Q&A: First Milk payment delay explained

Farmers Weekly’s business reporter Charlie Taverner looks at the reasons behind the producer co-op’s decision to delay milk payments.

What has happened at First Milk?

At the end of last week, dairy co-op First Milk told its members:

• The fortnightly milk payment they were expecting on Monday (12 January) was going to be delayed until the 26 January. For an undecided period of time, all later payments will also be pushed back two weeks
• The capital contribution to the co-op that comes off each member’s milk cheque was to be raised from 0.5p/litre to 2p/litre for milk supplied between December 2014 and August 2015
• The already announced February price cut would be softened by 1.1p/litre

See also: First Milk delays payments by two weeks

Why has it had to do this?

First Milk had £10m cashflow hole that it urgently needed to fill. Two things caused this.

The first was how it pays farmers. In spring 2014, when milk processors were fighting for farmers’ milk, all the processors held up farmgate prices even after their market returns were falling.

The dairy voluntary code has meant First Milk had to set a farmgate price 10 weeks before it knew that milk’s market value, a recipe for trouble as returns plunged.

Second, the value of its cheese stocks slid dramatically as the market crashed. First Milk’s ability to borrow from its banks has shrunk, as the value of those stocks provides security for its bank borrowing. The business could have tried to borrow even more, but the cost of that was deemed too high and officials wanted to draw on co-op members instead. First Milk has said these changes should stabilise the business heading into the spring flush and the rest of 2015.

Is this a good or a bad thing?

It is awful for farmers’ own immediate cashflow, especially if they had big feed or other bills to pay this week. The changes also amount to yet another price cut and, once capital contributions are deducted, First Milk members will now receive less than 20p/litre. Effectively First Milk is getting its farmers to bail it out, to keep the business stable and able to buy their milk.

However, it is important the directors took some action. With milk prices on the floor and no processors recruiting new farmers, it is vital that the 1,100 First Milk members/farmers have someone to buy their milk. What’s the alternative? First Milk is an important outlet and needs to still be around and able to pay out to farmers.

Otherwise those producers would face very tough decisions themselves as they scratched around for another buyer. And if, as is sometimes mooted, the co-op is to be bought or merge with a competitor, it needs to be in decent financial health.

Is this kind of thing allowed?

First Milk should give 90 days’ notice to change contract terms, but it can make shorter-term decisions in exceptional circumstances. The NFU has advised farmers to take independent legal advice if they think the recent moves are a fundamental breach of contract. First Milk’s board is allowed to up the capital investment targets, however.

The changes certainly stretch the co-operative ethos to its limit. Few First Milk members will be making money and now they must take an extra, heavy hit, for the sake of their joint business and at extremely short notice.

Will First Milk be coming back for more cash from members?

First Milk has said firmly the changes will solve the short-term cashflow issues and it is not planning to push back payments further. But the co-op has vaguely hinted it is working on other initiatives to improve its cash position and better link what farmers are paid to customer demand for products. Wait and see.

What’s the alternative for First Milk farmers?

Farmers could hand in their notice but they would have to wait 12 months to leave and five years to get back the money they invested.

Even if they could leave now, they would join the hundreds of British farmers already searching in vain for new contracts in the spring. It raises the question: Is a low-price, but safe home for your milk better than no home at all?

What’s going to happen in the spring flush that First Milk is supposedly preparing for

First Milk stressed four times within its statement the pressure it will face in the spring, when UK milk volumes could hit a 20-year high. Processors of all sizes will be fighting to find the best-value homes for all their milk. The Global Dairy Trade auction has crept up 5% in the past month, but that’s from five-year lows.

Traders and analysts still stress the market is fundamentally weak. More turbulence and more cuts to farmgate prices could lie ahead.

How secure is First Milk’s future?

First Milk directors framed the news as a “new beginning”. In a video to members, farmer and board vice-chairman Nigel Evans stressed the issue had been about cashflow and the business remained fundamentally sound.

But still there’s uncertainty, particularly when First Milk members are paid much lower farmgate prices than its competitors. A weakness the co-op can do nothing about is its milk field, made up of smaller-than-average dairy farms spread thinly across Wales, the North West and Scotland particularly.

That makes milk collection more expensive. Another big worry is the co-op being late in filing its accounts for 2013-14. However, the headline figures show turnover and profit before tax were up, and debt was down. Of course, that was the financial year to 31 March 2014, before dairy prices started to plummet.

What can First Milk members do if they are worried?

The co-op has told its members to get in touch with their farmer directors, area representatives and farm enterprise team if they have questions about last week’s changes. The most important thing is they try to go to the First Milk AGM on 30 January in Merseyside.

Full financial records will be available by then and it will be the chance for members to hold the management and directors to account. It is their business, after all.