The CEO of Ornua has told the Joint Oireachtas Committee on Agriculture, Food and the Marine that two of its co-op members have availed of a support package that it recently offered to help alleviate financial stresses experienced by farmers tied into fixed milk-price contracts (FMPC).
Chair of the committee, Deputy Jackie Cahill, questioned the CEO about the uptake of support that Ornua offered its eight member co-ops.
While John Jordan said that it should be left to the co-ops to identify themselves, he confirmed that two co-ops had availed of the support.
Deputy Cahill then called on the CEO to deliver a follow-up package, or payment for farmers, saying that it is in everyone’s interests to keep these farmers in business.
“I am pleading with you, as a major player and cornerstone of the industry,” he said.
But the CEO responded by saying that the flexibility already shown by Ornua through this offer of support will allow co-ops to set aside a pot of money to address hardship cases identified.
The committee convened at 5.30pm this evening (Wednesday, June 22) with FMPCs up for discussion with Ornua for an hour and a half. Joining the CEO of Ornua are managing director trading and member relations, Colin Kelly and corporate affairs director, Anne Randles. Between them, they will answer the committee’s questions on Ornua’s role in the dairy sector and in FMPCs.
Ornua CEO opening address
In his opening address to the committee, the CEO said that farmers should be “appropriately advised on the use of volatility-management mechanisms” in the context of fixed milk-price contracts (FMPCs) of the future.
He said that confidence in such contracts and schemes has been significantly impacted by the negative experience of some farmers in 2022.
But, he added, given the volatility of world markets “hedging and de-risking tools will continue to have a place in all our businesses”.
Commenting further on the future of these FMPCs, the CEO said lessons will need to be learned from recent experience, and consideration given to how income margins can be protected under any new schemes if there is an appetite for them.
Ornua and FMPCs
Ornua, which has eight member co-ops in Ireland – Aurivo, Arrabawn, Carbery, Dairygold, Glanbia, Lakelands, North Cork Creameries and Tipperary Co-op – has come in for criticism over the last few months as contracted milk prices fall well below the current price per litre for non-contracted milk.
In some instances, there is an almost 20c differential, and some farmers are very heavily exposed due to the volume of milk they have contracted.
The co-ops that these farmers supply are tied into what are called ‘back-to-back’ contracts with their customers on the other side – one of which is Ornua.
For example, Ornua’s fixed price contracts with its member co-ops are for an agreed volume of product – butter, cheese or powders – purchased at an agreed fixed price.
Mr. Jordan, in his address, spoke of market volatililty being “very much a feature of today’s dairy commodity market, and this market risk has to be managed”.
“In 2015, Ornua presented to this committee on the risks to dairy-farm incomes of greater market volatility and the need for resilience and adaptability,” he said.
“For farmers, the best insulator against volatility is a combination of market return, fixed milk-price schemes, margin protection measures, and efficient and shrewd financial planning,” he said.
“Ornua, itself, has invested significantly in volatility-management resources, skills, and mechanisms to ensure our own product prices trade in a narrower, less volatile range than the commodity markets, as evidenced by the PPI, and to ensure that we can provide an option – and I would stress it is only an option – for our co-op members to hedge or de-risk a portion of their business.”
He pointed out that this de-risking, through fixed-product price schemes, had brought “welcome stability” to its co-op members over the past number of years.
“We have, of course, become aware of a certain number of farmers, and farm families, under financial stress, and indeed mental strain, due to the fixed milk-price arrangements they have in place with their co-ops, given the unprecedented and unexpected rise in input costs in 2022.
“While we are not involved in managing these schemes, we strongly believe that it is incumbent on everybody to step up and support these hardship cases,” he said.
He went on to describe the way in which Ornua has stepped up – via the aforementioned support package:
“We have offered to increase the contractual purchase price on 10% of this volume, subject to the member co-op supplying the same volume in 2023 at the increased price.”
He said this is “intended as an option for the member co-ops and a potential contribution to addressing the difficulties that have arisen”.
“It is not, and was never, intended to be a full solution to bridge the price between fixed and prevailing milk prices for all of the Irish dairy sector,” he said.
He explained that the offer is “based on an assumption that 10% of the volume of Ornua purchases on a fixed-price basis is from milk supplied by farmers in hardship”.
“Therefore, Ornua’s offer is a price increase of an average of circa €1,000/MT, on 10% of product purchased from the member co-op in 2022.
“This offer can be managed by the co-op in whatever manner they deem most appropriate for their situation. It would equate to 10c/L on 10% of the volume or 1c/L on all of their volume.
There is a link to 2023, in that the volume and price are, in turn, fixed for 2023 at the same increased return, he explained.
He added that, as Ornua is not involved in the design or management of any of the fixed milk price schemes, it does not have data on hardship cases.
“This information is held by the individual co-ops and it is only they who can determine whether to take up this discretionary offer and how it should be used.
As reported by Agriland, Glanbia and Dairygold have declined to take up this offer from Ornua.
Stay tuned to Agriland for additional coverage of this Oireachtas committee meeting.