Despite the historical roller coaster ride of organic milk production, things currently seem to be settling into a more stable mode. Peter Hollinshead talks to Nicholas Saphir, executive chairman of the Organic Milk Suppliers Co-operative.
The last time I caught up with OMSCo it was having a bit of a hard time with organic milk effectively going into the normal liquid pool – now you tell me you are flying.
What has caused this turnaround?
If you look at the last few years, unlike northern Europe or America where organic consumption continued to grow during the recession, the UK market went backwards. We could see conventional prices falling through the floor and that if we weren’t careful we would end up in a boom-bust cycle again, and the only way to deal with that was to find markets that would significantly add value. We wondered if we could produce milk to an American standard, and we could, and could we find the right partner, and we did in Organic Valley, and so developed the Kingdom cheese business. We are also exporting butter to manufacturers in the States and Europe as there are a lot of manufacturers in Europe wanting to produce organic product for the States and want organic material which meets American standards, and we are the only milk producer in Europe currently able to produce to these standards.
OK, let’s look at the nitty gritty of the UK market first. With the conventional market here struggling to average somewhere around 20-22ppl, what are you currently returning to your members?
We don’t have a single price as it depends on seasonality and the like, but you can say the current premium against Defra farmgate conventional price is probably about 14-15p.
So you are at 35-36ppl?
That’s for sure, but you are on the bottom end of it.
Okay, a figure like that, which we will say for the sake of argument is around 37-38p, would make many non-organic producers green with envy, but of course it’s not the price that is important but the margin – how do your margins compare with those in the conventional field?
You have to say it is not just about the cost of production, which is higher, but it’s also higher in terms of collection and higher in terms of the management of the farm itself because you have to put much more attention into the detail. So unless you have a premium that is getting somewhere near that level, then it is uneconomic. We need that sort of level of premium to sustain organic production in the future.
I’ll come onto that in a moment, but to put your business into perspective you handle about 0.3bn litres, around two-thirds of all UK organic milk, and it must be a logistics nightmare collecting from all those scattered producers?
Yes, we’ve taken a view historically that we have a duty to UK organic farmers, which means we don’t have the most intensive milk fields in the country, and as we haven’t been selective that means our cost of collection is comparatively high. We do have milk swaps with other people which helps, but thickening up the milk field is going to be the primary goal of any further membership extension as you cannot go, as we do, from the north of Scotland to the tip of Cornwall, for effectively 250-300m litres and not suffer compared with conventional milk where it is all ring fenced around the factory.
Can you give me a figure for your cost of collection in ppl terms?
We have three different elements – farm collection, rerouting to factories and exports – but our cost of collection compared with conventional is going to be double.
You say your salvation has partly been in the export market, what percent do you export in one form or another?
Well, at the peak of the over production we were exporting more than 30% of our total collections, and now we are reducing significantly our exports to Europe and building the American business, and wish to see exports balanced at around 25% of our total production.
I believe you have just secured a US contract for organic mozzarella principally off the back of the antibiotic free milk (this means no milk from any cows that at any time may have been treated with an antibiotic for any reason), and this is on the top on your existing antibiotic free Cheddar. What is stopping the US producers, keen entrepreneurs as they are, from generating their own specialist milk for this market?
First of all we have this arrangement with Organic Valley – or rather the CROPP co-operative which owns the brand – which actually protects our long term position, and we have product which is different from that of the States. You have to remember there is incredible demand for GM free product – not just organic product, and it is difficult for the Americans to produce enough GM free.
Yes, that is the arrangement with CROPP, but there will be other people producing organic milk who could come in and fill that slot you are filling?
Yes, this is a race. What is interesting about what we have done in the last two to three years is we have actually taken the concept of producing to specific market demand, and with our partnership with America, and one or two other things we are doing at the moment but haven’t announced yet, we are talking about a global reach and we are ready to be very flexible and react to change.
I’ll come onto the GM bit in a moment, but your arrangement with CROPP says it will ‘allow both co-ops to market each other’s bulk and branded products’. Does that mean we will see US product coming over here shortly?
I think there is enough of a cultural difference between the US and UK that most of the products currently being sold in the US by Organic Valley would not automatically transfer to the UK. But I expect we will see some of their products in the UK in the fullness of time.
With all this potential demand at the back of your mind, how frustrating is it for you as a businessman that you may possibly be short of product to continue this development in due course?
Not worried at all actually. We are very clear it is our duty to produce the best return for our members and that means we will expand production initially from our own members, and then from recruitment, according to the forecasts we have for increased sales. This year we have introduced an added premium for extra production and the members have responded. We will start looking at taking more members in but only do it at a pace we can manage. One of the big lessons from the past is that people have converted and then looked for a route to market – that would be a disaster.
But the number of organic producers must be declining rather than increasing?
We are not losing any members – for the last two years we have seem no decline in membership and we would have expected 5% loss a year just from retirement, but we have seen virtually no retirees.
Just give me a figure for your current membership, if you would?
It’s 250 members.
I suppose what perhaps is most remarkable is how a fairly small co-op like your own secures these seemingly lucrative contracts – do you have a big marketing team out there drumming up business?
Well, let’s put it in context. We turn over £100m so we are not actually a small business, but I am delighted over the last 10 years OMSCo has built a management team that is loyal and committed, and is excited by what is going on. I think it is about focus and vision. When I came into OMSCo I said at the time I was a sceptic about organic and that organic farmers tended towards the Luddite, but I have been absolutely stunned by how innovative and creative the membership is.
And you say your turnover is about £100m – does the co-op actually own processing plant or does it do everything under contract?
We have a policy that says we are not in the business of running factories – we are focused on getting the best return for members and there is generally plenty of capacity out there for us to be able to use toll processing. However, we are getting closer into partnership with our processors and customers, and you will find us becoming more integrated in that way. We have powder and speciality butter – we have been moving product across to the continent and to Ireland to process for our markets… would we love to see more capacity in the UK, we would, but we are using UK cheese makers, UK butter makers and continental powder and butter makers.
I believe you adhere to the co-op remit that prices are averaged across all producers rather than the ones whose milk goes abroad... do you make a profit and if so how do you distribute that... is there a thirteenth payment?
We don’t set out to make a profit. We return to members net everything we receive from the marketplace, and, yes, all members do get treated equally except those members that are asked to do various added-cost things and they get a reasonable return for that effort, but the balance of that particular premium goes back in the pool as well. I think we are probably the only co-op to do it and that is to give each member an individual forecast month by month for the year ahead of what they will get, and that is the budget, and if there is a surplus on that budget at the end of the year then they will get a thirteenth payment, but we don’t set out to have such a payment.
In the conventional sector we are finding it particularly difficult to compete on the global stage, especially with the surplus overhang and the strength of the pound, yet, paradoxically, you appear to be thriving, so have you any advice for us in the conventional sphere?
Far be it for me to give advice. It’s a complex and difficult world. Currency is an issue and we have a very clear policy as to how we hedge currency – we are hedged for the next 12 months so currency is not something we play with. Yes, the pound is strong which makes it more difficult, but that means we have to be constantly looking for added value markets. Advice? I think farmers have to accept there is no magic bullet to deal with this current problem. The markets are going to be volatile from hereon in. Europe is no longer the world balancer – and I’m talking of Brussels – it will not defend dairy producers in terms of pricing. The world will be volatile, and farmers had better make sure their route to market is the right one. Every producer has got to look as to whom they are selling, or through, and make sure they put pressure on that organisation to do the right thing as regards added value. Otherwise all that happens is the farmer takes the bottom price, that is the price left after everybody else has had their margin. And that isn’t going to be sustainable in a marketplace where supermarkets are using milk as a loss leader in the UK, where bottlers have invested an enormous amount of money and have got to make a return, and where farmers are seen, to a great extent, as the fodder to that process. Farmers had better start to think how they influence their route to market and don’t look to somebody else to actually produce a return, or rely on fate, Government, or some kind distributor who has decided it is going to help you.
Which is a pretty bleak picture really. Do you see any sign of that happening in the conventional milk market?
I don’t think it is bleak – it is realistic. I think what it says, like in the commercial world generally, is that there are going to be winners and losers and there is no industry answer. Are there signs – yes, I think there are pretty good farmers out there and some of the farmhouse cheese making activity is very interesting and some of the big distributors are doing some amazing things. My concern with the big distributors or co-ops, like Arla or Muller-Wiseman, is that their focus naturally will be to use UK milk for UK consumption and if they have a long arm then the natural inclination may be to use other sources of supply for their world markets. I think it is for their members and suppliers to keep making sure their organisations focus on UK returns to UK farmers, and that they have a belief in the UK to make that investment in not just UK liquid or cheese, but also addedvalue opportunities.
Do you see any future while we have that devaluation of milk in the domestic market by the retailers of ever lifting that price very much?
I think there is general recognition in the industry that we cannot go on like this or we will lose a lot more milk in the future. I think there is momentum beginning and the pressure from retailers, distributors and particularly farmers is focused on just that – how you add value both in the UK and for export.
Just to come back to something you mentioned earlier and that is the GM element. Are you perturbed the UK government may be looking a little more benignly upon the idea of GM?
You have to remember that Scotland and Wales are different – both have said they will not go along with GM development and we have a lot of production there. Do I think the UK Government’s thinking about lifting the barrier on GM production is going to hurt us, yes, I think it could. Science has moved on since GM was introduced and there are other ways to lift agricultural yields economically without the risk or potentail commercial damage. It is interesting American consumers have started a significant movement in wanting to buy GM free products to the extent they have an organisation to certify GM free, and it goes on the label.
Does your US product have GM free on the label?
Finally, in your chequered history of organic production, you seem currently to be on a roll, how do you plan to safeguard your future?