Processing cost rises as Ornua board approves changes to PPI

Changes to the Ornua Purchase Price Index (PPI) have been approved by the Irish dairy exporter’s board earlier today, Tuesday, July 14 – while the exporter has also confirmed that there will be an increase to the assumed processing costs when gauging the index going forward.

The move aims “to ensure the Purchase Price Index remains an accurate base commodity reference and to bring greater transparency to how Ornua returns market premium”, a spokesperson for the cooperative said.

It was highlighted that, as the Purchase Price Index is a measure of Ornua’s market performance on commodity products, it should only include base commodities.

As such, previously included market premium payable by Ornua will be removed and expressed alongside the Purchase Price Index.

In addition, going forward the annual members’ bonus will be paid monthly and combined with the market premium.

Together, they will be called the ‘Ornua Value Payment’ and reported as part of the monthly Purchase Price Index communication.

As well as these two changes, Ornua confirmed that the estimated member co-op milk assembly and processing cost, used to convert the Purchase Price Index (for the Ornua base commodity portfolio of products) to a net cent per litre indicative milk price, will move from 6.5c/L to 7c/L.

This increase was advised by member co-ops and validated by an independent review, Ornua added.

This adjustment does not alter the Purchase Price Index or impact the prices Ornua pays for products, the exporter co-op stressed.

It does impact the indicative milk price calculation. The indicative milk price continues to be based on the industry standard solids expression of 3.6% fat; 3.3% protein.

This estimated member co-op milk assembly and processing cost is separate from Ornua’s costs and relates to the cost of collecting milk and processing it into dairy products by the member co-ops, the Ornua representative explained.

As before, this cost estimate excludes: supply chain costs (e.g. logistics, storage, insurance, selling and marketing); and member co-op processor margin.

The updates will come into effect from the July Purchase Price Index, which will be published in August.

The Ornua PPI

The Purchase Price Index was established in 2011, and works off a base year of 2010. It is a measure of the monthly gross value paid to member co-ops for the Ornua product portfolio.

In the 10 years since it was established, the exporter noted that new cost implications have arisen that need to be considered to maintain the Purchase Price Index’s relevance when converted to an indicative milk price.

As a result, late last year the Ornua Board agreed to a review of the member co-op milk assembly and processing cost used to convert the Purchase Price Index into an indicative milk price.

An Ornua spokesperson said: “Investment has facilitated significant milk output growth which has delivered scale benefits and contributed to fixed cost recovery.

However, member co-ops have highlighted that it has not contained new and increased costs that they have incurred over the past 10 years. Notable increases include seasonality inflated depreciation, maintenance, and compliance costs.

“Customers are demanding greater standards in terms of quality and traceability leading to new regulatory, environmental and sustainability costs.

“In addition, borrowings undertaken by member co-ops to fund the expansion of the industry post quota, require greater margin retention to meet strict banking covenant requirements,” the spokesperson said.

The estimated processing cost at 7c/L does not include member co-op margin.

The indicative milk price is derived from Ornua monthly product purchases, servicing year-round market demand, which are not fully aligned with seasonal milk production and payment. Individual member co-op product mixes will differ from the Ornua portfolio.

Describing the PPI as “an internationally recognised index over the past decade”, Ornua concluded by stating that it is fully committed to ensuring all elements of the PPI conversion to an indicative milk price remain relevant to ensure the integrity of the Purchase Price Index”.