Farm Ireland

Wednesday 18 July 2018

There's only one winner in the milk price casino

ICMSA's Edmond Phelan
ICMSA's Edmond Phelan
Darragh McCullough

Darragh McCullough

An interesting analysis dropped in the email last Friday evening from the ICMSA.

They looked at the fluctuation in dairy prices at both the farmgate and on the supermarket shelf.

While the farmgate prices have oscillated by over 30pc since 2012, supermarket prices have only varied by 12pc in the case of cheese, 9pc for milk, and 7pc for butter.

It could be argued that this is ok if the average price throughout the four-year period was consistent, but again we find the farmer is falling behind.

While the average price for the litre of milk dropped by 5pc compared to the January 2012 base, the average retail price for cheese crept up 2pc, while butter and milk stayed static.

We should not be surprised that retailers managed to protect their margins by preventing prices slipping over time ­­- they are the price setters after all.

And farmers won't like being told that their sale price is gradually sliding as costs rise relentlessly. However, this tends to be the nature of primary production.

As science delivers additional efficiencies in terms of breeding, feed production, and data capture, producers tend to slug it out until the most efficient are left standing.

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More worrying is the market's determination to ignore the cost associated with the new financial management frontier of increasing volatility.

Teagasc research shows that milk prices are now four times more volatile than a decade ago.

The theory is that the producer salts away a rainy-day fund during the good times, but the reality is that you can never save all the extra gains per litre or per kilo to fully compensate the losses during the bad times.

Even a cursory glance at interest rates will explain that. The interest your savings will accrue during the good times will always be less than the interest your borrowings will cost during the kind of price troughs that dairying is currently enduring.

And try keeping cost inflation under control during the good times. Every farmer knows that the first thing to increase when food commodities bounce is not the bank balance, but the fertiliser and fuel bill. So managing a 39 point swing in your income carries with it fixed costs.

As the ICMSA analysis highlights, we can be sure that the retailers are making a margin on their dairy products even when farmgate milk price is high. So where are the extra profits going now that raw milk prices have crashed?

No wonder ICMSA president John Comer describes it as a "casino rules situation, where the house (read retailer) always wins".

Indo Farming