Media & Diary

An industry in crisis?

The dairy industry is in the news and in crisis.  Farmers are protesting, claiming that they face all of the risk, are not being paid enough for their milk and are hemorrhaging money.  The fear cited is that the UK dairy farming industry faces extinction.  Supermarkets are commonly claimed to be the bogeyman.  The latest plea is that the Government should ensure that farmers are “protected” through properly designed contracts with their milk buyers.

As one ponders the debate, there are some simple facts that have to be considered.  First, it is a fundamental fact that the UK as well as the World generally is producing more milk than it is consuming.  Under traditional market conditions this means that prices fall so that production is cut back.  This happens in all industry sectors.  Farming is not unique.  What is evident, though, is that as prices decline so many farmers are increasing their production in a quest to generate more income.  In economic circles this is the prisoner’s dilemma: do you produce more to generate income but in so doing, assuming others do the same, force the price even lower, or do you take a stand?

The second fact is that, numerically, most farms are simply too small and/or inefficient to produce milk economically.   The great majority is notoriously cagey about giving details on their operating standards and economics.  Many of them don’t have the high standards of staff and animal welfare that one should be expecting in this day and age. 

The third fact is that way too many of the people, who lead the organisations that are supposed to support farming, are long in the tooth and come from farming backgrounds.  The lack of fresh air in such organisations is evident everywhere one looks.

Taking the last two points together, the layman can be forgiven in thinking that as an industry dairy farming still relies too much on 20th century thinking.

There are some observations to make, too.  First, while the population wishes to have black and white fluffy things dancing around the fields, the consumer is only prepared to pay, in essence, for factory produced milk.

Secondly, the organisations that are meant to support farmers have been woefully inadequate in working with all of the appropriate stakeholders in promoting dairy food.  An example here would be DairyCo.  They have allowed other products described as being milk to muscle in.  Here I am talking of such products as Almond milk and Soya milk.  Where are the teats that produced these products?  We should take a leaf out of the French champagne producers when it comes to brand recognition.  Milk and many of its related products are without doubt strong supporters of good health as well as delicious to drink.  We need to hear more about this. 

Thirdly, one must not forget that the supermarkets, all of which are listed on Stock Markets, have an obligation to their shareholders to extract the best possible margin possible from their suppliers.  For sure they are not honest in saying what their margin is on selling milk.  Typically, too, they sell milk as they do bread as loss leaders to lure shoppers in so that they will buy much higher margin produce as they pass the shelves.  They are, though, far from being the only bogeyman in this story.

On our farm, which is not a super-sized farm but milks roughly twice the number of cows the average UK farm does, we have invested over the past five years to improve our infrastructure and standards of staff and animal welfare.  It is not an ultra modern place, but it is appropriate given the state of the industry today and tomorrow.  Because of this investment, we have improved our yields and gone much of the way to drive down our costs, helped of course by the recent decline in world feed costs.  Today, we continue to pursue excellence and reduce costs.  Given that roughly half of our costs can be attributed to food we are now pursuing a strategy of focusing on just the better yielding cows, selling those that do not pass muster.  This is reducing our milk production, but putting us in a better place to expand when the time comes, as for sure one day it will.

This farm year we anticipate generating a milk price of 31 pence per litre (ppl) and will see costs of around the same level.  Our buyer expects our standards to be very high and so, with respect, one is skeptical hearing that the average cost of milk production across the UK is 31ppl.

Not to be forgotten, in addition to the selling of our milk we will get this year the equivalent of a 2.8ppl through the sale of livestock, calves and cows, which is surplus to requirements.  So, with luck, we will make a little bit of money this year in our dairy business.  This is welcome, although it has to be said this surplus will not cover a depreciation charge on the recent capital investment, let alone a return on capital.

Four years ago the consumer of our raw milk undertook a survey of the depreciation charge of some 23 farms.  These included our farm and many, which did not supply milk to it.  The results were amazing.  Based on appropriate assumptions, our depreciation charge was over 6ppl.  The average of all of the other farms was less than 1ppl.  This points to a significant lack of investment in our industry.  It also points to the trouble that consumers face in the not too distant future:  an industry that has poor standards every which way one looks.

So, what to do?  First, farmers must recognise that they are facing market forces and it is not up to the Government to bail them out.  They need to recognise that to see a sustained improvement in the price of their raw milk they need to reduce production in the short term and invest for the future, improving welfare and standards generally.  Inevitably, this will mean that some additional farms will have to close down their dairy operations.  Farming is not “special” and for sure does not carry more risk than most other industries.

Secondly, led hopefully by an improved DairyCo, professional marketers and the supermarkets, farmers need to actively promote the consumption of milk and dairy products.

Thirdly, the consumer has to connect with its public persona and work out what it wants:  good quality, tasty, health giving food of known origin or something less wholesome.

Fourthly, the supermarkets should recognise the danger that the lack of investment in farming will cause.  They need to pay more to their producers conditional on high, visible standards of sustainable production being achieved.  At the same time they should recognise that the basic foods are inherently more valuable to consumers than trash food.  So, passing on some or perhaps even all of any increase paid to the customer should not backfire.

Martin Lovegrove

11th August, 2015

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