Matching quality and quantity of milk to the needs of a supply contract ensures maximum revenue, but there is much more to making the most of the relationship with the buyer in an increasingly competitive market.
There continues to be a small but persistent over- supply of milk which arises because of the continued expansion of most units, despite some producers leaving the industry.
Matt Sheehan, principal consultant with Promar, says this imbalance suggests the supply chain is not as joined up as it needs to be.
“Production plans on-farm are sometimes disconnected from market needs.
Market signals do not filter through effectively, leaving the current milk price as often the only tool to influence production plans,” he says.
“The industry also has to acknowledge external influences and adapt accordingly.
There are those who oppose and challenge dairy production and who are influential, especially the millennial generation, many of whom are turning away from dairy.” Mr Sheehan says.
Despite this, he remains optimistic, suggesting farmers who are willing to engage with their buyer can look to a bright future.
He explains there are a number of well-established supply chain relationships and schemes which are effectively transmitting market signals and developing longer-term, more strategic decision making to ensure consumer needs and pressures are met.
“A farmer who is willing to engage with the supply chain, both upstream and downstream and who understands what the market wants, can be more successful”
He believes there are opportunities for more progressive farmers to exploit these positive partnerships.
He says: “A farmer who is willing to engage with the supply chain, both upstream and downstream and who understands what the market wants, can be more successful.
Mr Sheehan believes there are broadly four different groups of farmers in terms of how they respond and interact with their milk buyers.
He says: “The first group of farmers do not engage with their milk buyer or wish to understand their customers.
They simply want to get on and farm.
“Many have already exited from the dairy sector and will continue to do so, as ignoring the pressures of the market no longer works.”
He says the existence of this first group probably reflects the culture and practice of the dairy industry historically, where the farmer was so remote from the market for his product.
He says this approach is no longer tenable.
“The second approach is where producers are reluctant to do any more than they have to.
They are unwilling to change and adapt reluctantly to a shifting market.
This type of attitude still persists with some, but will not pay dividends in the future.
“The third way of thinking is farmers who adopt a responsible approach to their contract, aiming to at least achieve all the standards expected of them.
They probably use an adviser to help them move forward and embrace technology as far as they can.
“Finally, you have the pioneers who take a proactive approach and try to keep one step ahead of the market, thinking more widely about what their customer and consumers will want in the future.
“These farmers are often members of discussion groups, they benchmark their own data, seek outside advice and different opinions and will engage regularly and positively with their processor and secondary customer.
They display an open mind set in relation to potential changes and future demands.
Mr Sheehan believes the four categories define a model which represents the increasing maturity of the sector.
“It is inevitable that over time, this last group will come to dominate the marketplace as the industry becomes more demanding.
Farmers will need to adhere to higher standards across their business, whether it is cow welfare, people management or environmental improvement, as well as coping with increasing commercial pressures.
“Meeting these demands will be best achieved by working with supply chain partners and finding common, shared, solutions.
It will also provide the producers and the wider industry with a very positive story to tell.
Maintaining clear lines of communication with a milk buyer is essential, Mr Sheehan says, pointing to the example of how many farmers fail to inform their buyer when they plan to increase production.
He says: “Many farmers significantly increase their milk output but do not even think to tell their buyer.
“There has to be a dialogue because very often there is an assumption the milk will just find a home and the price received will stay the same.
This is against a background of an absence of an immediate market for the milk or additional costs being incurred elsewhere in the supply chain.
He urges producers to invite their buyers to the farm to open the dialogue.
Asking them what they are looking for from suppliers in the next one to five years is a good starting point for the discussion.
“Ask the supplier what you need to do to become a supplier of choice in the future and how you can best work together in the future.
“This conversation is likely to flush out a range of issues from changing milk quality standards, milk production requirements, future welfare and environmental expectations and reactions to likely policy changes.
All of these will help a producer to stay one step ahead and establish a positive on-going relationship with the buyer.”
“As farmers, we need to focus on the things we have control of”
Michael Oakes is the chairman of the NFU dairy board and a tenant farmer on the outskirts of Birmingham.
He runs a closed herd of 180 pedigree Holsteins selling milk to Arla and he is striving to improve relationships between farmers, processors and end users.
“The UK is lagging behind the rest of Europe on milk price and the industry has had to cope with several years of very tight margins and massively increased costs.
As farmers, we need to focus on the things we have control of, but investing to produce more from less is very difficult when the milk cheque does not pay all the bills,” Mr Oakes acknowledges.
Mr Oakes says the processing market is changing and where the milk is produced and the quality is becoming more important.
“The cost of transporting milk to market is a significant factor and there may come a time where dairy farmers who are a long way from the processing factory have to face difficult choices.
We are already seeing this happen where producers are located a long way from the market.”
It is not all doom and gloom, however, and Mr Oakes believes there is still scope to increase domestic consumption of dairy products, as the UK is still only 80 per cent self-sufficient.
“There is potential to increase UK sales of milk and dairy products but it is a very competitive market.
There are also opportunities to export globally and some UK companies are telling us they can make a higher margin by exporting quality products such as artisan cheeses to the United States than they can selling them at home.
“If we are to make the most of these markets there needs to be a constructive partnership between farmers, processors and Government to invest in and foster these relationships.”
Despite all the criticism, Mr Oakes believes the industry can put forward a strong argument in its favour, whether it is animal welfare or the environment and climate change.
He says: “We have a fantastic story to tell about UK dairy production.
We are at the forefront of reducing antibiotic use.
We have made a commitment that as an industry, we will reach net zero emissions by 2040 and this presents a significant opportunity.
“We have to communicate the message that our dairy farms are grass-based systems and grass leys are very effective at sequestrating carbon and feeding it back into the soil.
We are very much part of the climate change solution.”
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