Mr. John O'Gorman:

The Chairman's opening remarks have demonstrated he has a very clear understanding of where we are at the moment with the fixed milk price contracts in place. I reiterate co-operatives are member-owned organisations controlled by members and are in place to support them at every twist and turn. As co-operatives we fully understand and empathise with the members who have a high percentage of their annual milk supply in fixed milk price contracts. I wanted to reiterate that.

We are in an unprecedented situation with the significant input price inflation that has taken place. The Chairman has gone through the background so I will not belabour it too much but members were looking for a volatility management tool and the only option really open to milk processing co-operatives was to have back-to-back contracts with our customers. It was very much hanging on our ability because the co-operative itself could not take on the risk of a fixed milk price contract, so we back to back that with our customers. As the Chairman correctly said, the early iterations of the milk price contracts had a ratchet in them linked to the major input costs at farm level, namely, fertiliser, feed and so forth, but they were removed. Farmers did not like them as they felt they were tied to doing business with the co-operative by having them in there. That could have been a valid argument but the co-operative did not have the wherewithal to lock down a third party from a supply point of view so we were unable to continue to facilitate them.

We again reiterate and reaffirm our understanding and empathy of those milk suppliers and restate that the commitment of the co-operatives and the principle of the co-operative movement is to work with and support members of the co-operative, especially those in financial hardship. We must acknowledge the events of recent months have been unprecedented. They were caused initially by Covid and supply-chain disruption and so forth and exacerbated by the unfortunate war in Ukraine. Previous milk price volatility had prices at standard constituents ranging from the mid-20 cent per litre mark to the mid-30 cent per litre mark. As the Chairman correctly said, they are now reported to be approaching the mid-40 cent mark and probably higher. Prior to this it was not ICOS's understanding that milk suppliers would have significantly more than 20% to 30% of their milk supply tied into contracts. Indeed, we have some member co-operatives that have milk suppliers far in excess of that range and some approaching maybe 90%. There are not many but some milk suppliers have approaching 90% of their milk tied into milk supply contracts. In this regard, the banks must bear significant responsibility as they are in part accountable for encouraging certain suppliers to go down this route of tying in large volumes of milk into fixed-price contracts to minimise or de-risk the farm investment. On the basis of what we know now, it was unwise to become so heavily exposed by fixing a milk price while not having some security around inputs.

I am afraid the options to remedy the situation are limited. They involve appealing to the buyers, in other words, our customers, as fixed milk price contract holders are back-to-back contracts whereby a volume of milk is matched to a volume of product. We understand these conversations have taken place with only very limited success. From our position the integrity of the contract is very important in principle and we have to protect our reputation as a reputable trading partner. The only other option is for the wider milk pool to carry the cost. It should be pointed out that the co-operatives are also losing significantly in this regard as the cost of processing milk has increased massively and the processing margin has also been eroded due to the high inflationary costs around energy and so forth. However, co-operatives have been as creative as possible to help farmers and will continue to be, especially in the cash flow element, through their current difficulties.

We need to build new options into the fixed milk price scheme to deal with the risk of inflation, such as a financial transaction through the futures markets for feed, fertiliser and energy. However, these are very complex financial instruments and are not without risk. This is something we need to look at in future from a fixed milk price contract point of view. This would allow farmers to lock in their input costs as well as their output prices, thereby securing a margin. We have a very good example of this in the US.

It is something we need to examine. The farmers lock in a fixed margin so irrespective of whether milk is 50 cent a litre or 20 cent a litre, they have their margin which moves in time with it. It is probably a little easier in the American situation because their major inputs are bought in. From an Irish perspective, we are fortunate and have a very strong competitive advantage in being a grass-growing region of the world. Most of the costs of producing milk from an Irish dairy perspective are in the growing of grass, such as fertiliser. Feed is a cost as well. The initial scheme provided some options in this regard, but there was very limited farmer enthusiasm for it, unfortunately.

In closing, we appeal to the Oireachtas committee to prioritise the establishment of an income deferral scheme to manage volatility, along the lines of the ICOS 555 proposal. This has been a request of ICOS and farm organisations for up to seven years. We believe it is within the gift of the Oireachtas and the Government to deliver on this. If we had more options on volatility, farmers could deploy a range of measures to reduce volatility rather than rely on a single measure, which was the fixed milk price scheme. That was all that was available to them. It was introduced by co-operatives in good faith and it has served the industry well until recent unprecedented events.

I am happy to take questions or comments on this.