But the striking thing about the industry is that once again it has quickly talked itself into a state of crisis largely of its own doing.
The headlines in the UK at present include such gems as “Dairy farming: No milk of human kindness left “; “Crisis in cashflow; farmers planning protest action”; “No whey forward – future of Britain’s dairy industry hangs in the balance”.
Prince Charles has weighed in on the issue, and even the PM is suggesting action needs to be taken to “protect dairy farmers”.
The major supermarket chains are bearing the brunt of the criticism for the plight of UK dairy farmers.
While this might seem intuitive given the industry’s exposure to the domestic milk market, the reality is that farmers directly supplying retailers are paid the highest, with prices linked to cost of production, not commodity markets.
Despite largely servicing consumers in its own local market, the structure of the industry and the way it does business ensures milk prices are highly sensitive to world prices and currency rate movements.
Around 52% of all milk was processed into fresh milk cartons in 2013/14, and a further 27% into cheese, the most stable of commodities.
Leading retailer Tesco today retails milk for £1 for 4 pints (about 2.3 litres) which equates to about 86c in our money at present. Our weaker dollar has lifted the Australian dollar equivalent of that price.
On farm, average fresh milk contracts to retailers sit in the range of 27-30 pents per litre (ppl), or 52-58 cents per litre (cpl), and most move with the cost of production rather than commodity markets.
Retailers claim they are wearing the loss-lead margins in the interests of proving their worth to shoppers as the cheapest place to shop.
In our terms, milk prices to consumers are a little cheaper, farmgate prices a little higher. Processors are compelled to run their businesses with larger plants and tighter margins, allowing for limited further investment in new product development.
Milk producers control a tiny portion of the processing capacity beyond farmgate.
First Milk is the only major farmer-owned processor, but still that company on-sells about 60% of its milk, processing the rest into cheese and ingredients through small plants.
It was under fire last month for delaying payments to farmers by a fortnight, on top of recent losses and its announcements of price cuts.
With a dominant domestic focus, there is little effective leverage created by the value of milk sold into a hungry offshore market.
Milk contracts certainly exist – the UK invented sophisticated agreement structures in the 1990s – but they contain short-term price setting mechanisms. There are a multitude of milk buyers, buying on a range of different terms.
The gap between highest and lowest payers is a staggering 14 pence per litre, reflecting the different market risks. It was telling to see leading processor Dairy Crest announce recently that they would commit to long-term price signals, offering a price commitment four months into the future!
So why is the industry again in strife? While it has a small volume of overseas trade, the UK is a net importer of ingredients from efficient neighbouring producers, and prices of cheese and butterfat are sensitive to currency movements.
When commodity cheese and powder markets weaken, the price signal sent by buyers exposed to these products is a blunt one.
It isn’t like this hasn’t happened before – the industry has seen much volatility in milk prices over time, yet progressively seen farmers sell off their ownership in processing in preference for milk contracts with a large number of buyers.
The milk producers that have suffered the most in volatile times are those with what are effectively “uncovered positions” – supplying a pool of milk to processors and manufacturers rather than to a stable market offtake.
When milk prices were strongest late last year, producers grew milk supply in an “every man for himself” frenzy, with little call for caution as world prices for the commodities were already on the way down.
By the peak of the season in the spring of 2014, milk supply was up 15% over the prior year – in an industry that is not structured to handle such surges.
What has come since to make it worse has been the glut of milk across the EU, US and New Zealand, slowing Chinese demand and a Russian import ban.
Those uncontrollable externals combine to directly impact UK milk returns, as the industry has never had the capital, culture or the leadership to work together to improve the supply chain and market access.
Until that changes, which seems unlikely, crises will recur. We should watch and learn.
Steve Spencer is a director of Freshagenda, a Melbourne-based consulting and analysis firm that provides food value chain insights and solutions to a wide range of clients from farm to retail.
Source: Dairy News Australia
