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Potter's View: ‘It is only through Arla’s actions that the milk price hasn’t fallen by a similar degree'

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This month, Ian Potter tells us of a new processing plant opening up in Lancashire, about Arla’s pivotal role in prices and finally about the latest supermarket fiasco.
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Firstly I have to congratulate the Woodcock family, who trade as Yew Tree Dairy in Lancashire, for having the foresight and commitment to build a large butter-powder plant alongside their existing liquid dairy. The plant will be up and running by mid-2015.

Carl Woodcock told me the dairy world is changing and the business simply has to change to survive.

 

It would be brave, if not foolish, for Woodcocks to continue to have all its eggs in one basket by relying on liquid milk alone. With the new plant they will produce butter, WMP, SMP and concentrate. The plant can be run flat out to process just over half the milk Westbury processes, or it can be shut down for periods.

 

Up until now, Woodcocks has remained under the radar, but slowly growing and recruiting farmers. Now it has firmly launched itself onto the UK and the European dairy map.

 

Recruiting farmers is not necessarily the goal, so don’t go beating down Woodcock’s door because, post-quotas, there are likely to be lots of options with the plant in terms of contract/toll processing and buying spot milk in the post-quota world. I wish them every success.

 

On January 31, 2014, Arla Foods increased the milk price it pays its 2800 British owners by 0.74ppl. Under normal circumstances this would have instantly triggered price rises from competitors, typically within 48 hours. But not this time – only one milk buyer (Barbers) announced a substantial price increase. I am excluding Dairy Crest’s formulae price rebasing too.

 

By the time you read this article it will be at least 56 days since Arla’s increase and there has not been a flinch from its competitors. Not only that, but on February 25, Arla directs were notified of a 1.23ppl March 1 increase. Again, not a murmur.

 

Two years ago we had milk buyers dropping the price 2p, followed by another 2p, and farmers were not happy. And here we are, now, two years later, and one company is keeping the milk price high and stopping it falling and some farmers are still not happy.

 

In 2012, it was the differential between the cream price and the milk price which triggered the successive price drops. And yet that same differential exists today. It is only through Arla’s actions that the milk price hasn’t fallen by a similar degree.

 

Following my last article and items in my Friday news bulletin, I received a few emails questioning my objectivity as regards Arla. A few asked me if I was in bed with the firm. This really annoyed me. I would therefore like to know how widespread this view is across the industry. To help me, I am looking for dairy farmers to read the following three questions and reply by email with their answer to lydia@ipaquotas.co.uk. Pick 1 if you agree with the first question, 2 if you agree with the second, or 3 if you agree with the third:

 

1) Arla’s milk price increases have prevented the UK milk price from falling this spring. This is a good thing for dairy farmers, and worthy of a bouquet or two.

2) Arla’s price increase has prevented the UK milk price from falling, but that is a very bad thing indeed. (Please elaborate on your answer to explain why.)


3) Arla’s price rise has made no difference whatsoever to milk pricing. Believe it or not I have had two very long emails from two farmers wives who believe number two is the correct answer. The fact is, non-Arla farmers like their milk prices being kept high, but hate the fact it is Arla – a farmer-owned business – that is doing it. Why is that? It’s the same mentality some have of ‘I’m not bothered what my milk price is, so long as it’s higher than my neighbour’s’. I have never shied away from controversy in my articles and, as much as it won’t suit some readers, I wish to put on record that I can’t currently see a flaw in the Arla strategy. If you can, then please email me. Their only vulnerability is to volatile global markets. But Arla hasn’t got all its eggs in one basket, as most companies in the UK have.

 

I am praising Arla at the moment, because it is doing a good job for all farmers, not just their owners. Anyone who doesn’t see that doesn’t understand what is happening. But there will be a time when the market turns, Arla drops the price, others will follow, and the comments won’t be as positive.

 

If the moaning farmers who had spent time emailing me because I have written about Arla had spent the time writing to their own milk buyer instead, asking for the same price, maybe the UK price would be moving forward a bit more.

 

The recent price war battle between retailers with four pints for £1 or less is causing pain to many, particularly those operating in the middle ground where most can’t purchase milk from their supplier at that price. Corner shops are pressing wholesalers for milk at lower prices and for price support to retain business. It is a disaster – they all want to pay less for liquid milk. This time, though, with the Arla factor, it won’t be the farmers paying.

 

Meanwhile, production continues to rocket north at more than 10% on last year. Surely it can’t continue? Some pundits believe it will continue at these levels throughout the flush. I doubt it. It could be that the cows have milked exceptionally well whilst indoors and the so-called spring flush will be smaller than predicted. (I can only pray this will happen).

 

One bean counter has calculated that at peak there could be an extra 100 of our biggest tankers seeking an outlet for the milk. That is an eye watering additional 2.3m litres/day, which will see the current spot milk price of 31p/32p plummet and exert more pain and suffering.

 

If that materialises it is likely several farmers and processors will be on the brink of a disaster. A price correction is coming our way, but let’s hope it is gradual and not an overnight big bang!

Ian Potter

Ian is a specialist milk quota and entitlement broker. Comments please to ianpotter@ipaquotas.co.uk

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