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Ian Potter: ‘Processors cannot live with unspecified volume’

This month, Ian Potter queries whether the sluggish price response particularly from the liquid purchasers should be independently investigated, thinks it is high time we had some better relationship between volume prediction and price, and finally goes on to
applaud the progress seemingly being made at First Milk.

This month, Ian Potter queries whether the sluggish price response particularly from the liquid purchasers should be independently investigated, thinks it is high time we had some better relationship between volume prediction and price, and finally goes on to
applaud the progress seemingly being made at First Milk.

 

As I write the glacial pace of milk price improvements from mainly liquid milk purchasers is understandably attracting huge criticism from those affected. The liquid market is now almost a millstone, with the liquid premium long gone. The market is being led up by butter and cheese and the liquid buyers might have their work cut out to match cheese prices going forward.

 

On previous occasions like this producers have blamed imports as the culprit, but not this time. Many farmers are convinced their processor is continuing to squeeze its farmers simply because it can. The differential in price is staggering. For example, the November AMPE was 31.5ppl and the November Muller non-aligned standard liquid litre price was 20.94ppl (plus 2.623ppl retail supplement) making 23.56p.

 

Similarly Arla’s member price was 23.14ppl (including a forecast 13th payment) and some of those on basket prices were under 20ppl. Is the market – particularly the liquid market – functioning so poorly that it warrants an outside investigation/ review I wonder. Yes, I hear you cry.

 

Resignations to some milk purchasers have rained in, and while it has taken time for the penny to drop, the affected processors realise they cannot recruit at their current milk price. Sadly for them the loss of large volumes of milk, in addition to the loss of trust and producer support, has resulted in permanent reputational damage.

 

Their only option is to try to retain their remaining core farmer suppliers. But farmers are not all saints! Listen to these stories of the ultimate milk tarts! The farmer signs a new contract to commence supplying purchaser X before his existing contract to supply purchaser Y ends. But if that wasn’t enough he then decides he wants to supply an ingredients processor, and contacts everyone to say he hasn’t delivered any milk to X, so he can go where he wants – despite having signed the contract.

 

Another had his business rescued by processor Z when he had no milk contract, but as soon as that processor was 1p off the pace to a rival the farmer jumps ship. That’s loyalty for you. Not. Processors should take a very hard line on tarts like this, in my opinion. Yew Tree factor How dramatic the U-turn has been on price this year, assisted by the Yew Tree factor.

 

In May at the DIN conference, two respected industry experts commented that a big milk price recovery was ‘unlikely in 2016’ and ‘the current down cycle will continue into 2017 and beyond’, with a third saying ‘we won’t see 30ppl for a long time’.

 

If prices continue to head north in 2017 and above 30ppl over the spring period and beyond, I fear another wave of milk will flood the market like a tsunami, and swamp all but the strongest, financially sound farmers again. Will farmers and processors learn from two years of painful crisis and chaos?

 

I fear they won’t! But uncontrolled expansion, whether it be processor, producer or representative organisation driven should not be repeated. For the UK the recent expansion was a whopping 1.9 billion litres in less than three years, but with no similar, sustained increase in demand.

 

The implications of this expansion are serious and costly. In the liquid sector many processors on A&B and basket pricing have had to review their offering and have given additional financial support in this fast moving market.

 

Others have introduced penalties for wild fluctuations in forecasting. One major problem is some farmers see it as their right to increase milk output without notifying their milk purchaser whose job, the farmers think, is simply to deal with whatever milk comes along and to find a profitable outlet for it. But that isn’t always possible.

 

Processors had to buy large quantities of milk in spring 2016 at 23/34p+ and then sell some of it for 10p to 12ppl. Then the opposite happened – they had to buy at 40p+. Both were financial suicide.

 

This comment won’t be popular, but dairy farmers should not have the freedom to significantly vary the quantity of milk they supply to their processor without agreeing it in advance. Neither should a milk contract force a purchaser to collect 100% of the milk without an idea of the quantity. And the flip side is processors should not have the freedom to discretionary price.

 

I believe we have to develop contracts that are geared to a volume and price say +/-5%. Yes it could be a variation on A&B but the fact is processors cannot live with unspecified milk volumes and profiles, and farmers can’t live with unspecified, unpredictable prices. If things don’t change then two or three big buyers will get bigger, because they are potentially better able to shoulder the financial pressure.

 

Everyone wants maximum flexibility to change what they want with limited price risk, but surely in a mature balanced relationship the dairy industry can crack this simple conundrum and not work on short-term smash and grab rules as they are now. I will be returning to this in a future article, and I thank consultant Norman Oldmeadow for his input so far on these suggestions. First Milk Now First Milk.

 

This time around the firm does not appear to be the main resignation target, having dramatically re-structured the business following the dismissal of the incompetent individuals running it and the parachuting in of Mike Gallacher. Out went loss making activities and the air of arrogance First Milk once had.

 

Then came major surgery at board level to leave people who have the ability to seriously challenge the management and who fully understand balance sheets, accounts and cash flows. Two years ago First Milk tried to keep up with competitor milk purchasers in a rising market by paying a milk price it failed to recover from the market.

 

But then the milk price tanked. Somehow its members clung on by their fingertips and today many believe Gallacher and his board actually know what they are doing and have faith in them.

 

It’s easy to say but all First Milk needs to do now is produce consistently high quality cheese, particularly for Tesco through the Ornua (formerly Adams) relationship. I wish them well and sincerely hope they succeed.

 

Finally, all the best for 2017. Whatever comes, it can’t be as bad as 2016 for most farmers!

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