Average family will spend over €600 on milk before end of year

Milk is one of the ever-present staples in the Irish home and the average family will spend more than €600 on the stuff between now and the end of the year.

The scrapping of EU-imposed dairy quotas after more than 30 years has seen dairy farmers getting ready to ramp up production from the beginning of next month.

This massive milk shake-up, combined with increased production due to benign weather conditions across Europe last year and falling demand globally, has seen dairy prices dropping sharply in recent months.

But is this good news for Irish dairy consumers?

The answer is most likely no and the changes probably won’t make a whole lot of difference to the prices paid in supermarkets, because the milk we drink in Ireland makes up a very small fraction of the milk we produce.

Liquid milk production made up just 8.4 per cent of the Republic’s total milk output in 2014 with the rest ending up as an ingredient in everything from cheese and cakes to sweets and infant formula, which is exported around the world.

While milk production across the board might increase quite significantly this year and next, the liquid milk market is pretty much static in terms of consumption and sales. Increases in the supply of creamery milk – the milk which is not liquid – will be targeted to export markets.

So how much is a litre of milk? When it comes to production, the per-litre price has been on a rollercoaster in recent years.

In 2006, the cost of milk was 30 cent. It climbed to 45 cent two years later, before dropping back to lows of just over 20 cent in January 2009.

Spread over the 12 months of last year, the average price was 38 cent. As the curtain comes down on the quota era, the cost of producing a litre of milk hovers at about 33 cent.

Dairy farmers and their representatives in the Irish Farmers’ Association say they make less than 2 cent profit on each litre of milk they produce. If it costs 33 cent to produce a litre, this means they are selling a litre to one of the eight main processors doing business in the Republic for about 35 cent.

Liquid milk is priced differently. Not all the co-operatives are involved in production and they all have different pricing systems, but they tend to start with a creamery milk price base and add a premium over the winter months. Farmers who produce milk for drinking have a contract to supply the same daily amount and the liquid season runs from April to March, with the annualised average price paid over the past 12 months 36 cent plus VAT.

If the likes of Arrabawn, Kerry Group and Glanbia are paying that little for a litre, then how does a carton of branded milk from the Glanbia-owned Avonmore cost €1.24? How does the price jump in excess of 400 per cent from udder to kitchen table?

It is hard to answer that question because of the lack of transparency in the retail sector.

The number of deals struck between milk processors and retailers are a closely guarded secret and there are very few leaks. One thing is clear, however – neither the consumer or the farmer is on the winning side.

Even if the specialist producers who milk their herds year-round to ensure continuity of supply get 40 cent a litre, that still leaves 84 cent of the litre of Avonmore to be divvied up between the processors and the retailers.

But that is if you are talking about a market-leading branded product.

Those margins fall significantly when it comes to the own-brand sector. A litre of milk carrying a recognised brand name in Tesco costs about €1.24. An own-brand alternative sold by the same retailer, or indeed any of the other big retailers who engage in price matching when it comes to milk, costs 75 cent, a saving of 49 cent.

Avonmore milk comes from co-ops owned by Glanbia as does the Tesco milk. So, unless one herd of cows is being fed a special sort of grass, there can be absolutely nothing to separate the two products – except 49 cent.

There is a reason the branded products sell for so much, however. A litre of milk, whether it ends up own brand or not, costs the same to produce. And over many years a balance has been struck by the co-ops between branded milk and own-brand, with the branded milk effectively subsidising the own-brand alternatives.

Industry insiders say that while retailers use cheap milk to get customers through their doors and are always willing to cut the cost of their own-brand milk to compete for market share, they are not prepared to see their margins cut. This means the processors have to take the hit.

And if the processors take a hit, then so do the farmers.

Farmers supplying liquid milk then find it hard to justify their continued existence – and many will look at the creamery sector as an easier, and more profitable, sector to be in.

If they were to switch, fresh milk would not be so easy to come by, particularly in the winter.

In a scenario like that – one which exists across much of Europe, where long-life UHT milk is the norm – then we will all be the losers.