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Potter's View: "Through this column I have previously issued warnings like this because the situation is simply unsustainable"

This month, Ian Potter questions whether a two-tier industry with its aligned and non-aligned producers is sustainable in the longer term, and goes on to look at ways in which we could promote the industry.

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Now this will not be popular with a certain elite section of the industry, but the gap between the so-called have’s (on retailer-aligned contracts) and the have not’s (those without) has widened to, in my opinion, totally unacceptable levels.

It’s now 10ppl or more, and for me it’s the elephant in the room and has to change. Retailers are now battling to compete with cheap milk from the discounters, which has sunk to new lows in the Midlands of a gut wrenching 35ppl for two litres (17.5ppl).

Let’s just look at Tesco, with an aligned pool involving Arla and Muller farmers, which is costing them upwards of £80million per annum, and rising! Tesco’s results were the worst on record and its share price almost halved between June and December last year before partially recovering.

Tesco’s producer price is fixed until November 1st and abandoning its commitment to its farmers is certainly not a credible option. But a variation most certainly has to be in the wind, and I think it might be imminent. Some Tesco farmers haven’t helped themselves, preferring to crow about their investment and what Tesco are paying for instead of focusing their efforts on demonstrating the benefits that the extra £80million brings to the retailer. Why haven’t the farmers who benefit, especially Muller Wiseman aligned and Arla directs, stepped forward to promote a common message? Some are even brazenly saying that what Tesco pays for includes some non-dairy costs, which they believe they have been smart in lumping into the cost of production! Presumably Promar doesn’t spot this!

Through this column I have previously issued warnings like this because the situation is simply unsustainable. The likes of Tesco and Sainsbury’s stepped forward in 2007 with a much-needed sustainable model, but it’s now time for an overhaul.

I do believe Tesco’s, Sainsbury’s and others would not be foolish enough to seek a way out altogether, but they will be acutely aware that it is time for a review because some of their aligned farmers are piling on the extra cows, feeding more concentrate, paying higher rents to grow maize in the belief that it can continue without them giving anything back. On the other side of the fence are my farming friends, Mr Envy and Mr Jealous, who are receiving anywhere between 15ppl and 24ppl and they would love to see their aligned neighbours’ milk price fall closer to theirs. I think, on this occasion, it will.

Those on non-aligned contracts are being forced to change how they do things to reduce cost. Those on aligned contracts receiving 30ppl+ are not, and are highly unlikely to be the most efficient producers. Change is in the air and Promar and the processors need to engage with the retailers to be a catalyst for the change rather than sit back. In that case something more drastic might come. Either the farmers deliver more of what the retailers want, or the retailers WILL review the cost of production model. In New Zealand there is a school of thought that low prices will deliver a long-term benefit because it will curb expansion, especially from EU farmers on housed systems. When milk prices were flying high there was talk of New Zealand farmers moving towards housing more cows and abandoning their low cost grassbased cornerstone.

Moving on, back in the summer of 2003 there was a joint press release issued by Milk Link (Barry Nicholls), former MMB Board member Allin Bewes, yours truly, and freelance journalist/my occasional partner in crime Chris Walkland, with the headline ‘Should we, could we, get the Milk Race back?’. The four of us set up a company called ‘The Milk Race Limited’, and I won’t go over which industry organisations and personalities ensured the idea was binned, but they succeeded. Fortunately, though, only for a decade. However, back in May I was delighted to have a great day out at Nottingham to see first hand this year’s Milk Race, the third in a row. And what a success it was!

For 35 years the Milk Race was a 10-day round Britain international cycle race and a cornerstone of the dairy industry’s milk promotional campaigns before deregulation. It has certainly risen from the ashes and I was pleased to see Arla, Dairy Crest and the Dairy Council/DairyCo promoting their milk, milk products, farming and the countryside to 50,000+ people of all ages from five to 85 at a major national sporting event.

Congratulations to all who made it happen and I hope its success is capitalised on. I am not qualified to verify whether it’s a cost effective investment of dairy farmers’ money, but to me there are three things which sell products today – pop idols, sex and sporting personalities. The industry has forked out for the first one but not the second! I am very much behind the benefits of using sporting personalities and cycling is both popular and topical.

I do believe as an industry we have to promote the sales of all our dairy products. That’s why the new Arla TV advert is so fantastic! I wish more companies would do it. The public like dairy farmers and want to support you but some of you are sadly poor, grumpy ambassadors for this exciting industry.

Milk prices continue to fall and as I pen this article the spot milk is back down at 12ppl and it’s five weeks past the UK’s peak production. It’s grim but heaven knows how bad it would have been if Woodcock’s new state-of-the-art 500 million litres/year capacity hadn’t absorbed a chunk of this milk.

Most, if not all, dairy analysts accept that prices will certainly remain low for all of 2015 and some are suggesting it will run through most, if not all, of 2016 until supply and demand are re-aligned. It’s going to get tougher and regrettably there will be casualties.

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

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