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Can farmer self-control solve the dairy industry's problems?

Insights
Should UK dairy farmers collectively enter into a pact of self-control to protect themselves from the vagaries of the milk market? Or is this a naive idea in a market driven by global supply and demand?
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The launch of a proposed new milk contract by Farmers For Action (FFA) has added further fuel to the debate about how to address the current problems facing the dairy sector.

 

FFA chairman David Handley’s Milk Pricing Formula, launched ahead of The Dairy Show, at the Royal Bath and West showground, this week, encapsulates his view that UK farmers potentially have a significant degree of control over their own destiny.

 

With in excess of 80 per cent of UK production sold domestically, this is where the industry should be focusing its efforts, rather than exposing itself the huge uncertainties of global supply and demand, Mr Handley believes.

 

His position continues to be fundamentally by other parts of the UK industry, including the NFU.

 

But he has now upped the stakes with a price formula, launched for consultation across the industry, which includes an element of farmer ‘self-control’.

The formula

The Handley two-part price formula works like this:

  • The ‘A PRICE’ would be a standard litre price paid by the processor based on the production of each producer at the end of the 2014/15 milk year.
  • If individual producers exceed that base year’s production by more than 5 per cent without negotiation with their processor and their consent to do so, this will instigate the B part of the formula.
  • The B PRICE paid would be based on the returns received by the processor from the open market.  These returns could be considerably higher or lower than the standard litre price.
  • An ‘independent body’ such as Dairy Co could monitor market returns and display them to the industry on a monthly basis so producers have the ability to hold their processor to account ‘should they try and manipulate figures’.
  • If this is found to be the case producers would be able, under the Voluntary Code or his or her individual contract to give notice and move to another processor.
  • ‘Genuine new entrants’ would be given one million litres as a base to start their business.  These litres would come from a pool, which would take litres from natural wastage such as retirement. These litres should never hold a financial value.

Mr Handley has acknowledged the political difficulties of a milk contract that places an element of restraint on an individual’s production, especially, he acknowledged as it would ‘carry the three letters – FFA – in front of it’.

 

There are also obvious practical issues in monitoring the formula on a national scale, even if the wider industry bought into the concept.

The debate

But it will stimulate further debate over questions that are dividing milk producers.

 

Is the way forward to innovate and expand into the global market, with a view to cashing in when the supply and demand dynamics eventually right themselves?

 

Should farmers be keeping an eye on how much they produce?

 

Or is to grab back an element of control, be satisfied with markets closer to home - and pay more attention to the supply side of the equation?

 

Mr Handley, who has been a vocal critic of encouragement by the NFU and other industry bodies for farmers to invest and expand to take advantage of improving global dynamics, said: “We know this Formula will not please everyone but it will bring some control into the industry, will remove the supply demand issue and should bring price stability which is what every farming business needs.”

 

He insisted his formula would ‘not prevent entrepreneurial dairy farmers going forward’ or hold back new entrants but will ‘do something to control supply and demand for milk’.

 

He acknowledged that the idea appeared simplistic but said it needed to be ‘uncomplicated and workable for grass root dairy farmers’.

 

It will help milk processors by giving them clearer insight into their supply profile and making it easier to plan forward, he added.

 

The NFU has also been giving its opinion on the global market situation this week. Unsurprisingly, given the obvious divisions between it and FFA on the reasons for and solutions to the current situation, it does not agree.

The impact of world prices

Rob Newbery, in one of his last acts before leaving his post as NFU chief dairy adviser to head up the union’s West Midlands branch, has described the idea as ‘naïve’.

 

In an article published on the NFU website, he wrote: “Market management can only ever work in an environment where all players are working to the same rule book and where the market is in some way insulated.”

 

The article aims to show how European and UK market are now ‘entirely exposed to world prices’.

 

“To suggest that by restricting production here in the UK or even all of Europe, we could manage global commodity prices is very naïve,” he wrote.

 

“It would merely inhibit the ability of UK producers to compete in this growing global market, would penalise the most dynamic business and would leave our domestic market wide open to further penetration by importers of yogurts, cheese and other dairy products in the future.

 

“Supply management has to be a decision for each individual farmer or dairy company. Post quotas, farmers in the UK need to be given the freedom and flexibility to compete to grow their business, unencumbered by policy tools, designed for a bygone age.”

 

Mr Newbery said ‘price convergence’ of the EU milk market with global commodity prices - reinforced by the heavy influence of Arla, paying a European price, in the UK- was the reason UK prices reached 34-35ppl and, for some, have reached 25ppl recently.

 

It will also drive prices up when the global commodity market next peaks in price, he added.

 

He said the current situation is different to 2012 when the UK was bottom of the EU price table.

Long-term prospects

“Today, the conditions are very different. At the peak of the market in the Spring, UK prices were higher than average in Europe and now in the trough, they remain higher than most European contemporary prices – this is why the NFU believe that current market conditions are very tough – but not dysfunctional,” he wrote.

 

The longer term prospects remain favourable, he added.

 

“Demand growth globally is still predicted to be around 2 per cent per annum over the next 10 years,” Mr Newbery said.

 

“Costs of production, scale, efficiency and skill in the UK industry, mean that UK producers on average are still in a favourable competitive position, relative to others in Europe and the world.”

 

He predicted producers in countries like Ireland, Germany and the Netherlands would respond to lower prices and the threat over super-levy for exceeding quota, in its final year, by cutting back production quickly, resulting in ‘price advantage for UK farmers’.

 

The debate will continue.

  

Let us know your views. Is FFA right to be encouraging supply control?

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