This month, Ian Potter discusses the future direction of prices as the much-awaited improvement starts to falter, considers whether this turnabout will be the final blow for many producers, and takes a look at the reluctance of some to sign up to the new Muller contract.
Arla stunned its 2700 UK members (and the industry) with its April 1 price cut of 0.79ppl, and it is widely known a similar cut may be on the cards for May 1. To be fair though, Arla was one of the few which pushed through a March 1 increase of 0.25ppl when others stood on.
Rumours suggest Arla needed to plug a hole created when it paid the 13th payment. Others say the market is pointing to the levels it is now paying. Whatever the reason, it has put the kibosh on farmer enthusiasm. What added insult to injury was the fact that in the same week Arla said its brands were named as recording the largest growth out of the top 100 UK grocery brands, achieving growth of £37 million in 2016.
This is a fantastic achievement, but understandably a number of Arla members are questioning whether such impressive brand growth is translating into a better milk price for them, with profits returning to members. Questions are increasingly being asked about whether the current musketeer price (‘all for one, one for all’) for the 13,000 Arla members can continue, especially in a post-Brexit world.
There are already some pushing for Arla’s milk pricing to be devolved. But while Arla gets red pen strokes and a ‘must do better’ for its milk price, it secures full marks for lobbying Government on Brexit to ensure it safeguards the UK dairy industry during negotiations. It highlighted milk from the 2700 GB members is responsible for a staggering 119,000 jobs, and Arla’s economic footprint equates to £6 billion.
In other words, for every £1 generated by Arla’s business, £15 is generated further upstream. It is a powerful message. Now milk volumes. An analysis of figures confirms production in the first three months of 2017 is down compared to 2016, although it has caught up this week on a like-for-like basis.
At least two milk buyers are concerned about the effects spring price cuts will have on production in the second half of this year, and the potential permanent damage to their supply base. To my mind, all UK milk purchasers must recognise they are on a knife-edge in terms of safeguarding their long term milk supply base.
Couple this with volatile milk prices and the almost inevitable hair cuts to farm income which will come after Brexit, and I reckon the next two years will see a serious exodus of dairy farmers who have either had a gut full of working for less than nothing, or will have an exit managed by others to whom they owe substantial amounts of money.
Only today I read an extract from a recent dairy farm administrator’s report of a typical farming family. It made for sobering reading: “The farm continued to trade and milk prices have gradually increased since the beginning of 2016. The long period of low milk prices has, however, led to a build up of historical debt to suppliers which the business was struggling to service, despite achieving a reasonable price for its milk supply.”
Prior to taking the decision to appoint administrators, the partnership had been affected by TB testing issues, as well as receiving as little as 21ppl for its expanded milk production. This story could be applied to any one of hundreds if not thousands of dairy farms, especially if we are about to embark on another price collapse, which sadly will put many of you on life support (again), and which will eventually sap your fighting spirit.
Many farmers are simply on their knees unable to cope with wide swings in volatile milk prices. You have not even started to recover from the last slump. Then there is the scourge of TB and the fact the image of our industry is constantly under attack from powerful well-funded anti-milk and anti-livestock farming organisations which are chipping away at demand for our fresh products, especially among young people.
I think a brief period of spring and summer price cuts will confirm to many silent farmers it is time to quit, while others will bury their heads in the sand, convincing themselves and their family it cannot get worse and the next 10 years will be more profitable than the last.
The only factor which may stop the exodus is whether alternative enterprises are even worse. For those who stay, you will have to be internationally competitive, as UK milk prices converge with world dairy prices.
To survive and prosper you will have to continue to cut costs and be on top of your game or have deep pockets.
Now, a warning and a plea I hope will help many non-aligned farmers. From May 1, Muller will have almost all of its producers on its new single supply contract. However, for various reasons, such as imminent retirements, or the member of the Awkward Squad (ie those who will not sign until they are forced to), means the existing contract will still run parallel until Muller ‘persuades’ them it is this contract or no contract.
This leaves the likes of Steven Bradley and AHDB with a dilemma on league tables. Do they quote the old or new Muller price? For my money, given the ‘seismic’ sign-up Muller claims, they must drop quoting the old price from May 1. This means all those contracts which include the Muller price in their basket will have to accept the new contract price.
Why is this important? Because if I was Muller and I wanted to ‘persuade’ stragglers to sign the new contract, I would eventually go for differential pricing and widen the price paid between old and new contracts. As one farmer suggested to me: if Muller has 500 who do not sign, it has a problem, if it has 50 who do not sign, those farmers have a problem.
If the tables quote the old Muller price and it is eventually reduced, it would deliver a blow to a heap of non-Muller farmers who are likely to get caught in the crossfire and suffer financially.