Superdairies are off the boil

By Sue Scott

- Last updated on GMT

Related tags Milk Liquid milk Dairy

The UK is the third largest dairy producer in Europe but it pays farmers the third worst price for its milk. No wonder producers are more inclined to bottle out than bottle it.

Yet while producers exit at the rate of nearly 10 a week, the volume of milk that trundled down the farm track last year increased and by a substantial 500m litres, restoring it to levels not seen since 2008, as farm sizes increase. Hardly a distress call from an industry in dire straits.

It's just one of the counter-intuitive stats in the topsy-turvy world of dairy economics, which leaves policymakers scratching their heads and farmer organisations, which have been warning of a meltdown in dairy farms for years, stuck in an uncomfortable cleft stick.

Now, though, the push to restore power and profits at the bottom of the supply chain has come to an almighty shove driven not solely by a very British regard for fairness, but by an EU heading towards deregulation and desperate to avoid a repeat fall-out from last year's world dairy price collapse.

In June its agricultural committee surprised the farm-gate lobby with an amendment to the EU dairy reform package that proposed to fix prices for at least 12 months in mandatory milk supply contracts. This is a luxury not afforded to the UK's dairy farmers, who rarely know what the cheque will be until after delivery and are hit by penalties when they try to escape an 'agreement' many argue they had little say in.

"At the moment the situation is criminal,"​ says George Jamieson, milk policy manager for National Farmers Union (NFU) Scotland, "and a lot of it is to do with the fact that the supply chain determines the price. The processors generally force the milk price down because of the strong competition between the retailers. Their easiest option is to keep the price of raw material low that's good for business, but it does not help the industry going forward."

DairyCo, the levy-funded organisation that works on behalf of Britain's dairy farmers, recently released the first of its raft of industry reports, which every year attempt to throw light on the inscrutable and fuel bickering about "transparency" ​of price.

"It was quite clear that retailer margins have been increasing over the past 10 years,"​ says Patty Clayton, senior analyst of market intelligence at DairyCo. "The retail price went down this year because of the price wars. How that has impacted retailer margins will depend on whether they funded the cuts with reduced margins or passed it down to processors." ​But with supermarkets managing to retain their 34% at the tills in 2010/11, while the processors' share of a retail price of a litre fell from 29% to 23%, the answer seems clear.

Hopes of an improved return from a 2.2% volume increase in liquid milk sold in the year to April 17 was more than offset by a 4.6 pence per litre (ppl) fall in the retail price, thanks to jaw-droppingly cheap multi-buys that have continued. Only last month Morrisons, supplied by Arla and Dairy Crest, advertised 'Britain's cheapest milk' at 50p for four pints.

If there are any fat cats getting the cream in the milk supply chain the finger of suspicion is pointing at 'Tesco Tom'. And if Jerry is going to outwit him, farmers have two options, They either get better at what they do, which will see them getting bigger, or they persuade processors to chase more of the global market for added value dairy products, thereby reducing farmers' reliance on the premium but distorting domestic market for milk. The nuclear option is for government to weigh in.

Superdairy solutions

Notwithstanding the doomed Nocton 'superdairy' bid for an 8,000-cow unit in Lincolnshire which was pared down to 3,000 before being dropped in February after consumer opposition the trend towards larger, leaner dairy farms is gathering pace.

It's unlikely Britain will ever see farms on the scale of Indiana's 32,000-cow dairies. "But it's definitely going in the direction of larger farms," ​says Clayton. "Even then, the presence of larger farms alone is not going to shift power away from the processors here. In terms of the dairy industry's future structure, it's going to be more influenced by the ability to compete on an international market not necessarily selling on to it, but being able to produce at that level so any premium we can keep."

And that is where mandatory contracts or at least the threat of them could really bring about a dramatic shift in the power base.

Unlike the rest of Europe, contracts for liquid milk have been in place in the UK for years but what's missing is a transparent pricing mechanism that would make suppliers more influential price negotiators. And that, argues Jamieson, would benefit not just the farmer, but also the processor.

"We don't want to cripple processors. We want them to be more ambitious and look at opportunities," ​he says. "Farmers would go with them and produce milk efficiently then, but it needs a partnership. I spent the first two years in this job listening to everybody slagging each other off. What we need is to get the industry to an equal, sensible, professional position."

NFU Scotland's suggestion, which is being run past competition lawyers, is for processors to agree to the ex-farm milk price tracking the world commodity prices for skimmed milk powder, butter and cheese using the industry-wide Actual Milk Price Equivalent (AMPE) and the Milk for Cheese Value Equivalent (MCVE) figures.

By weighting it 20% on the AMPE and 80% on the MCVE, the union claims that, over the last 10 years, producers would have been 2ppl to 3ppl better off. This year, they would have received a 5ppl premium over the liquid milk price, which is hovering at around 26ppl.

The extra rake-off would still only plug the £330m deficit that the NFU identified early this year between farmers' returns and costs of production. But it's a step in the right direction and one that farms minister Jim Paice, who has just resurrected the industry-wide Dairy Forum, would already appear sympathetic to.

If processors "had to pay 29ppl they would have to add more value or get more from the retail sector and if they couldn't, they'd have to look at alternative markets, as they do in Denmark, Holland and Ireland"​, says Jamieson.

Trade body DairyUK chief executive Jim Begg opposes the dead hand of government intervention, but says "volatility is reduced [by] the greater amount of milk that goes into value added products rather than liquid [milk]".

Taking the bull by the horns

Co-operative First Milk has already taken the dairy bull by the horns by opening a global milk pool last month for skimmed milk powder. By diverting excess liquid on to the powdered market, which is at an historic high, it hopes to cream off some added value for suppliers.

But long-term investment in processing capacity to reverse the 25% trade imbalance in dairy products not just plug it is unlikely to come about without that Brussels boot, argues NFU dairy board chairman Mansel Raymond.

"There is demand for a lot more milk than we are producing in the UK and there are enough young farmers who are keen to take off the shackles and produce it,​" he says.

"But what they want to know is: are we going to be in a better position and not languishing at the bottom of the European price league? So, for God's sake, let's give them the ammunition they need to invest."

"Compulsion is the last resort,"​ he says. "It's better to sit down with retailers and processors to agree a code of practice, rather than have it put upon us. But if, at the end of the day that's our only chance of restoring the balance, we will take it."

Here comes The Moo Man

The average punter might struggle to grasp even the basics of how the dairy market operates, but a 90-minute feature film due for a cinema release later this year will bring home the harsh impact of a supermarket economy on one family farm.

The Moo Man, which follows a year in the life of organic dairy farmer Steve Hook and his family, has already received an emotional response at previews. "It's beautiful and sad and if it has a message, it's: 'Wake up, because we are going to lose this kind of farming,'" says producer Andy Heathcote.

The row over Nocton

Tom Rawson watched with keen interest as the row raged over Nocton, 18 miles down the road from his own dairy farm, set up just 14 months ago in Lincolnshire.

At 32, he is one of the next-generation producers that the industry is desperate to keep and a 'Nocton' is something he might one day aspire to.

His Lincolnshire unit is on a non-aligned fixed-price contract with Dairy Crest, and is one of three farms Rawson runs with a 24-year-old business partner. They have already had more experience of dairy supply contracts than the previous generation had in a lifetime.

"We milk 1,000 cows under three different arrangements on three different farms in Lincolnshire, Yorkshire and North Wales,"​ he says. "All three contracts have their own merits."

Aside from Dairy Crest, Evolution Farming supplies Robert Wiseman under a dedicated Tesco producer contract and organic co-op OMSCo which Tom describes as "one of the few true farmer-owned co-operatives".

Although he describes his own contracts as "pretty fair"​ he welcomes government intervention to restore balance of power in the industry.

"There's no farmer out there trying to be greedy that's the point. They just want a fair return for their product. We run our businesses efficiently, but you need to be huge to go up against the supermarkets. Nocton might have been the business to negotiate with them.

"It was an audacious plan, but it was good they had a go," ​he adds. "I'd rather it happened here than in eastern Europe."

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