The Ornua Board today approved two changes to the Ornua Purchase Price Index to ensure the Purchase Price Index remains an accurate base commodity reference and to bring greater transparency to how Ornua returns market premium.
- As the Purchase Price Index is a measure of Ornua’s market performance on commodity products it should only include base commodities. As such, previously included market premium payable by Ornua will be removed and expressed alongside the Purchase Price Index.
- In addition, going forward the annual Members’ Bonus will be paid monthly and combined with the market premium. Together, they will be called the ‘Ornua Value Payment’ and reported as part of the monthly Purchase Price Index communication.
In addition to these changes, the estimated Member Co-op milk assembly and processing cost, used to convert the Purchase Price Index (for the Ornua base commodity portfolio of products) to a net cent per litre (cpl) indicative milk price, will move from 6.5 cpl to 7 cpl. This increase was advised by Member Co-ops and validated by an independent review. This adjustment does not alter the Purchase Price Index or impact the prices Ornua pays for products. It does impact the indicative milk price calculation. The indicative milk price continues to be based on the industry standard solids expression of 3.6% Fat, 3.3% Protein.
This estimated Member Co-op milk assembly and processing cost is separate from Ornua’s costs and relates to the cost of collecting milk and processing it into dairy products by the Member Co-ops. As before, this cost estimate excludes:
- Supply chain costs (e.g. logistics, storage, insurance, selling and marketing)
- Member Co-op processor margin.
Background to Member Co-ops estimated milk assembly and processing cost adjustment
- The Purchase Price Index was established in 2011 (and works off a base year of 2010). It is a measure of the monthly gross value paid to Member Co-ops for the Ornua product portfolio. In the ten years since it was established, new cost implications have arisen that need to be considered to maintain the Purchase Price Index’s relevance when converted to an indicative milk price. As a result, late last year the Ornua Board agreed to a review of the Member Co-op milk assembly and processing cost used to convert the Purchase Price Index into an indicative milk price.
- Investment has facilitated significant milk output growth which has delivered scale benefits and contributed to fixed cost recovery. However, Member Co-ops have highlighted that it has not contained new and increased costs that they have incurred over the past ten years. Notable increases include seasonality inflated depreciation, maintenance, and compliance costs. Customers are demanding greater standards in terms of quality and traceability leading to new regulatory, environmental and sustainability costs.
- In addition, borrowings undertaken by Member Co-ops to fund the expansion of the industry post quota, require greater margin retention to meet strict banking covenant requirements.
- The estimated processing cost at 7cpl does not include Member Co-op margin.
The indicative milk price is derived from Ornua monthly product purchases, servicing year-round market demand, which are not fully aligned with seasonal milk production and payment. Individual Member Co-op product mixes will differ from the Ornua portfolio.
The updates will come into effect from the July Purchase Price Index, which will be published in August.
The Ornua Purchase Price Index has become an internationally recognised index over the past decade. Ornua is fully committed to ensuring all elements of the Purchase Price Index conversion to an indicative milk price remain relevant to ensure the integrity of the Purchase Price Index.