Alarm bells rang loud in the beleaguered dairy industry last week, as dairy co-op First Milk announced it was deferring payments to its farmers.

The move sparked fears farmers could be put out of business. So how serious is it, and what are the long-term prospects for First Milk and its farmers?

First Milk members discovered last Thursday (8 January) that the latest twice-monthly payment to farmers - scheduled for 12 January - would be pushed back to 26 January. All payments thereafter will also be deferred by two weeks until further notice, meaning suppliers miss a payment, though First Milk says it intends to reverse the deferral “in due course.”

The processor also partially reversed its latest farmgate milk price cut but increased its member levy requirements for capital investment from 0.5ppl to 2ppl - in effect cutting the price farmers receive for their milk. 

First Milk says this “fundamentally solved” the financial situation it had found itself in, but dairy experts warn these moves could nevertheless prove problematic. “In the end, the farmers will be the ones who pick up the tab,” says one, adding the payment deferral will disrupt farmers’ own cashflows.

He warns First Milk could lose the confidence of customers, and also be forced to pay more for inputs such as packaging and farm supplies. “They will have to pay top dollar and lose credit facilities - that’s the environment they will now have to operate in.”

First Milk has moved to quash initial concerns about confidence. Writing in The Grocer this week, CEO Kate Allum says major customers are standing “shoulder to shoulder” with the co-op and are supporting the action it’s taken.

A question of confidence

This is an important signal, but the co-op could still face a battle in holding on to its farmers. 

One industry source points out many farmers’ contracts will be coming to an end over the next six months, and the deferral of payments could lead to a fall in member numbers.

The National Farmers Union has already expressed “serious concerns.” Chief dairy advisor Sian Davies says the union has met with First Milk, and is urging members to attend four upcoming meetings arranged by the co-op. “We were surprised by the announcement but understand the management’s reasoning,” she adds, stressing First Milk “need to be clear with their members” about the situation. 

Maintaining farmer numbers - and milk volumes - will be crucial, says the industry source, not least so First Milk can keep up supply to Adams Foods, which last February agreed to take control of packing and marketing First Milk’s cheese.

It would be somewhat ironic if First Milk ended up facing a shortage of milk given many of its current troubles (and troubles in the dairy sector more generally) have been brought about by oversupply, which has pushed down prices.

Agriculture specialists Dodd Accountants also suggest First Milk has been hamstrung by the voluntary code on farmer contracts, which insists any price changes should be announced to producers at least 30 days in advance. “This is great when markets are rising but, as we all know, over the past year the price has consistently fallen,” says Dodd partner Rob Hitch.

One thing is certain: the dairy industry will be closely watching what happens at First Milk. And if markets remain volatile, pricing and contract flexibility may well become a recurring debating point in 2015.