This month, Ian Potter looks at the prospect of mechanisms that will more closely match supply to demand but comes up against the fundamental paradox that dairy farmers tend to produce more when margins come under pressure.
By the time this article is published, bank balances will be feeling the effects of the price cuts.
Many farmers will be eagerly awaiting their (lower) Single Payment money too. But part of that will need to be reserved for the tax bills due at the end of January and July. Cash will be short in 2015, and the spending spree is over.
Some processors are guilty of bringing on some of the production problems themselves. Paying production bonuses to new and existing suppliers until April 2014 lacked foresight, for example. And farmers were encouraged by the organisations to which they pay subscriptions and levies to ‘grab the opportunities’.
So they did, and it’s they who are paying the price. UK farmers have produced up to 9.5% more milk than they did a year ago, only to find processors do not want it irrespective of the end product it could be turned into.
But here’s the question: can you name one business which produces 10% more and expects buyers to buy it all? It doesn’t happen in beef, cereals, pigs or lamb. Most produce to the market, and until producers and processors match anticipated demand such extreme volatility will continue.
Many farmers ramped up production quickly without talking to their milk buyer, expecting them to automatically take every litre they produced. This has to change and both parties have to agree limits. For some this may include something like A and B quotas or volumes. The current problem will return unless we try to do things differently. At least FFA’s David Handley is coming up with ideas, like the A and B. It’s a constructive suggestion in my view, and will have merit for some processors.
To my mind farmers have three options:
But I think I know what will happen. Many will look to produce more milk to maintain incomes, thus adding to the problem.
There is minimal light at the end of the tunnel. Winter forage is good and if we have a good spring, that’s when the casualty department will fill up both at farm and processor level. As this article goes to print, Arla has announced there will be no price adjustments for November. Good for it, but don’t read too much into that because the fundamentals have not changed.
It’s a blood bath wherever I look, particularly in cheese and the middle ground liquid sector where the extra milk is sloshing around and several are hawking cheap milk around, chopping the legs from incumbent processors and, in turn, dragging the whole market down.
On cheese, most processors last year were increasing farmgate milk prices on a monthly basis, which actually left few with little or no margin. For them it is grim, as milk costing well over 30ppl has gone into cheddar which is still maturing and which will come out of store to face customers demanding lower priced cheese.
Some farmers are under notice to find a new milk purchaser with many under instruction that if they can find a new home they can leave at the end of the month as opposed to having to serve their full notice period. The NFU president talked about some producers only getting around 25ppl in a press release in early October. If only his information were correct. Some are on just over 17ppl, with only one option of where to sell their milk, and some are our very largest producers. But then again, they did have the option to sign long-term secure contracts but chose to ride it out on shorter, seemingly higher, priced ones.
On that note, there is one financial winner out of this mess – DairyCo – because the extra milk produced in the past 12 months has netted it an extra £600,000. Questions are already being asked about how it will be spent. I hope its new chairman spends it wisely for the benefit of all the industry and not telling farmers how to produce more milk.
Questions are also being asked about the Tesco TSDG model. It works for farmers but does it work for Tesco? Yes it gains the PR high ground and is less attractive to FFA and its protests, but does that make it worth it? No it doesn’t, and TSDG farmers in my opinion need to stop focusing on the cost of production and their milk price and come up with additional, tangible benefits for Tesco if they want to maintain the aligned pool.
A difference of 9ppl plus between TSDG and First Milk ‘liquid’ is the elephant in the room. Do I believe Tesco, Sainsbury’, M and S or Waitrose will ditch the aligned concept? No I don’t, in fact, I believe the likes of Morrisons will have to follow suit and come up with a similar scheme. Morrisons is on the radar and its commercial team is squeezing processors and playing ducks and drakes with its sourcing policy. Until Morrisons demonstrates it is as serious as others about supporting UK dairy farmers, it will remain firmly on FFA’s radar in blue flashing lights
Those retailers which have no clarity will be under suspicion for buying dairy products cheaper and exerting more downward pressure on farmgate milk prices. It’s hunting season, and FFA is rooting out retailers, food service companies, discounters, caterers and any dairy customers who are exerting downward pressure. Those which declare their position as supporting the industry get a ‘get out of jail free’ card, while others may find their name is associated as one taking money off farmers, and with that comes the attention of Mr Handley and an army of angry farmers.
Finally, hats off to Arla for its high profile and positive ‘Support our farmers’ campaign to link its owners, with its brands, with consumers.
It’s a brilliant campaign and I wish it well. We need more like it. DairyCo please take note!