EU dairy co-operative Arla recently launched a membership package to its 1,600 Arla Foods Milk Partnership (AFMP), Arla direct and Milk Link direct suppliers. Gemma Mackenzie finds out what producers need to consider before signing on the dotted line
Co-operative membership is a long-term commitment and not for the faint hearted – producers signing up must fully buy into the co-op concept and Arla’s ethos of “one price for all”.
Joining a co-op isn’t likely to appeal to a dairy farmer nearing retirement or someone just wanting to “give it a go”, says NFU chief dairy adviser Rob Newbery.
“When farmers are most disappointed is when they leave,” he says. “You have to be really convinced by the co-op and that Arla’s the right co-op for you.”
Anyone joining the co-op must find out how their investment will be repaid after exit, says Ian Powell, director of The Dairy Group.
Farmers joining the Arla amba co-op need to be aware their milk price will be influenced by the EU marketplace, and as a result, exposed to more volatility, says Mr Newbery.
“The EU market and the Arla price has been characterised by its volatility and farmers should expect the price to drop below other farmers’ prices in the UK but also to rise above it. It will be a more volatile price but you will probably be better exposed to the highs of the market,” he says.
Analysis from The Dairy Group in January this year, found the Danish milk price had outperformed the average UK price by 15.2% over the past 12 years.
Return on capital invested
AFMP farmers who choose not to join the co-op and instead go on to a direct supply contract or move to another milk buyer, could be left disappointed when it comes to return on individual investment in the business.
Fully paid-up farmers have invested 2p/litre in Milk Partnership Limited, the investment company of which all AFMP farmers are members, since 2008.
Upon exit from MPL, 1p/litre will be paid out to farmers within 60 days; however the second 1p/litre is accounted for as shares in MPL, with their value dictated by an exit formula.
The original value of the shares was 71p but it is anticipated the shares will be valued at 30p for exiting farmers. This proportion of investment will be paid in three equal instalments on the first business day after 1 January in 2017, 2018 and 2019.
Tesco and Sainsbury’s aligned dairy producers are among those in Arla’s milk pool who have been offered co-op membership.
Upon joining the co-op, these farmers will agree to be paid the same price as all other co-op members and all retailer premiums, after the deduction of costs incurred, will be shared equally among other co-op members.
These farmers will have to think long and hard about whether they want to move away from a cost of production based contract, says NFU Scotland milk policy manager George Jamieson.
“If you are a retail direct supplier, do you want to risk losing that comfort blanket? We cannot deny that these guys have had a better price than the rest,” he says.
As with any new contract, producers must check the contract and pricing schedule to ensure it suits their business.
“Check if the new contract suits your milk profile and the quality of your milk,” says Mr Jamieson. Pay close attention to bactoscan, somatic cell count, fat and protein requirements, he says.
In addition, direct supply producers must remember by joining the co-op they will forego their three-month notice period and enter into a 12-month contract.
Arla also plans to roll out its own Arlagarden farm assurance scheme from 2016 onwards.
“Farmers would be sensible to look at what the implications are of that,” says Mr Jamieson. “I don’t think it will be a major issue but if I was a farmer I’d want to know what that entails in case I need to invest in my business to meet it.”