This week the European Central Bank will, unless there is a major surprise, cut interest rates for the first time following the rapid rise which began in mid-2022 (see Figure 1).

While many farmers may not see a huge correlation between their own incomes and the price of borrowing, interest costs are a significant factor for processors. The rapid increase in those costs means that those processors were able to pay less to farmer suppliers last year than they otherwise might have been.

Looking at annual results from Tirlán, Dairygold and Lakeland, we see that interest costs for those co-ops doubled from €27m in 2022 to more than €54m last year (see Figure 2).

For Dairygold, the €12.5m increase in interest costs was equivalent to almost 1c a litre on the milk it processed.

Peak interest payments

With much of the interest expense in the co-op sector arising from working capital needs around peak months – where milk has to be paid for before the product produced at the co-op is sold – it is probably safe to assume to peak interest payments probably occurred last year before ECB interest rates rose to their highest level in September.

With the milk delivery peak for this year already passed, the co-ops have already gone through their highest working capital needs period at even higher interest costs than they had in 2023.

For the processors, the cut in rates cannot come soon enough. It is also critical that their lenders pass the reduced costs onto them as quickly as possible.

For farmers, any uplift in milk prices from reduced interest costs will not come until 2025. The other important factor is the pace at which the ECB reduces rates – if it make small reductions over a number of years then the drag on milk prices could continue for a long time.