Strathroy Dairy has joined the likes of Tirlán, and Lakeland Dairies in confirming that it is to pay suppliers on the basis of milk solids using an A+B-C model.

However, unlike its competitors, Strathroy is making it a voluntary option and farmers can choose to remain locked into a traditional payment system.

The options have been set out in a letter to suppliers by the Omagh-based company.

The first option allows farmers to switch to an A+B-C system, where A is the value of 1kg of protein, B is 1kg of butterfat and C is a deduction to cover the cost of processing milk.

Traditional top-up payments on volume, TBC and SCC will remain in place, as will winter bonus payments, so it is a similar format to that announced by Lakeland Dairies and Tirlán.

Strathroy will set A and B prices at base of 3.25% protein and 3.95% butterfat, with a 3.5p/l deduction made for processing (C).

Timeline

In terms of rollout, farmers can switch immediately and receive payment under the A+B-C model on August supplies.

Alternatively, farmers can choose to switch at any point in the future, if the A+B-C model becomes financially more rewarding.

If suppliers do switch, and find they are financially worse off, they can revert back to the traditional payment system after a period of 12 months.

New increments

The second pricing model retains the current format, where bonus payments for higher milk quality are applied on top of a monthly base price.

However, to encourage farmers to produce higher solids, Strathroy will increase the payment rates on fat and protein, starting in January 2025.

Butterfat rises from the current 0.018p/l to 0.03p/l, with the base increasing from 3.85% to 3.9%. Protein will increase from 0.028p/l to 0.048p/l with the base rising from 3.19% to 3.22%. Come 1 January 2026, butterfat rises to 0.036p/l at a 3.95% base, while protein remains on 0.48p/l, but at a higher 3.25% base.

Again, all traditional top-up payments for volume, cell counts and winter bonuses will be applied as normal.

Strathroy expects a modest uptake of the A+B-C option over the coming months, as farmers require time to consider the financial pros and cons of both payment models.

The company will keep the dual pricing options under review and will notify suppliers should they be better off switching to the A+B-C option, or vice versa.

What are the changes worth to farmers?

To put the outlined changes into monetary value, our analysis shown in Table 1 is based on a farmer producing 750,000l at a 4.18% butterfat and 3.32% protein, similar to the average NI dairy herd.

Assuming a standard base price of 38p/l in 2024 and 2025 and no change to milk quality, the higher fat and protein increment values applying in 2025 increase milk sales by £2,715, to £294,900.

That equates to a 0.36p/l increase to 39.32p/l over the year.

If the example farm is able to increase butterfat by 0.1% to 4.28% and protein by 0.025% to 3.345% in 2025, this boosts milk sales to £298,500, or 39.74p/l.

A+B-C

To calculate an A+B-C payment, we assume the value of protein is set at 1.8 times the value of butterfat.

At a base price of 38p/l and 4.18% butterfat and 3.32% protein, 2025 milk sales are higher than the conventional payment system, at £296,401, or 39.52p/l.

Repeating the 0.1% rise in butterfat and 0.025% increase in protein, annual milk sales rise to £301,008 or an average price of 40.13p/l.

Economics

As base price increases or decreases, the economics of the A+B-C model change – at higher base prices, more farmers should consider A+B-C.

The approximate tipping point in favour of this option is 33.5p/l for milk at 4.18% butterfat and 3.32% protein.

At a 38p/l base price, this tipping point changes to around 4.13% butterfat 3.32% protein.

Anyone with low solids is normally better off continuing with the traditional payment system.