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Friday 2 December 2016

New milk levies of up to 30c/l facing dairy farmers

Proposed expense would fund expansion of industry output in years in come

Darragh McCullough and Caitriona Murphy

Published 08/02/2011 | 05:00

A milk levy of up to 30c/l is among a raft of new charges under discussion to fund the expansion of the dairy industry in the coming years.

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The levy, which would be payable over several years, would be calculated on milk supplies above a suggested reference period of 2007-2009.

While most dairy farmers already pay almost 1c in levies for every litre of milk that they supply, it looks increasingly likely that every dairy farmer planning to expand output will be paying multiples of this in the future.

Among the new levies being proposed is an innovation fund levy to be applied to milk supplies, on the back of buoyant markets. Butter price jumped by 10pc last month, according to Food and Agriculture Organisation (FAO) data. EU butter price is now nearly 40pc higher than the same period last year and market analysts remain extremely bullish about dairy markets as concerns grow over tightening supplies.

"Now is the time to drive more expenditure on innovation," said IBEC's director of dairy policy, Michael Barry. "If we want to replicate what the Finns have achieved with their Valio co-op and get into higher-value products, then we need to seriously reassess how much money we put aside for research and development," said Mr Barry. He contrasted the 1pc of turnover that Valio channels into R&D with the average levels in Ireland of 0.5pc. "This is an ideal time for the dairy industry to put aside some money to tackle this issue," he said.

An even thornier issue is building around who is going to bear the brunt of funding the 50pc expansion target for the dairy sector. There is a growing belief that Glanbia is facing the biggest investment requirement to cope with extra milk supplies. Many of the other dairy processors will be able to provide additional capacity at little or no cost.

Despite this, most co-ops are planning to levy suppliers bringing new or increased volumes of milk to their facility with a one-off payment of 1-2c/l, according to ICOS's dairy policy executive, TJ Flanagan.

"This would be equivalent to what the existing shareholders have invested on a per litre basis in shares in their co-ops," he said.

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However, a much stiffer levy of anywhere from 16-30c/l spread over more than 10 years could be facing farmers who plan to start or increase their supplies into processors that will require significant investment, according to Mr Flanagan. This would be used to cover processing facilities, along with working capital, the development of routes to market and the acquisition of distribution channels.

This is similar to the system adopted by Fonterra to cope with expansion in New Zealand over the past 10 years. Suppliers can then redeem their investment in the form of coupons or payments when they decide to retire from milk production.

Mr Flanagan said that ICOS's view is that the expansion should be funded by the farmer as much as possible. "That's the co-op principle because it guarantees suppliers the maximum say over how their milk is managed," he said.

However, he cautioned that existing suppliers should be wary of over burdening new entrants with the costs of any expansion. "If it is going to cost a lot of money, it is going to make it unattractive for new entrants to get involved," he said.

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