A farmer supplier of North Cork Creameries is entering the final year of a three-year fixed-price milk scheme (FPMS) that is paying 31c/L – close to 12c below the current open-market price.
Under normal circumstances, while this price is far from ideal, Timmy Flaherty could weather the storm but during these unprecedented times, he feels he is facing a bleak future, he said.
The 32-year-old north-Kerry dairy farmer, who employs two people on his farm, said that his short-term future could see him forced into selling off 60 animals in order to honour financial commitments that he has.
He explained that 85% of his milk is under contract, and the consequence of this is compounded by the extraordinary rise in inputs costs such as fertiliser, fuel, and energy.
Fixed-price contracts
FPMCs were introduced, generally, in 2011, offering farmers the opportunity to sell a percentage of their milk at an agreed price for an agreed period of time. The schemes are voluntary and milk not included in them is sold at the usual base price. According to the IFA, most schemes allow farmers to commit between 5-15% of their overall supplies, but producers who have availed of the longest running schemes may have significantly more than that committed through consecutive schemes.
Timmy explained his current situation to Agriland:
“I have 900,000L in milk contract, which is 85% of my milk pool at 31c. The other 15% is at the open market price, which, at present is 43c,” he said.
This 12c/L differential across 900,000L comes to €108,000.
“This year, I have extra costs across the whole enterprise with increases in silage, diesel, vets’ fees, wages, electricity, gas, sprays, seeds, etc.”
Timmy’s fertiliser bill for 2022 is €50,000 more than it was in 2021, while his ration bill has significantly increased too, he said.
Fertiliser costs soar
The Central Statistics Office (CSO) Agricultural Price Indices for January 2022 show that the cost of fertiliser jumped by 127% compared to the same month in the previous year.
“For me to buy the same amount of fertiliser this year it would cost €85,000 which is €50,000 extra on last year’s cost. My ration bill will rise roughly €35,000 extra so that is an extra €85,000 expenses, and this is only two examples.”
Timmy accepts that he signed into an agreement with North Cork Creameries and is not critical of the staff or management. But he and farmers like him in north Kerry are now seeking help. He said that along with the financial stresses, mental anguish is impacting many farmers now.
“If the co-op would be willing to negotiate between the milk contract and open-market price, it would help some bit,” he said.
“For example, at the moment meeting halfway of 12c would be 6c, which would be €54,000 [loss] for me.
“This still wouldn’t cover my extra costs but it would help a great deal,” he said.
“It is clear that this is not sustainable for the year going forward if the situation isn’t addressed. Someone is going to pocket my 12c.
North Cork Creameries
When contacted this week, North Cork Creameries, which first introduced FPMSs in 2014 – said that the specific aim of the scheme is to support milk suppliers in coping with the impacts of dairy-market volatility.
A spokesperson for the co-op told Agriland that it is a “farmer-owned and farmer-directed” co-operative that is committed to paying the highest possible milk price, in line with market conditions.
It said that in addition to its base milk price, it recently made a 2c/L supplementary payment for all milk suppliers, including those involved in FPMSs.
The North Cork Creameries spokesperson also said that last week, its board decided to pay its milk suppliers 1c/L for all milk supplied in 2021.
“This additional payment has been made this month with the February milk price payment, and it includes milk suppliers on fixed milk price contracts.
“We are acutely aware of the growing burden of increased input costs for all milk suppliers and will do everything we can to support them through these currently difficult times,” the spokesperson said.
Contract complexity
The spokesperson explained that there is a complexity involved in the fixed-price contracts between a farmer and co-op, and the contracts that the co-op itself has in place on the other side.
“The underlying operation of the FPMS is based on binding contracts agreed with customers in the marketplace – the buyers of dairy products – who agree a set price for specific volumes of supply across various dairy-product categories.”
It is this forward agreement that sets the price within the fixed price milk contract, the spokesperson said.
“The contracted price agreed with end customers remains constant whether dairy prices should rise or fall in the marketplace.
“It is difficult to envisage how these contracts could be altered following from the basis of the formal agreements made and which underpin the fixed milk price contracts.”
‘Farmers thinking of milking once a day’
North Kerry farmer, Joe Barrett, also supplies North Cork Creameries – 60% of his milk is in an FPMS.
That fixed price of 31c, he said, will finish him and farmers like him.
He said he understands that the co-op and, indeed, other co-ops in the country, have binding contracts with customers in the marketplace. But, he said, the way things are going, farmers won’t be in a position to produce the milk required for those customers.
Painting a clearer picture of that, he said:
“There are farmers down here thinking of milking once a day to cut the costs. And there are men going to doctors over this, their health is in trouble,” he said.
He added that this is now a national problem that does not solely involve North Cork Creameries.
He admitted freely that he was hedging his bets when he entered into the FPMS in 2020.
At that time, a litre of milk was making 28c so it made sense for him to fix at 31c. But the average price-rise predictions were not significant nor were they too far ahead of the fixed price over the three-year term. But Brexit, Covid-19, and now the war in Ukraine, have all taken a toll.
“There were banks to be paid, there were mortgages to be paid, there was land bought, I had a house built for my parents. We went into this to cover ourselves and now it is the opposite that is happening. The costs have gone out of control,” Joe said.
Agricultural Price Indices
On an annual basis, the agricultural input price index increased by 26.4% in January 2022 compared with January 2021. The agricultural output price index increased by 16.9% in January 2022 compared with January 2021.
“I wouldn’t be speaking to you if milk was making 33c and fertiliser was the price it was, and ration was the way it was,” he said.
“But everything has gone astronomical. It has gone crazy.”
He said actions taken by some co-ops – North Cork Creameries included – to offer a 5c/L loan spread out over the next three years is just “kicking the can down the road”.
North Cork Creameries explained that this is a voluntary working capital loan scheme for milk producers. It would be paid on milk supplied from April to October, inclusive, in 2022, and on volumes of milk over the first 20% of milk supplied. This would be repaid gradually to the co-op by way of monthly deductions between 2023 and 2024 at “nominal interest rates”.
Joe is now calling for support and representation on this issue, and is contacting all relevant farming bodies to get behind him and farmers in a similar situation.
He is also calling on those “customers in the marketplace – the buyers of dairy products” to review their role in this situation also. If the co-ops hands’ are tied, then questions must be asked of the marketplace and the customers in it, Joe said.
‘A war situation’
An Irish Farmers’ Association spokesperson told Agriland that it has been in discussion with processors about the “exceptional situation arising from sky-rocketing input prices”.
“We fully accept that farmers freely entered into fixed-price contracts, and sometimes that turns out to be a good decision and other times it doesn’t.
“However, what we have here is an exceptional set of circumstances arising from a war situation,” he said.
“The processors should come forward with proposals to address the issue,” he said.
Earlier this month, the IFA released a statement, which called out processors for not passing onto farmers “what the market is returning”.
“Over the past 12 months, the European price for butter, skim milk powder and whole milk powder have each increased by over 50%,” the IFA said.
“During the same period, the IFA estimates the average Irish farmgate milk price has increased by circa 27%. Milk processors are returning a price significantly less than what the market is proven to be delivering. Farmers are asking where this money is going.”