Further consolidation in UK dairy ‘inevitable’

Allen.This was pushing the balance of power back towards farmers for the first time in years, said Allen. “Milk output has fallen by a staggering 102M litres over the first four months of the 08–09 quota year compared to 07–08. Our revised annual forecast for 2008–09 is 12.9bn litres, which will be around 200M litres less than 07–08. This is on top of last year’s record fall of 313M litres.”

Dairies that did not have a direct milk supply or had not bought milk on contract would therefore have to pay through the nose on the spot market to fulfil orders, he predicted. “The dairies are also having to pay higher and higher milk prices just to hold on to their milk fields. The change in the balance of power should therefore be seen as an opportunity for farmers and their representatives to work with the processors and retailers to re-set the milk pricing mechanism while milk supply is tight.”

Meadow Foods, a major supplier of dairy ingredients including butter, anhydrous milk fat, condensed milk and chocolate crumb, said the issue of security of supply was now a real problem. Md Paul Deakin said: “Last year a number of dairy companies let customers down because they could not secure the supplies they needed. One of the reasons we have made progress this year is because we have contracts with farmers covering more than 400M litres of milk, so that when we say we can supply you with a product, we genuinely have access to the raw materials to produce it.”

The fact that the major multiples had recently embarked on a price war on milk merely exacerbated the problems facing processors, said Deakin. “Things like this can undermine the whole market, because everyone else follows suit and it spreads like a virus. The retailers might not immediately come knocking on their suppliers’ doors for money, but it always happens in the end.”

Given the levels of overcapacity in some areas of the dairy processing sector, further consolidation was now “inevitable”, he predicted. “Take butter. There are three major butter manufacturing plants in the UK, any one of which could produce the volumes coming out of the other two as well. That’s not sustainable.”

The most obvious area of consolidation was within the major farmer-owned co-ops, he predicted. “When they decided to get into processing, they acquired poor manufacturing assets, and they have been paying the price ever since. My own view is that there is only room for two co-ops, not three.”