Report suggests bad deal for UK dairy suppliers

Retailer margins on liquid milk and dairy products in the UK have
increased significantly over the past 10 years - with the gross
margin on mature cheddar rising to as much as 60 per cent - while
farmgate prices and farm margins have continued to fall, writes
Anthony Fletcher.

The findings of the Dairy Supply Chain Margins 2003-04​ report from the Milk Development Council (MDC) helps to underline growing supplier concerns over the lack of transparency over supply chain margins and profits in the industry as a whole.

"The report confirms that weak commodity markets and processor competition have meant it is primarily retailers, and not farmers, who have benefited from improved liquid milk retail prices,"​ said MDC chief executive Kevin Bellamy.

"As a result, the six pence per litre fall in the farmgate milk price between 1994 and 2003 has generally increased retailer margins."

Bellamy said that the UK is a significant commodity producer of mild cheddar, skim milk powder and butter. It is these products that provide the base to the raw milk market.

As with all commodities, they are sensitive to exchange rates and as sterling has strengthened, commodity prices have weakened and resulted in farmgate prices falling.

"So it would be fair to say that while supermarkets haven't been responsible for causing the low prices, the report shows they have taken advantage of the situation caused by strengthening sterling to increase their margins,"​ he said.

David Homer, farmer and council member of MDC, adds that processors engaging in price competition with each other for big retail contracts is another factor placing further downward pressure on farmgate prices.

"We're dealing with a strange economic model at the moment, where having relatively few buyers at retail level leads to greater competition at wholesale level to supply large retailer contracts - which in turn leads to downward pressure on farmgate prices."

There is certainly intense pressure on milk suppliers in the UK, with retailers calling the shots. Tesco's recent decision to cut the number of suppliers from three to two mirrors Sainsbury's recent decision to deal with just two suppliers as well, while Asda jettisoned both Dairy Crest and Robert Wiseman in favour of an exclusive supply deal with Arla.

This trend towards supplier consolidation, say farmers, is bad news for an industry already in decline. UK suppliers have complained about their relationship with the four main supermarkets, prompting an audit by the Office of Fair Trading.

"At the moment the industry is hampered by an intensely competitive domestic market and a degree of exposure to low value commodity markets which continue to drive down revenue for producers and processors,"​ said Gwyn Jones, chairman of the dairy board for the National Union of Farmers​ (NFU).

"The report emphasises, and the NFU agrees, that it is critical the industry addresses this exposure and continues to add value to raw milk. Any cuts to milk prices would be disastrous and will have lasting impact on the fabric of dairy farming and the large rural economy it supports."

However, the report does indicate some potential opportunities. The UK milk price is consistently the lowest in the EU, and UK milk producers should therefore be able to obtain slightly higher prices out of sectors that are working effectively.

"For example, the trade deficit in dairy products has grown to £690 million, an increase of 50 per cent over six years," said Bellamy. "In addition, imports of speciality cheese have risen by over 40 per cent since 1998, to around 210,000 tonnes.

"The UK industry and in particular dairy farmers - through their representative bodies - need to address these opportunities by vertically integrating to strengthen their position in the marketplace, developing added value products, differentiating milk supply through altering production patterns, and stimulating export demand."

The NFU agrees that dairy production has a potentially profitable future in the UK, as long as the industry takes measures to address the considerable problems that remain in the sector, notably the lack of transparency and mistrust between different parts of the supply chain.

Critically, says the NFU, the top of the supply chain must recognise the need for a profitable dairy farming industry. To this end the union wants assurances from retailers that the effect of recent milk supply deals will not put downward pressure on producer prices.

"If they don't, then margins will continue to be under pressure, and this can only be exacerbated by the effects of CAP reform,"​ said Bellamy.

The Milk Development Council​ (MDC) is a non-departmental public body established by the agriculture ministers following the reorganisation of the milk industry at the end of 1994. It is funded by a statutory levy on all milk sold off farms in Great Britain.

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