First Milk new pricing system explained

Published 28 May 15

Next week will see the introduction of a new payment system by First Milk (FM) which involves a change to the number of pricing schedules the co-op offers and the way prices are determined. The change is part of the continued efforts of FM to cut costs and improve cash flow.

At present, to all extents and purposes, FM have two contracts - a balancing contract and a manufacturing contract. The latter gives farmers a choice of being paid on milk solids or constituents. Both contracts use an A&B pricing system each offering an ‘A’ price based on the returns from the co-op’s core markets. This applies to ‘A’ volumes, set at 80% of a member’s average production over the past two years (e.g. the May 15 ‘A’ price will be based on a member’s average milk production for May 13 and May 14). The ‘B’ price covers the rest of milk produced and is based on spot trade. This means it is initially estimated, then confirmed in arrears. All members receive the same ‘B’ price and will continue to do so with the new pricing system.

However, this two-horse system for ‘A’ prices will change from 1 June 2015. FM will introduce 7 different contracts with 7 different ‘A’ prices, broken down into 3 balancing and 4 manufacturing regional contracts. Each contract will offer an ‘A’ price determined by the products the milk is used for and the returns from those specific markets, rather than only the co-ops core markets as before. The range between estimated high and low ‘A’ prices from 1 June is nearly 2ppl. However the changes, at present, will not alter FM’s league table position radically.

What does this mean?

Presently the co-op averages payments within the balancing and manufacturing contracts respectively which could result in them paying a slightly higher price for milk that may actually be achieving lower returns. With the change, FM will be able to pay for milk in accordance with returns from specific markets it is used for. Therefore, for instance, those FM farmers supplying a market which is rising should see their milk price rise quicker than those who do not. In addition, farmers will be able to see the returns from the markets their milk is involved in more clearly, which could provide more transparency.

On the flip side, the change could create a divide within the co-op between members as where they are located could mean they obtain a slightly higher or lower milk price rather than all members being “in it together”. Therefore, the new pricing system could result in some members feeling more financial pressure, whilst some farmers closer to factories (e.g. near Haverfordwest) and supplying higher value markets could feel some limited relief. Exactly how the affected farmers react to the news will depend on the recruitment activities of other processors, market developments and their level of “co-op loyalty.”