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Milk processors 'risk destroying supply base'

After the latest round of processor price cuts, Alistair Driver, Ben Briggs and Joel Durkin take a look at the implications of another dire week for dairy farming.
There are growing concerns about how long under-pressure farms can stay in business
There are growing concerns about how long under-pressure farms can stay in business

Dairy processors will destroy their supply base if they continue to drive the value of milk on farms down, NFU dairy board chairman Rob Harrison has warned.

 

Mr Harrison’s comments followed confirmation by Tesco it had shifted a significant volume of milk supply from Arla to Muller.

 

The retailer did not confirm the volume, but the 200 million litre figure suggested by Farmers For Action (FFA) would give Muller 700m litres of the 1 billion litre Tesco Sustainable Dairy Group (TSDG) pool, with Arla retaining the rest.

 

Tesco said the deal was part of its ‘commitment to create long-term, sustainable partnerships across its supply base’.

 

Muller Milk and Ingredients managing director Andrew McInnes said the company was ‘delighted’ to build on its term partnership with Tesco.

 

Arla said it was ‘disappointed with the loss’ and responded by slashing 3.25ppl off milk prices for its direct suppliers who will now be on just 16ppl from March.

 

While Muller’s Tesco-aligned producers will see benefits of the move, there were fears for its non-aligned producers.

Haves and haves nots

FFA chairman David Handley said last week non-aligned farmers would foot the bill, further widening the gap between the ‘haves and have nots’.

 


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In echoes of 2012, Mr Harrison said Muller appeared to have secured the deal with a ‘very low tender’, symptomatic of ongoing battles for market share across the industry.

 

“They have all got too much milk and getting it into liquid or higher value markets is better than putting it into milk powder for 14-15ppl,” he said.

While much of the downturn is driven by global supply and demand factors and, as Mr Harrison suggested recently, farmers across the world have not helped themselves by continuing to churn out high volumes of milk, he is urging retailers and processors to adopt a long-term view.

 

"We are really concerned as a union. There is real worry about what is going to happen, particularly given the price cuts since Christmas," he said.

 

“Farmers are doing budget and looking at sustaining losses of £10,000, £50,000, hundreds of thousands of pounds, depending on their business, over the next 12 months.

 

“These are good, well invested, owner-occupiers not necessarily with big staff costs and they are going to lose a fortune over the next 12 months at the 19-21ppl level that we’re at.

Massively bleak

The latest GDT auction results, showing a 7.4 per cent reduction, further entrenched the view there is little immediate prospect of an upturn in the market.

 

Mr Harrison said: “Our real concern is over the next four to five months particularly with the spring flush approaching. In the short-term the outlook is massively bleak.

 

"In the medium-term there is nothing on the horizon that says we will make all those losses back in 2017. Things may improve towards the back of end of this year but they are not going to deliver 30ppl."

 

He said farmers needed to be ’very realistic’ about what they can achieve an said the NFU had a role to play in helping them’ face up to those issues’.

 

But he said the NFU was also keen to meet processors over the next few weeks to impress on them the need to ‘act responsibly to keep producers in business’ and be ‘open and honest with suppliers about their plans to get through the next 12 months’.

 

“A lot of dairy farmers will not survive the next 12 months and that has the potential to destroy the supply base," he said.

Untold damage

He said it was essential the big players like Muller ‘bring their producers with them’ as they set about achieving their growth plans. “I don’t want them to cause untold damage in the short term in order to achieve their aims,” he said.

 

The NFU was due to meet Meadow Foods this week, after the retailer came under-fire from suppliers for a wave of price cuts which have seen it plummet the price league table.

 

He added: “It is easy for processors and retailers to drive the value down on-farm but there will be a tipping point when the floodgates open and production will disappear. It will take a long time to go back the other way."

Graeme Kilpatrick, NFU Scotland milk committee chairman, said the pain would continue as long as EU supplies remained high.

 

With other retailer contracts up for renewal he said it was vital ‘processors don’t use this as a race to the bottom’.

 

“This is worse than 2012. Everybody is slashing each others’ throats," he said.

 

"Farmers need to gear their businesses up for survival for the next six to 12 months.”

 A week of cuts

Here is a round-up of just some of the milk price cuts seen over the past week:

 

  • Arla Direct, down 3.25ppl to 16ppl
  • Dairy Crest Davidstow farmer down 1.6ppl to 22.72ppl
  • First Milk Midlands and East Wales balancing pools down 0.62ppl to 17.28ppl. Scotland balancing pool down 0.19ppl to 17.93ppl from Febuarry 1.
  • Payne’s Dairies B price down 2ppl to just 9ppl
  • Woodcock’s (Yew Tree Dairy) down 1.5ppl to 22.25ppl

 

*All cuts applicable from March 1 unless stated

Arla makes its case clear

Arla makes its case clear

 

In a stark letter to Arla Direct producers informing them of the 3.25ppl cut, Arla Foods said its main priority was to protect co-operative members in wake of the Tesco contract decision.

 

The letter, signed by Ash Amirahmadi, Arla Food’s head of milk and member services, also raises the spectre of Arla Direct suppliers being left without a contract at all.

 

The letter says: “As a farmer-owned business our priority is to protect our owners but we will do everything in our power to also support our farmers on a direct contract.

 

“The action we are trying to avoid is the possibility of having to serve you with 12 months’ notice on your contract.”

 

Adding it faced ‘surplus milk in spring for which we do not have a retail home’, the firm said it had ‘no option’ but to cut 3.25ppl from the milk price.

 

Claiming it was working hard to mitigate the impact of surplus milk, the letter adds it would be ‘irresponsible of us not to inform you, in a timely manner, there could be significant consequences’.

Case Study   Wales

Case Study   Wales

Richard and Ruth Pilkington milk about 230 cows on 234 owned and tenanted hectares (800 acres) in Wrexham, North Wales.

 

Mrs Pilkington suggested the gulf in returns was making the gap between those on aligned contracts and other producers wider.

 

She said: “We are surrounded by aligned contracts. The people on aligned contracts are very fortunate and we all would like to have those.

 

“People are saying everybody needs to reduce production but those people on aligned contracts are increasing. The industry is so fragmented but it has been like that for a long period of time.”

 

She said they were currently trying to remain resilient.

 

“One day you have to do some sums and say ‘we cannot carry on’. I imagine tenant farmers are having to do that summing up,” she said.

 

Case study - Scotland

Graeme Kirkpatrick milks cows at Craigie, near Kilmarnock, Ayrshire, supplying an independent Scottish dairy. He is also chairman of the NFU Scotland milk committee.


“We will be down probably 8-9ppl. Our milk income is down by more than £200,000.


“We are changing things round. We have done budgets for the next 12 months and I have spoken to my bank manager and accountant.


“We have split the cows into two groups for the first time in 15 years and we have changed how we feed the cows, which is saving 70p per head per day.


“The largest accountants in the country say not even the very best can produce milk for less than 22ppl. There are many farmers in Scotland receiving nowhere near that amount.


“It means sweating your assets, you are not investing and you are selling machinery.


“How much more farmers can take is down to many factors – how much borrowing they have got, what their assets are worth, whether they own the farm and the next generation.”

 

Case study - England

Richard Yates, who milks 100 Friesian cows alongside 800 ewes and about 120 hectares (300 acres) of arable land, near Bridgnorth, in Shropshire, knows more than most about the difficulties farmers are facing today.

 

As a Meadow Foods supplier, he has recently seen his milk price slashed from 32ppl not long ago to an A price of 19ppl and an unknown B price of considerably less.

 

He is also one of thousands of farmers in England still waiting for waiting for his Basic Payment Scheme (BPS) money with no idea when it is going to arrive.

 

 

Like many others, he is considering his future in dairying.

 

“We have locked the cheque book away and are reviewing every cost on a daily basis but, after two years, I am getting fed up of saying this now.

 

“There comes a point at which people say: “I have just had enough”. Having spoken to my milk supplier they are expecting many producers leave to the industry this year.

 

“There are a number of dairy producers I speak to on a daily basis that will struggle to see the summer," he said, highlighting farmers on his area who are switching to more profitable uses for their land, such as poultry and solar farms.

 

“A vast amount of dairy cows being slaughtered for various reasons – people need to raise cash," he said.

 

“As a producer we have to accept that in Britain we are on a 30-year high of milk production. So to a degree we have only got ourselves to blame on a national level. But on an individual basis, it is very difficult.”

 

 

Mr Yates said he would not look anywhere else if his contract with Meadow Foods, which is not signed up to the industry code and is on 12-month contracts, was terminated.

 

“I would exit the industry. I am a chap who gets up at 5am every morning to milk my cows. There comes a point when I am fed of working for nothing and won’t do it any longer. I am getting closer to that point.”

 

 

 

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