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LAMMA 2021

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Ian Potter: 'Confidence among farmers is close to rock bottom'

This month, Ian Potter returns to the Arla proposal to ban the early disposal of unwanted dairy bull calves, and how working in partnership with a retailer in a never-ending price battle is a more promising route to market harmony.

I start with last month’s article, and the lead taken by Arla on the dairy bull calf issue. This effectively bans slaughtering them from January 1, 2021, which is a ground-breaking move others will likely follow.

 

Now this might be a costly move and unpalatable for some, but to date, not one Arla member has complained to me about the policy. The complaints have all come from non-Arla farmers, some of whom are in complete denial that it is a potential PR nuclear bomb for the industry.

It has come to light that there are no discussions scheduled with a view to reflecting the additional cost of rearing calves to the point of sale in any retailer cost of production models.

 

It is down to Arla farmers to use sexed semen and/or change their breeding policies to produce a more valuable calf, which hopefully does not end up in an abattoir before its time.

 

For those who believe selling 10-day-old calves to a rearer gets them off the hook, be warned. Arla intends to monitor movements, so farmers will have an obligation to ensure any sales are compliant. I imagine auctioneers to be rolling their eyes at the prospect.

 

At the moment, an Arla farmer in Denmark can euthanise male calves, so the policy is not yet ‘one Arla’, but it will come.

On milk prices, Arla is taking some living with in terms of a very stable high price and initiatives which shape its 10,300 farmer owners farms and the countryside. The bull calf initiative is one of several, including pasture promise, public access and active involvement in Open Farm Sunday.

 

Plus, on-farm wildlife and environmental initiatives, along with Arla’s 2050 zero carbon target.

While some of Arla’s liquid competitors are fighting for volume and clearly struggling to stay in business, the co-operative appears to be looking and planning five years and more down the line.

 

It seems to be onto a winner, because it does not have all its eggs in one basket and its portfolio makes it painful for others to deliver and compete, especially on bog standard own label liquid milk (unlike cheese, where there is still a market for farmhouse and bespoke players).

 

Now let’s look at the woes of the liquid milk market. Arla has recently secured a five-year extension to continue supplying Asda 100% of its liquid milk with an estimated 500 million litres/year. This partnership started 15 years ago in 2004, and will now run for at least 20 years.

It is a relationship where Asda dairy sales growth translates to Arla growth, and joins similar long-term contracts agreed with Arla involving Aldi (five years) and Morrisons (four years).

Let’s turn to Sainsbury’s, which is wielding the big stick again by being out to tender with its suppliers Arla, Muller, Medina and Tomlinsons, with an announcement due in September.

 

Unlike Asda, Sainsbury’s is witnessing its liquid milk sales decline. In addition, it has been the focus of numerous PR kickings in recent months, not least due to my mate Walkland sticking the boot in. But thick-skinned Sainsbury’s won’t bother about that.

It will bother about the cost of its milk. And word on the street is Sainsbury’s has had a shock, and most if not all processors have said ‘this is the price or we walk away’. So it is new territory for Sainsbury’s where its tender process will see it paying more for milk.

 

Going out to tender is costly administratively and inevitably damages the relationship, because it is the equivalent of saying ‘We are going to threaten you because we think there might be someone out there that can do a better or cheaper job’.

 

Tomlinsons, for example, was a good family business before it got the Sainsbury’s business, but is now practically bust, leaving some (like Walkland) to question whether the retailer is a decent outfit to deal with.

 

Some of those tendering for the Sainsbury’s liquid contract in the past would have been concerned they would lose volume, but I am not so sure they are bothered this time around. I think they are sick of Sainsbury’s being hardwired to the big stick of tendering. The Sainsbury’s experiment to distribute volume between four processors failed.

 

In contrast, Asda wants a partner which engages with it, works with the retailer to improve processes and takes it forward. These are the basics for the best commercial relationships, with both sides investing in building a partnership.

 

To sum it up, Asda is a friend and ally of Arla and vice-versa, while Sainsbury’s wants to beat-up its suppliers every three years into supplying it with the cheapest milk, and does not seem to value a relationship.

 

Processors are sick of Sainsbury’s approach and are increasingly sticking two fingers up to retailer, as this is not the type of business they want to work with long-term. Good for them!

Turning to farmgate milk prices, things do not look good, particularly for liquid processors, and few, if any, have any concerns or worries about pending Government contract regulation. The main concerns are survival, Brexit and hoping that none of the big guns opens the recruitment doors to entice farmers.

 

Confidence among farmers in some liquid processors’ long-term future is close to rock bottom, with some processors very short-term operators and struggling to continue and run professional processing and sales departments.

They certainly do not look five to 10 years ahead as to what is coming down the road. In fact, one or two cannot even look much beyond five to 10 days. The GB liquid business is basically knackered. It is a zero margin high volume business, and that is what ‘four pints for £1’ has done. As I write, Cash and Carry Bestways is selling two litres for only 79p.

 

A September 25p liquid standard litre price, with the likelihood of even lower prices to come, will cause serious problems on many farms. If we look ahead six or seven months, we have a perfect cocktail for milk production to break all records, resulting in more distress milk and pain. Then throw in a no-deal Brexit and it will be time to buckle up, strap yourselves in and prepare for some mega G-forces on your milk prices.

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