UK: Consolidate to boost margins, milk firms told

By: just-food.com | 25 February 2008

A reduction in the number of milk processors in the UK would improve margins among the companies and boost returns to farmers, a study has claimed.

The report, produced by economists at Oxford University, said UK supermarkets enjoy effective bargaining power throughout the milk supply chain and gain most of the margins on milk.

The study said that of the 15p margin on each litre of milk, only 5p was available for negotiation between processors and supermarkets. The economists said supermarkets were able to secure 3.2p, or about 64%, of that 5p margin.

"The model explains how competitive forces influence buyer-seller relationships within the supply chain and clarifies where the bargaining power lies in price negotiations," says Huw Thomas, head of market information at the Milk Development Council, which co-funded the report. "The insights it provides are powerful and in some cases they challenge the established wisdom in the dairy sector."

The study claimed that milk processors would enjoy higher margins if the number of the companies was reduced. Consolidation in the sector would not have an impact on retail prices, the economists claimed.

The study also found "generally no evidence" of uncompetitive behaviour by supermarkets in the milk sector.

In December, Asda, Sainsbury's and Safeway - three of the country's largest dairy processors - admitted fixing the price of milk, butter and cheese during 2002 and 2003.

The UK's Office of Fair Trading (OFT) also accused Tesco and Morrisons of taking part in the collusion. The investigation against the two retailers continues but Tesco has protested its innocence, while Morrisons has launched legal action against the OFT for linking it to the case.

Sectors: Commodities & ingredients, Dairy, Retail

Companies: Asda, Tesco, Morrisons