What Ireland can learn from Fonterra

COMMENTFonterra sells a lot of its dairy products through Global Dairy Trade (GDT) Auctions. The revenue generated from dairy produce sales in GDT is only one factor, albeit an important one, in their milk pricing strategy.

Fonterra has published a 75-page manual (yes, 75 pages!) to explain its milk pricing to farmers. Condensing this down to a single sentence, Fonterra’s milk pricing can be summarised as follows;

Product Revenue – Overhead & Operating Costs – Capital Recovery = Aggregate Milk Price

Coupled with this, the New Zealand based co-operative publishes an annual ‘Milk Price Statement’ document, which outlines how they have calculated their Farmgate Prices for the milk season that has passed.

Fonterra releases its initial yearly forecast ‘Farmgate Milk Price’ in May every year, prior to the commencement of their milk season.

This milk price is re-adjusted over the year and the revised price is retroactively paid across the entire milk supply of the supplying farmer. The final price paid to the farm is often decided two to three months after the end of the season. Again, the final price for the year is retroactively paid across the entire milk pool that the farmer supplies the co-op.

On May 29 Fonterra of this year announced an opening forecast Farmgate Milk Price for their 2013 / 2014 season of NZ$7.00 per Kg Milk Solids. At todays exchange rate this has a Euro value of €4.29 per KG of Milk Solids.

This forecast price was estimated upwards by the co-operative in further announcements occurring in July, August and September. Published in September, the current Farmgate Milk Price stands at NZ$8.30 or €5.09 per KG of Milk Solids for the 2013 / 2014 season. Presently, the majority Irish co-ops have priced milk at between €5.00 to €5.20 per KGs of milk solids.

What are the merits for the Irish Dairy industry towards adopting a yearly pricing model similar to Fonterra?

Click Fonterra Milk Price – Charts – October 2013 for supporting charts. 

Consider the following three reasons for moving away from a monthly milk pricing system in Ireland:

  1. Would a 12 month forecast milk price help Irish dairy farmers plan their businesses better, and encourage banks to lend more if they were to see clear short to medium term milk price estimates?
  2. With all the talk about risk control and volatility management tools post 2015, why do we still debate milk prices in Ireland on a monthly basis?Producing innovative products and adding value means entering into medium to long-term supply contracts and long-term partnerships with key customers. Within Fonterra many of their products are sold on average three months prior to shipment. Can the Irish dairy industry drag itself away from debating spot market dairy prices and start setting milk prices or forecasts on a quarterly, bi-annual basis or annual basis?
  3. With the abolition of quotas just around the corner any distractions from key strategy discussions at monthly co-op board meetings is counter productive. In the grand scheme of things, having a high quoted milk price in the middle of winter will amount to little if the peak month milk prices are a cent or two per litre lower.

Consider the following facts:

  • Only five per cent of Irish milk solids are delivered for processing in December and January
  • >25 per cent of Irish milk solids are processed in May and June

Tom O’Callaghan has 15 years of global experience in the agri-food sector, including dairy, meat, consumer package goods, bio-fuels and farming-owned co-operatives. He is currently focusing on emerging area of improving efficiency through agri-analytics and is advising on agri-food and farm efficiency expansion across Eastern Europe and former Soviet Union countries. He is also the ex-ceo of ICOS.