Editor's viewpoint: Global factors hold sway over UK milk prices
The price of milk has made national headlines in the UK
The price farmers are paid for milk has again made national headlines in the UK - and again it is the country's supermarket chains and processors in the firing line. Even David Cameron has weighed in on the issue.
There should be sympathy for dairy farmers. Supplying milk is hardly the most lucrative endeavour at the moment and some farmers are under severe pressure.
However, for all the data claiming to show how milk is now on sale for less than water as UK supermarkets battle on the price of staples, it is facile to point the finger at the retailers. The UK farmers, like their counterparts around the world, are at the mercy of global factors.
This week, a group of UK politicians called for all dairy farmers to be included "in protection against major retailers" by the country's Groceries Code Adjudicator.
Anne McIntosh, chair of the Environment, Food and Rural Affairs Committee, said: "The vast majority of dairy farmers fall outside the protection offered by the Groceries Code Adjudicator. She can only investigate complaints involving direct suppliers to the big ten supermarkets and retailers, and as most milk production is small-scale, that excludes most dairy farmers.
"The EFRA Committee thought that was wrong when the GCA was set up in 2013, and events since then justify our view that her remit should be extended to include small-scale suppliers, whether or not they have a direct relationship with the ultimate seller of their produce."
EFRA says 3% of milk producers supply direct to retailers and the "vast majority" are not covered by the GCA.
The MPs on the EFRA committee should be applauded for at least speaking out on the issue. And, on a raft of issues, it is right supermarkets should be placed under scrutiny.
However, while the EFRA committee acknowledged the "volatility of worldwide and domestic milk markets", it must be underlined global factors have become perhaps the most significant influence on UK milk prices. Global prices of dairy commodities fell 50% in 2014.
Some industry watchers sought to defend supermarkets this week. "Liquid milk is currently a prime product in the footfall battle for the UK supermarkets, particularly the discount channel," Shore Capital analyst Clive Black wrote this week. "Should such low prices persist then the other major supermarkets are likely to be drawn into a battle where gross profit is largely being transferred from the retailer to the consumer. Note that whilst wholly unhelpful to the reputation of milk, in our view, farmers supplying supermarkets are largely protected from the worst of these market conditions through their transparent supply contracts, as it is the supermarkets that are funding the discounts; UK supermarkets are still paying the highest price for milk from farmers in the UK."
Tesco and Sainsbury's are among retailers that have devised contracts to pay farmers above the cost of production. The two retailers, alongside Marks and Spencer, lead the field in the price farmers receive for their milk (and Sainsbury's sought to highlight the gap between what the three pay and what others do with an advertising offensive this week). Could the likes of Morrisons pay more?
However, as Black argues, there are "bigger forces pressurising dairy farmers' incomes". He said: "Weak international commodity prices, primarily reflecting damper Asian and Middle Eastern demand and the knock-on effects of Russia's ban on EU food products, are making for very challenging conditions for British dairy farmers, albeit falling input costs e.g. feed and fuel, may mitigate some of the pain for milk producers."
Are the processors to blame? Well, they are hardly prospering. Dairy Crest has announced plans to quit processing liquid milk, a prospect the City is hoping for as some analysts estimate the company's dairy division will make a loss (excluding property) in 2014/15.
The issue is not just linked to the price of a pint. UK dairy co-op First Milk has found itself under tremendous pressure. The co-op has deferred payments to its farmer-members for their milk by two weeks in a bid to improve its cash flow. It has also increased the capital investment made by its members. The bulk of First Milk's business is not in liquid milk but in cheese and powder, a "market mix", chairman Jim Paice told farmers last week, that has "taken a bit of a hit".
What can be done? The laws of supply and demand mean the situation will ameliorate in the coming months. That's not to say some farmers will not quit dairy farming, which will be a shame.
However, looking forward, if the UK dairy industry is serious about long-term sustainable growth, a concerted plan of action is needed.
Where criticism of the supermarkets holds up are the claims retailers need to do more to convince consumers to buy British.
And, to confront a global problem, a possible global solution exists: export. Dr Judith Bryans, chief executive of industry association Dairy UK, said bringing more farmers into the protection of the GCA would not help the situation and pointed to the industry's own voluntary code.
"We do not believe that extending the powers of the Grocery Code Adjudicator would help to address the challenge of volatility, and contractual relationships between farmers and processors that are already covered by the voluntary code," Dr Bryans said.
She also said the EFRA committee itself recognised the UK's global competitiveness was key - but argued the industry needed support from the country's government.
"The committee clearly recognised the fact that the main driver for the downturn in milk prices is volatility in global markets and there should be greater promotion of UK dairy produce.
"In particular, we support the committee's recommendation that Defra explore practical steps to help the export of UK dairy products, and there are clearly identifiable areas where government can help, such as the simplification of export documentation and the funding of foreign inspection visits. We also believe that longer-term country of origin labelling will be of benefit to the industry and to the British consumer.
"We agree with the committee that the industry's future lies largely in its own hands and its development is the most effective mechanism to protect farmers from price volatility."
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