7 June 1996

MILK LEAGUE TABLE DOUBTS

When you study milk supply league tables, what you see may not always be what you get. Peter Grimshaw examines the Milk Marque deal in more detail

LEAGUE tables available to most milk producers fail to give the whole picture when comparing one milk contract with another, according to Neil MacFarlane, Milk Marque membership manager.

"They are at best a compilation of information, either from milk statements or the trading terms of various organisations," he says. "There are fundamental differences between true co-ops and the dairy companies that purchase milk direct from farmers."

He says the main difference is that co-ops make final payments at the end of their trading period, whereas dairy companies are more likely to make once-and-for-all payments.

Milk Marque runs its own relatively confidential league tables. Mr MacFarlane says the data they contain backs up his views on the broad brush impression provided by more freely available comparisons.

In particular, he pinpoints three areas that are easily overlooked: Retrospective payments, other financial benefits and quality variations.

Many league tables are calculated simply on constituent values, modified by seasonality adjustments and the deduction of transport charges.

"This is misleading in two respects," he believes. "It overlooks both the interim bonus and profit distribution payments made by Milk Marque."

Mr MacFarlane explains that, unlike a dairy company, Milk Marque cannot take a view on pricing and then, depending upon the way things turn out, take the effects in the bottom line.

"We prefer to pay out what weve got rather than speculate on the future. Therefore our bonuses and profit distribution have to be retrospective, and will not figure on the normal league tables."

This year, the interim bonus of 0.3p/litre is expected to be supplemented by a distributed profit of at least 0.2p/litre. Both are paid on all litres sold in the year, so for a 100-cow herd averaging 5500 litres they add up an extra £2750.

Individual producers can further boost their bonus.

Most – about 85% – of Milk Marque members qualified for a somatic cell count bonus of 0.2p/litre in the past year, although this was abolished from Apr 1.

Furthermore, says Mr Mac-Farlane, about a third of members have their milk collected every other day, and for this they receive an average of 0.2p/litre benefit.

Those who qualify on both counts can therefore add 0.4p/litre to their bonus and profit distribution, a total of 0.9p, of £4950 for the 100-cow, 5500-litre herd.

That, says Mr MacFarlane, is what Milk Marque members get for being part of a large co-operative.

But he claims that this large scale organisation carries further benefits. Many producers look upon the 0.16p/litre levy they pay back to producers who did not join Milk Marque on vesting day as a penalty. Mr MacFarlane sees it as an investment. "It will increase their stake in the co-operative after Apr 1997, and is therefore a benefit," he says.

The calculation of quota threshold probably also gives a bonus to Milk Marque members in years of surplus. This is because a greater number of the co-operatives producers tend to deliver at or below quota, even in a surplus year. Mr MacFarlane attributes it partly to better management, based on regular and accurate information.

Also, he says, a larger proportion of Milk Marque membership plan to retire in a few years and they are less inclined to go flat out for maximum production.

This allows the super-levy to over-producing members to be discounted to a greater extent than it is for groups in which a larger proportion of the members are subject to levy.

"Our threshold tends to be larger by about 1%," he says. "This year it gives a saving in levy payment of some 0.3p/litre, spread over members total production."

A few Milk Marque members find themselves beneficiaries of the organisations free antibiotic insurance scheme. This entitles anyone who realises that they have unintentionally released milk containing antibodies into the tank to claim complete recompense, up to twice a year. According to Milk Marque, it is worth a further 0.15p/litre on all litres produced.

The total hidden benefit can therefore theoretically be as much as 1.51p/litre, or £8305 for the nominal 100 cows/5500 litre herd.

Finally, Mr MacFarlane points to a small, but significantly favourable advantage that Milk Marque members appear to enjoy in sampling and testing results for their milk constituent values. While protein results for its producers are close to the average for all companies, their fat content is 0.06% higher than average.

Delicate subject

"It is a small figure, but equivalent to 0.16p/litre for all litres, and obviously much more than that when compared with some companies," he states. He also admits that it is a delicate subject and difficult to clarify because there is little public information.

Altogether, he claims the extra benefits added up to between 1.22 and 1.66p/litre in the 1995/96 milk year.

There is also no joining fee for Milk Marque membership, a cost that Mr MacFarlane says can be easily overlooked in other contracts.

Milk Marque has on its computers a detailed analysis of competing milk payment packages, but for the present is keeping the information to itself. It is in any case a moving picture, and by the time it is complete, the terms of contracts will already have changed.

For example, it is impossible to judge the net effect of a Milk Marque contract until three months after the year end, when the profit distribution payment is made. The league tables have by then moved on.


UNDER THE MICROSCOPE


Milk Marque

&#8226 Milk price league tables overlook retrospective payments, other financial benefits and quality variations.

&#8226 Calculation of quota threshold gives bonus to members in years of surplus.

Competitors

&#8226 Milk Marque price advantage certain to be eroded due to high overhead cost of its commitment to collect all milk.

&#8226 Co-ops – not necessarily most efficient in cost terms.

"We dont give a lot of credibility to the milk league tables," says Neil MacFarlane. "They are increasingly discredited as time goes on, for a variety of reasons."

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