CEO of Ornua, John Jordan, has confirmed that the dairy co-operative offered support to its member co-ops aimed at providing a level of flexibility to alleviate financial strains experienced by some farmers tied into fixed milk-price contracts.
On the morning that Ornua published its 2021 financial results, the CEO told Agriland that it offered 10c/L on 10% of the fixed-product volume that it currently purchases from its member co-ops, back to those co-ops for 2022.
While the volume of milk equivalent purchased by Ornua from these co-ops is not confirmed for 2021, in 2020 the business purchased 400 million litres from its member co-ops, of which there are eight.
These member co-ops are: Carbery, Lakeland, Glanbia, Aurivo, Arrabawn, North Cork Creameries, Dairygold, and Tipperary Cooperative.
Based on the 2020 figure, the amount of money potentially offered back to co-ops for 2022 is approximately €4 million.
This ’10c/L on 10% volume’ offer was made a number of weeks ago “to all the co-ops that have fixed-price product” with Ornua.
However, not all eight co-ops have such contracts, according to Jordan.
And he was unable to confirm which co-ops accepted the offer and which have not.
Recent fixed-price movers
Carbery, Lakeland, Glanbia, Aurivo, Arrabawn, and North Cork Creameries have moved recently on the prices paid to farmer suppliers who are on fixed-price contracts. It is unknown what plans Dairygold and Tipperary Cooperative have in this regard.
Jordan pointed out that these recent price moves are not necessarily connected to the ’10c/L on 10% volume’ offer from Ornua.
He said Ornua is currently “taking the hit” on the offer to the co-ops, but said it is in discussions with some of its own customers too.
Fixed-price contract conversations
Ornua is the largest exporter of primary dairy products from Ireland, and in 2021 it purchased €1.2 billion worth of Irish dairy products.
It is regularly referenced in the conversation about fixed milk-price contracts.
These fixed-price contracts have garnered much attention recently due to the dire situation that some contracted farmers are in because of spiralling inputs costs, and a fixed-price per litre that is significantly less than the non-contracted, or variable, milk price.
In some instances, farmers have up to 90% of their milk in a number of different contracts.
Agriland understands that 12 farmers supplying one co-op have 100% of their milk tied into fixed contracts.
The Ornua CEO acknowledged that there are cases of “absolute and genuine hardship”.
“There are farmers and farming families who are under severe financial stress, and under severe stress, that is not right and that has to be addressed,” he said.
But he pointed out that Ornua is responsible for one third of the fixed-product price paid to co-ops.
The dairy co-operative has recently stated that it is one of “a number of companies engaged in similar agreements with co-operatives”.
“Ornua represents about one third of the fixed-product contracts – there are a lot of other blue-chip customers out there – and that is probably an unknown,” he said.
“There is probably a view that Ornua is all of it [co-op customer contracts] and to be fair, many of the co-ops won’t name their customers as that is commercially sensitive,” he said.
He said it is Ornua’s view that “a portion” of farmers do need help.
“What we have done is targeted 10% of the fixed-product volume coming to us for a 10c/L equivalent price increase.
“We made this offer to the co-ops, to create a fund of money that the co-ops could target at those individual hardship cases,” he said. But he stated that it is up to the co-ops to accept the offer, and how they pass on that ‘flexibility’ is the co-ops’ business entirely.
He confirmed that the ’10c/L on 10% volume’ offer is linked to 2022 volumes and there is a return expected on that volume in 2023.
“Then we stop there. What every individual co-op does is 100% their decision. We have no input, no say, no discussion on that,” he said.
The Ornua CEO confirmed that, on June 22, he will be present at a meeting of the Joint Oireachtas Committee on Agriculture, Food and the Marine.
There, he will face questioning from TDs and senators regarding fixed-price contracts and Ornua’s place in the ‘back-to-back‘ contracts that are central to the fixed-contract debacle.
Asked if he believes that the fixed-price contracts are fit for purpose and should be reviewed, Jordan said he believes that in the future, such contracts will take on a different guise – not just for farmers, but for customers too.
Explaining, he said:
“Prior to this explosion of product [milk] price, the 10-year average of fixed contracts was marginally ahead of the variable [price]. But it is not about winning or losing, it is about stability on some of your milk. It [the fixed-price contract] was designed so that a portion of your milk would be fixed and would have stability. This starts with a customer, not with a farmer,” he said.
“It starts with a customer saying ‘I will do a fixed-price contract for multiple years’. In today’s environment, there’ll be no customer stepping up to that. They see these as record-high prices and I don’t think we will have customers signing up to multi-year deals at today’s prices.
“I think farmers feel burned this year and will be slow to fix further. It will be interesting to see how many farmers will sign up to the [new] deals that the co-ops are offering. Some may decide to see out this year and do full variable next year.
“I think this will lead to a review [of contracts] … there will be new criteria attached.”
But, he said, those farmers now who find themselves in a difficult financial position have to be assisted to ensure that they have a viable future.
Asked if fixed-price contracts should be linked to the Ornua Purchase Price Index, he stated:
“The specific milk contracts that co-ops offer, we have no input or say into. If fixed price contracts survive as a hedging and de-risking mechanism, will there be changes to the criteria, to the levels of inputs, the levels of milk? For sure there will.”
One option would be for farmers to tie in inputs costs as well as outputs prices, so their margins are guaranteed, he said.
But he questioned farmers’ interest in such an approach.
‘Flexibility’ to co-ops
A recent query to Ornua relating to fixed-price contracts yielded the following response, which Agriland passed on to Ornua’s eight member co-ops for comment:
“We are aware that fixed milk contract arrangements are posing a challenge at farm level at present and are supporting our member co-ops by providing flexibility in relation to fixed price product arrangements we have in place with them, allowing co-operatives to target support to where it is most needed.”
When asked for clarity on the “flexibility in relation to fixed price product arrangements” provided to the co-ops by Ornua, just two of the eight, so far, responded.
Although neither directly addressed the query, they confirmed the fixed-price changes they had recently applied:
North Cork Creameries said it had adjusted the milk price it is paying on existing fixed-milk contracts “where suppliers can receive a 10c/L supplementary payment for up to 75% of contracted volumes, providing a milk price of 41c/L”.
This payment is in place for April to October 2022,inclusive. This is in addition to other payment announcements made earlier this year.
Lakeland Dairies confirmed that in the Republic of Ireland, all fixed milk volumes received an 8c/L supplementary payment from April 2022 until December 2022, inclusive.
In Northern Ireland the corresponding payment will be 7p/L on all milk in fixed-price schemes for the same months.
Lakeland Dairies said the supplementary initiative is underpinned by market support from its customers and is intended to assist in currently unprecedented market conditions.