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Flag up as Dairy Crest waits on starting grid

Competition referrals permitting, Dairy Crest’s liquid division is set to be taken over by Muller Wiseman Dairies shortly. Peter Hollinshead talks to Michael Masters, secretary of the producers’ representative body Dairy Crest Direct, about what this means for his members and the industry at large.



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Dairy Crest makes significant milk price cut from September Dairy Crest makes significant milk price cut from September
Muller's purchase of Dairy Crest liquid division welcomed Muller's purchase of Dairy Crest liquid division welcomed

Things have moved apace lately with the recent figures from DairyCrest’s liquid division showing profits plummeting from around £19 million to just short of £2m. On top of that, the Competition and Markets Authority (CMA) has announced it is to further investigate the proposed £80m takeover of the division by Muller Wiseman Dairies.

What is the current mood among your members?

Farmers are naturally unsettled, primarily, I think, because of the milk price rather than the CMA issue. The milk price has fallen considerably in the last year and the economic situation is difficult on many farms.

As for DC profits in its dairies division, the 90% is a bleak figure but you have to remember it is always a year on year comparison and last year DC sold a significant amount of property in inner London which generated a profit of £15m in the previous year’s accounts. This was a massive contributor to the profits last year and there isn’t a similar figure in this last financial year, and so although it looks a big headline, it is not quite the drop figures would suggest.

 

If a deal goes through, some supermarkets seem to feel a duopoly would ensue, which would put the pressure on them over farm prices. To what extent do you think such fears are justified?

I don’t think they are justified at all. Having two wellinvested major liquid processors in the UK, which potentially will be Muller and Arla, should be to everybody’s benefit – farmer, processor and retailer – in ensuring we have decently invested facilities for the future. In other sectors like the poultry industry there are already duopolies working perfectly satisfactorily and there’s no reason why that shouldn’t happen in dairy as well.

 

But intrinsically it must give processors a little more power when they are negotiating prices when there are only two major suppliers?

Naturally one would imagine the tender process will be quite robust, but then hasn’t it always been.

 

In the meantime, you have transformed yourself into the UK’s first Dairy Producer Organisation and this has been incorporated into your latest member’s agreement which should have been signed by producers by now – how has this gone down?

The DPO evolution took place over the last year with our elected forum reps and we launched back in May. We sent all information to farmers and have had meetings up and down the country. The attendance has been outstanding and the rationale of the DPO seems to have been well understood and accepted, and we are confident we will have a big sign up to the DPO.


I suppose the crucial bit is what does it do for DCD members which you weren’t able to do before?

The crucial difference between the new DCD DPO and what we were before is the EU and UK Government legislative competition compliance and authority we now have. With the uncertainties we face within the dairy business, ensuring we have proper authority to negotiate contract terms and pricing for the future is going to be more important than ever.


But you were able to negotiate prices before, were you not?

Previous discussions with DCD have been within what is termed ‘discretionary’ pricing. What we have been able to do under the DPO is move from discretionary pricing to pricing by negotiation, and that is cemented in the core DPO regulations. This gives elected, accountable DPOs the authority to represent up to a third of all milk in a member state with complete competition compliance, and we did not have that right before.


And the new agreement I believe incorporates adherence to the voluntary code – DC accepted that, but what is the position regarding MWD?

Both DC and MWD got right behind the code from day one, which was great, and gave some rigour to notice periods of price announcements and when they were applied – being at least 30 days – and the three months notice ability for farmers if they wished. That decision was a step change in the relationship in how milk pricing was conducted, and it is such a shame there are so few other farmers able to share those benefits.


You currently have 1050 members, I believe, and 700 roughly will go to MWD if the deal goes ahead – will you still have just the one DPO despite serving two purchasers?

We applied to the RPA, which is the UK Authority for DPO registration, for a single DPO as that is exactly where we were last November. Until the CMA have completed their deliberations it is uncertain exactly how the position will look then.


And what will happen to any who decide not to join your DPO??

Anybody who chooses not to join our DPO will remain on discretionary pricing, and we would hope we would be able to encourage those members to join the DPO, but there will be no coercion.


If the MWD deal does go through, what will happen there – will you be looking to recruit members to your DPO from MWD farmers?

We would hope to continue to represent our farmers to the new processor. I hope we will be able to build on the best of both groups – the Muller group and the DC group – as there is a great opportunity to develop an organisation which has electoral accountability and independence and can add some real value to both parties in the farmer/ processor relationship.


But slightly deeper than that, MWD has around 1300 members – you could end up as quite an influential body with getting on for 2000 milk producers – is that a goal you would be aiming for?

As I say there is a great opportunity for farmers working together and developing solutions with their processor, but we are not allowed to talk to our counterparts at Muller Wiseman because of the competition restrictions. Those conversations will have to wait until the deal goes through.


Yes, but if it went through and you had those 2000 members in your DPO it would give you quite a bit of leverage, bearing in mind you now have the authority to negotiate prices, wouldn’t it?

It absolutely would, but to be fair to Muller farmers, they don’t know all the various aspects about what makes DCD tick and what authority DPO provides – so there is a big piece of work there to explain that and hopefully to encourage them to look at it.


It sounds like a bit of a softly, softly approach and you say you are not allowed to speak to MWD at the moment, but have they given you any unofficial indication about taking on a DPO from Dairy Crest?

Following the announcement of the proposed takeover, all DCD members received a letter from Muller’s Ronald Kers confirming they were looking forward to working with DC farmers and with DCD, and were committed to taking on all contracts and contract provisions, and I am sure they will honour that good intent.


About 60% of your members on standard liquid contracts use your formula pricing – admittedly for only a proportion (around half) of their milk, and this had been a godsend for them with up to 4ppl difference over normal liquid members. However, the formula price has come back from around 32 to just under 28ppl and standard liquid from 32 to 23ppl. That’s 14% and 29% respectively. Has this structure caused any friction or envy among your members?

I don’t believe it has. When you talk about envy, we tend to think of the ‘haves’ and ‘have nots’ to do with retail pools. When retail pools have been established, farmers selected are appointed, or annointed, by the processor, so the choice is not the farmers. With offering a formula option we gave our farmers the opportunity to sign up to a proposition if they wished to, and the choice to sign up to 25, 50, 75 or 100% to formula pricing. The choice was theirs and they had three separate opportunities to sign up last year if they wished.


There won’t be any at 100% will there?

Yes, there are a number at 100%.


These formula mechanisms have been looked at elsewhere and some say they will not be sustainable because of the fact they do create ‘haves’ and ‘have nots’. Do you think formula pricing has a future?

Absolutely. The formula concepts have been great as you give the farmer a choice as to how his milk is priced. I would like to think in the longer term there will be further mechanisms such as futures and formulas so farmers have a greater ownership on how their milk pricing operates on a month-to-month basis. Also, because our formula has a 12-month commitment, as and when our contracts move across to Muller – bearing in mind they have already stated they will abide by all the contract terms – our formula will still be in operation to at least 2017 if the deal is not completed until early 2016.


MWD is operating its own formula pricing at the moment, so presumably it is not opposed to the idea of formula pricing?

Agreed. That said, the Muller formula is very different. The DC formula has a blend of markets and also farm inputs, where, as I understand it, the Muller formula is focused on markets alone – AMPE, MCVE and a basket of prices.


You didn’t have any restraint like A,B or C categories under DC – are you likely to meet such things under MWD?

We don’t know what the situation will be on the supply and demand balance by the time 2016/17 arrives. I have no objection to A and B pricing so long as you have some transparency as to how those A and B prices are set.


Moving on to the wider front, you say UK production is up 1.6m litres per day over the last two years despite the price collapse. Are we seeing two-tier production with top earners continuing to expand, or is price alone not a realistic constraint on production?

Price will have a major impact on curbing production but we do have a twotier market at the moment. Those lucky enough to be on a retail contract in most instances have their production levels capped, so if they decide to produce more milk they won’t be getting the full benefit of 31-32p for those extra litres. Conversely, the guys at the bottom end currently on 14- 15ppl, particularly on the former brokering contracts, some of those will be under significant pressure. However, once this amazing 2015 grazing season subsides, those farmers will find it hard to afford concentrate supplements due to high costs and milk production will start to fall quite quickly.


Part of your DPO intention is to develop a futures market for milk to counteract some of this inherent volatility – yet you are quoting an AMPE futures price of around 22ppl for June 2016 against a DCD May 15 price of 23ppl – which is not very encouraging, is it? Do you see ‘futures’ as a vital tool in the years ahead?

It absolutely will be. UK dairy farmers have only really had historic market information to date, and so futures will become a more important tool. Futures will only ever reflect longer term markets but at last we have a crystal ball we can look into with greater certainty than ever before. Yes, the AMPE futures quoting a gross figure of 21- 22ppl for June 2016 is hardly encouraging, but far better that we have got some informed data whereby we can start to make some decisions than just sailing on blind.


Is the figure you quote for June 2016 a figure set for 30 days?

AMPE futures is about translating the dairy futures trades in butter/ skim milk powder being conducted today for next June, and then converting that in to an AMPE figure so you get a translation figure farmers can understand. Yes, I completely accept it is not exciting at the moment but this will be one of the first markets that does respond when we come out of the present trough.


Just back to the MWD deal, if I may, you do see it going ahead do you… they won’t get cold feet will they?

I sincerely hope not. I think Muller has done a heck of a job in the UK in the last three years. They have invested hugely in their own facilities, spent £280m on buying the Wiseman assets, they have invested in a butter facility at Market Drayton, bought the Nom yoghurt factory and now got their cheque book out again to acquire Dairy Crest Dairies. DCD wishes them well.


OK, on the wider front, will UK producers have to lower their cost of production if we are to compete on the global stage. You talk of some Irish producers signing up to three year deals at 20-21ppl. Is that right?

Some Irish farmers are agreeing to those sort of deals. Farming is a business and cost of production will inevitably have to come down if margins continue to be squeezed as they are.


And do you think that will be principally from econ-omies of scale?

No, not necessarily. There are still some tremendous businesses which are run on a small scale and you don’t have to have 1200 cows to have an efficient business.


Finally, where do you see the UK milk price going in the next 12 months or so?

It’s not looking very pretty at the moment. We have a larger UK national dairy herd than we have had for some time and the BCMS herd registrations for the last couple of years have shown increases. And with AMPE futures not looking very bright, I expect we are going to see some unpalatable pricing through to the other side of next year’s spring flush.

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