Competition could mean end to dairy seasonality payments

With competition for milk hotting up around the country, buyers are doing everything to charm producers and attract them with new incentives and price bonuses.

While attention is being focussed on the main headline milk price, there is a danger seasonality incentives and deductions will increasingly be watered down, and this will have a marked effect on the efficiency of the industry going forward.

That’s because big dairies – both liquid and cheese – are most efficient when they get a similar volume of milk going through them every month.

However, with the current market drivers, a move to more spring production and away from level supply is a certainty. That’s because seasonality deductions in the spring have reduced over the years and the incentive to produce level supply has diminished.

And now the recruitment battle has begun, it is an absolute given that processors will not risk losing suppliers over harsher seasonality schemes. Thus we are faced with a situation where the processors want level supply, but either won’t or dare not reward all-year-round suppliers for the extra cost and workload that goes into it, nor penalise heavy seasonal producers for not giving them the production profile they require.

Peak-to-trough incentives

Back in the days of the Milk Marketing Board there was about a 4-5p/litre differential between peak and trough incentives.

Given the milk price was about 18p/litre, this means there was a potential swing of 8p/litre (from 14p/litre in the flush to 22p/litre in the trough). That’s a swing of 8p on 18p/litre – or nearly 45%.

If a similar percentage swing was applied today on a milk price of 30p/litre then the seasonality swing would be 13p/litre between peak and trough – a 6.5p/litre differential. Clearly it is nowhere near that, and such a range just isn’t going to happen in today’s market.

Although there is currently a myriad of different seasonality schemes, we estimate the peak-to-trough differential is probably near to 2p/litre these days – a seasonality swing of about 15%.

According to an analysis of our figures two to three years ago, the additional cost of level supply over spring production was 4p/litre. With the recent hikes in feed and fertiliser prices that is probably nearer to 5-6p/litre now. No buyer came anywhere near to paying a 4p/litre premium before, and with the competition for milk being what it is, they certainly won’t pay 6p/litre.

The net result of this will be more milk produced in the spring, at the same time that more will be produced in Ireland due to its ambitious expansion aspirations. The effect this will have on the market at that time of year is unclear. But it will hardly be bullish.

Both Arla’s and Muller Wisemans’ investments in butter should help balance surplus spring production and iron out some volatility, but the fact remains that the flatter the supply profile, the more efficient the industry will be, bringing better prices for farmers.

Yet we are increasingly kissing goodbye to meaningful seasonality incentives and penalties that ensure a flatter profile, and are failing to pay enough to reward level supply.