers, it was farmers coming to co-ops looking for an income-volatility tool – then there needs to be a margin protection mechanism built into them.”

Volatility management tool

Earlier in the meeting Oireachtas committee chair, Jackie Cahill, said that he and other members of the committee had been lobbied on this issue by farmers who are being squeezed between rising inputs costs, and a milk price that is significantly lower than the current base-milk price offering.

“This [type of] contract has serious shortcomings in that it was purely based on milk-price prediction but had no prediction as regards costs.”

He said the primary producer seems to be the only one to bear the huge escalation of costs.

“Milk prices are heading towards 50c/L and will go the other side of that, significantly, which will help the farmer to offset the huge increase in costs. But not those in FMPCs.

“There are a number of people in this chain: the primary producer; the processor; the customer purchasing from the processor; and the retailer. There are four links in the chain and unless there is a mechanism found to divide that pain, it will be very difficult for the farmer on the FPMC to survive,” he said.

O’Gorman reiterated that co-ops are member-owned, and exist to support members “at every twist and turn”.

“We fully empathise with members who have a high percentage of their annual milk supply in fixed-price contracts,” he said.

Such contracts were, he explained, the response and answer to members’ demands for a volatility-management tool.

“The only option open to milk processing co-ops was back-to-back contracts with our customers. The co-op could not take on the risk of a fixed-price contract, so we back-to-back that with our customers,” he said.

Income-deferral scheme

O’Gorman said that ICOS is appealing to the Oireachtas committee and government to prioritise the establishment of an income-deferral scheme to manage volatility.

“This has been an ask of ICOS and farm organisations for seven years and we believe that is within the gift of the Oireachtas committee and government to deliver on this.

“If we had more options on volatility, farmers could deploy a range of measures to reduce volatility than just to rely on one single measure,” he added.