MPs have been called to investigate the UK’s ‘broken’ liquid milk market as retailers continue to drive down prices and processors buckle under the strain.
NFU Cyrmu sounded the alarm at this week’s Welsh Dairy Show at Nantyci in Carmarthenshire, where it warned of the precarious financial situation of liquid milk processing and the severe impact it was having on primary producers and the wider supply chain.
NFU Cymru milk board chairman Gareth Richards said: “Just last week we saw retailers offering two litres of semi-skimmed or whole milk for £1, with some wholesalers reducing the price even further below £1.
“Meanwhile, the farmgate milk price paid by most major processors in the liquid milk sector is in the region of 24/25ppl, a price putting pressure on many farmers who have struggled to recover from the 2016 downturn which saw farmgate prices drop below 20ppl.”
He said while some retailers paid a fair farmgate price, often based on a cost of production formula, only about 7 per cent of UK milk was sold this way.
He has written to the Environment, Food and Rural Affairs Committee to ask for an ‘urgent’ investigation.
It followed the collapse of North Wales processor Tomlinsons Dairies, with market commentator Ian Potter saying he believed there would be ’more casualties in the coming months’.
Muller suppliers who asked not to be named said they were worried about the extra strain being placed on the processor after Sainsbury’s moved its dairy development group (SDDG) suppliers over when Tomlinsons went bust.
Last year Muller announced its Project Darwin turnaround strategy as it sought to make efficiency savings. This has already resulted in the closure of it 400 million-litre Foston plant in July.
This week it was expected to announce the results of its review into Scottish milk supply after production jumped 25 per cent.
Farmers in England said the extra supply had put extra pressure on the loss-making business, with milk being trucked south in order to find a market.
One said Muller was a ‘sick patient’, unable to cope with less than convenient milk fields and having to screw down its direct suppliers to balance the books.
But dairy analyst Chris Walkland said Muller, along with all exclusively liquid processors were ‘not just sick but on life support’.
He said: “Basically what some retailers are doing is robbing the poor to pay the rich, by screwing the processors down on the processing fee while they pay their own farmers a handsome milk price.
“In the absence of a profitable cream price the processors can only maintain their margins by reducing the money they pay their directs, and that is what is happening now.”
NFU dairy board chairman Michael Oakes, who has echoed calls for an EFRA inquiry, said liquid milk was once the ’jewel in the crown’ of UK dairy, but the sector was no longer functioning properly.
He added: "No business can function or plan for tomorrow without certainty or clarity as to how much it will get paid for its product.
"We have been arguing for years that there needs to be greater fairness in dairy contracts, with risk and reward shared more fairly across the supply chain."
Muller Milk Group chairman David Herdman said: “Milk is largely being undersold by retailers which is their choice but they have a duty to ensure the milk chain remains viable.
“If we allow the situation to continue we will lose processing capacity and once it goes it is not likely to come back again.”
He predicted more closures ‘in the not too distant future’ as processors reported continued losses.
Analysis by the Grocer found only Paynes Dairies and Graham’s the Family Dairy made a profit in 2018.
Average margins for the six largest liquid milk processors (excluding Tomlinsons) fell to -2.8 per cent, according to accounts filed at Companies House.
Based on a combined turnover of £5.2bn, that equated to a cumulative loss of £144.2m in 2018.
Patrick Muller, chief executive of Muller Milk and Ingredients (MMI) said: “Our Project Darwin transformation plan is on track and in an increasingly fragile sector, many customers are acting now to secure ongoing and sustainable partnerships with us and their supplies of this amazing product.
“We are continuing to challenge every part of our organisation and network to make sure that we are offering an industry leading proposition and we are confident that we can return MMI to sustainable levels of profitability.”
Meanwhile Sainsbury’s has continued to ignore calls for it to pay the 39 Tomlinsons farmers who were on aligned contracts as part of the SDDG and are still missing milk cheques for September to October 12.
At its supplier conference in London last week, the supermarket’s head of agriculture, Barney Kay, said he understood farmers’ financial concerns, adding the group was committed to doing everything it could to ensure it was ‘another bump in the road and nothing more serious’.
There were also questions being asked about the £5m grant it received from the Welsh Government, which some said had effectively enabled Sainsbury’s to get its milk processed cheaply.
One farmer told FG: “Sainsbury’s should open its accounts to the Welsh Assembly and refund the millions of pounds of taxpayers money it appears to have laid to waste. It should commit to fully funding there SDDG schemes rather than underfunding them.”
A Welsh Government spokesperson said: “The company [Tomlinsons] was awarded a non-repayable grant and had fully met the grant conditions. Under European regulations, there is no provision to recover funding from businesses that cease production due to bankruptcy.
“No funding was provided to Sainsbury’s.”
Results for the UK’s six biggest liquid milk processors in 2018
Muller UK and Ireland: £100m net loss
Arla Foods Ltd: £41m pre-tax loss
Nijjar Group (Freshways): £2.6m pre-tax loss
Medina Dairy: £1.4m pre-tax loss
Paynes Dairies: £132k pre-tax profit
Graham’s the Family Dairy: £363k pre-tax profit
Source: 2018 accounts posted at Companies House