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Potter's View: Distant glimmer of hope for milk price

This month, Ian Potter has some slightly better news of the prospect of declining production, takes a look at AHDB’s plans, scrutinises First Milk’s financial reversal and finally wonders just whether the Tesco liquid model is sustainable.

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Good news! Milk production is easing across the UK and, most importantly, across Europe and globally. UK volumes are dropping by 4% and 5% against last year, equivalent to around two million litres a day.

 

Futures markets and auction results are slowly trending up and WMP and cheddar prices are nudging north. Cull cow numbers are up 20% in March and, according to AHDB Dairy, are at their highest level since 2006 – the time OTM cattle were allowed into the food chain.

 

We are, I believe, at 6.35 on the clock having already passed the bottom at 6.30. The trend is now up, but remember, intervention stocks are worryingly high and the increase in Europe SMP intervention stocks is scary.

 

It is only a slight U-turn and a distant glimmer of hope in a market which some analysts are now predicting will not pick up until late 2017 or early 2018. Remember a pick-up does not, in my opinion, mean a return to 30ppl.

 

There is now the option for EU member states to provide state aid to dairy farmers for up to three years to a maximum of €45,000 (£35,000+), which could be directly linked to a freeze in production on a farm. There is even talk of financial incentives to those who cut milk production. Just don’t bank on Defra doing this and paying out.

 

AHDB has published an activity review report which confirms it has a lot of work to do. But at least it accepts its shortfalls and recognises it needs to demonstrate a return and a benefit on the investment made by levy payers.

 

Under the heading of ‘Communication’ the report refers to ‘a very strong view expressed across producers about AHDB’s communications…’. On reading this, one dairy farmer said AHDB Dairy ‘is guilty of producing masses of information, which us dairy farmers pay for and don’t use or understand. It’s about as much use to my business as tits on a bull’.

 

The report also acknowledges ‘the organisation should provide more forward looking market insight and analysis in addition to historic price reporting’. That’s a bulls eye for me, and I, for one, was very unhappy that AHDB Dairy shied away from giving dairy farmers strong signals on dramatic milk price falls months before farmers realised. It remained in hibernation and failed to give notice to farmers to prepare for a downturn while others, including me, were lambasted for talking the industry down.

 

AHDB Dairy has to think differently, be brave and communicate the signals – both positive and negative – to farmers whether the medicine is tasty or bitter. Just for the record, and no doubt to the delight of one or two top brass in AHDB Dairy, I have confirmed that if they communicate more hard hitting commentary on the industry I’ll shut up shop and retire.

 

Finally, on export development, the organisation has realised it needs to do signficantly more work and the budget has been boosted. That’s good news too!

 

First Milk’s fortunes, under Mike Gallacher’s captaincy, have improved and in the last year the business has moved from a £20m loss to a £4m surplus, before one-off restructuring costs. Crucial to this is the cost savings made. Yes, there have been milk price cuts, but no more than others and its price is comparable to other commodity buyers now.

The senior management has focused on how it can mitigate the impact of the market on members’ milk price – a tough job in the current market. His predecessors got away with paying one of the lowest milk prices for years, but at least today the business no longer suffers the pain of balancing on behalf of the industry now that it is out of Westbury. He has made the big plays and now the focus needs to be on the simple stuff. The signs are cautiously encouraging. He will have to continue to find further cost saving and efficiencies across all areas of the business, which will be tough and painful.

 

The recent move by Tesco to dump its COP cheese model, which automatically encouraged farmers to increase production, has received limited analysis. When TSDG piloted its cheese group with Parkham Farms’ producers in 2012, the premium was 1.6ppl above a ‘top secret’ undisclosed basket price. Today it’s allegedly 2ppl.

 

Parkham backed Tesco to move from COP as it was convinced the new model is more sustainable and, on balance, I tend to agree. Yes, the move is a financial blow to the farmers but sensible farmers involved with Parkham and First Milk are likely to support the move and want a long-term direct relationship with the retailer, and will listen to Tesco’s requirements. The reality is if Tesco offered the same 2p milk for cheese premium today, First Milk and others would grab it with both hands.

 

But the Tesco move to have dedicated First Milk suppliers to the Haverfordwest Creamery, and the switch of 200 million litres of liquid milk from Arla to Muller, sends a clear signal Tesco doesn’t want to share its premiums across all co-op members.

 

So where does the cheese model leave TSDG liquid suppliers currently on a COP model, which is now not market related? Producers involved will fight to retain the status quo, but will surely acknowledge the warning signs and clear direction of travel in that Tesco wants to slash the costs of its TSDG pool. And quickly!

 

It may pay well at the moment, but the price gap between the non-aligned is narrowing fast. When Arla opened up a final window of opportunity for its members supplying Tesco to leave the coop and become Tesco directs, few farmers actually jumped ship. For me this sent a powerful message that those farmers joined Arla to be part of a 13,000 strong EU co-op which owns brands and invests heavy in new product development. They declined the invitation to have all their eggs in the Tesco basket, and I reckon they were right!

About Ian Potter

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