Mike Brady: Dairy co-ops need to to become more transparent on milk pricing strategy

Agricultural consultant, Mike Brady.
Agricultural consultant, Mike Brady.
The decision to increase or decrease milk prices should be communicated well in advance to every supplier
Mike Brady

Mike Brady

The first lesson of agricultural economics is that farmers are price takers not price makers.

There is a long chain between the farmer and the ultimate consumer of food produce.

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At first glance one would think the farmer holds the key as they are the primary producer and owner of the food, but the economic reality is quite the opposite; the farmer appears to have little or no power when it comes to price making.

The relentless increase in farm sizes globally is adding to this problem, where the formula is lower margins multiplied by larger scale in land or livestock numbers. This is squeezing out smaller full-time farmers.

Brazilian arable farms of 100,000 hectares, American dairy farms with 10,000 dairy cows and Australian cattle and sheep stations with 50,000 head - this is farming at a corporate level, capitalism at maximum speed and it is showing no signs of slowing down.

Presently beef farmers in Ireland are in the eye of this global storm.

The poor prices being paid by processors, are blamed on supply and demand and, of course, Brexit.

Pushing beef margins further into the red is causing some disruption in the beef market, but beef farmers are still selling cattle.

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So, what exactly is the problem with beef price? Is it supply/demand, Brexit or are we simply just not price competitive with our international rivals when it come to selling commodity beef?

The answer is probably a combination of all three.

Dairy farmers are also price takers, but in contract to beef farmers Irish dairy farmers margins are certainly not in the red.

Two good years of milk price in 2017 and 2018 have put their finances in order, so the complaints have revolved around the non-financial matters such as drought and workload rather than milk price.

The global market for milk appears to be on an upward trajectory when one looks at recent publications of the various milk price indices.

Yet, many processors announced reductions in the price paid for March milk.

This has largely gone unchallenged and continues to be overshadowed by the beef crisis.

Again, the question must be asked: why milk price cuts by some but not all milk processors?

Some of the dairy co-ops have an unwritten policy of holding back a little on milk price paid when prices are good so that they can shore prices up when they are on the floor.

Perhaps this explains some of what's at play.

However, one can't but help imagining the conversations at milk processor management meetings when price is relatively strong in the markets and a decision must be made on the price paid to farmers.

The 'will we or won't we' debate must be coloured by potential projected profits, resulting bonuses and may other non-farmer issues.

This is where a well composed strategic plan with a clear mission statement, values, key priorities and strategic goals comes into its own for a processing business - co-op or plc.

The decisions made by management, presented to the board for approval, are a lot smoother when everybody is on the same track with a clear focus on the end goal.

Surely a decision to increase, hold or decrease milk price should be communicated to every supplier well in advance with that crystal-clear reasoning, based on the strategic plan from that particular business.

Instead there seems to be a monthly stand off at this time of the year, with the big co-ops waiting to see who will put out the bad news first and then the rest follow. Implicit in this is the false reasoning that the damage will be limited because they did not go first.

Farmer suppliers are intelligent people.

If they know and understand the aims and goals of the milk processor in which they are also most likely are shareholder, then milk price announcements should not have all the mystery and drama presently surrounding them.

Good milk prices should add value to a dairy farmer by improving the net share value of the milk processing business in which the farmer supplier has a shareholding. Clarity and communication are essential.

Mike Brady is managing director at Brady Group agricultural consultants & land agents; email: mike@bradygroup.ie

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