IP DAIRY FARMER – MARCH 2017
There are fears that with a good early spring we could be in for another rollercoaster farm gate milk price ride as milk volumes increase further.
There are milk processors, particularly on the liquid side, who gave numerous reasons as to why producer farm gate milk prices lagged behind the 2016 rapid increase in spot, commodity and cream prices. For many farmers their prices moved at a glacial pace as they struggled to make ends meet. The issue now is whether processors will attempt to reduce the price in reaction to falling cream, commodity and spot prices quicker than they put them up! (That’s assuming they are not on a contract which tracks the prices up, that is. Farmers should certainly be ready to challenge their purchaser if they do!
If the various co-ops operate as they should I expect one or more will try their hardest to increase farm gate milk prices in March and April, with the aim of getting and holding prices through the flush at around 28-29ppl. Whether the others take a similar line will be interesting to see.
In the case of our biggest co-op, Arla, now is the time to demonstrate that its UK model works. The numbers show that the currency smoothing mechanism has held back farm gate milk prices by around 2.5 , and that means this extra money should flow to members during the next 18 months. In fact, given where the Arla milk price is today it would comfortably be over 2ppl higher were it not for the currency smoothing mechanism.
There has been lots of talk about how to smooth out the tops and bottoms and this model is the one farmer’s who joined Arla signed up to. Hopefully further increases from Arla will filter through in March and April, and if they do this should confirm to members that the model does, indeed, work and will ensure they are no longer behind the curve. It’s unlikely to end up being the top price in a league table, and it is often said and proven that only fools chase the top prices.
Finally on prices I wish farmers would focus on the independent facts and not the rubbish pedaled by some spin-doctors as to what their firms’ milk price is. For many years Dairy Farmer has featured Steven Bradley’s www.milkprices.com and in my weekly bulletin I only refer to his numbers. Unless Steven verifies the numbers to confirm what a purchaser’s milk price is and what their ranking is I ignore it, and so should farmers who are being courted!
Now Muller. Its ambition is to be the biggest and best milk processor in the UK and the buyer of choice for dairy farmers in its catchment fields. As part of this ambition its producer communication is now focused on developing the best supply group relationship, having lost ground in 2016 following the acquisition of Dairy Crest’s liquid business. It wants, it says, “a mature and trusting relationship” along the lines of the one the former Dairy Crest producers had with Dairy Crest Direct.
The cornerstone will be electoral accountability, which is fundamental to dairy farmers as it gives them a say. Muller have listened to feedback from its first series of farmer meetings with its 1900 or so suppliers, and it’s now down to those farmers to elect 21 farmers to a forum who, in turn, will then elect seven to represent them on the board.
It’s no good some big shot farmers thinking this is an opportunity to kick some back sides and get stuck in to Muller’s management. It will require farmers who understand the brief and the responsibilities and, for me, ones who are open minded and can think outside of the box and – believe it or not - respect non-disclosure! We have seen too many boards and directors full of farmers who were self-denying in their competence in such positions, some of whom simply wanted to feel important when in reality they were impotent.
Muller’s plan to change the directors by rotation over a three year period is excellent because, just like nappies, representatives all need changing regularly… and sometimes for the same reason! It’s now down to Muller farmers to put the best candidates forward. From now on there’s no point standing on the sidelines throwing bricks if you supply Muller. It’s time to put up or shut up!
It’s a fact that post quotas UK dairy farmers are competing at world market prices and to do so profitably will require a clear plan of action. The same will be true post Brexit.
The UK is the largest cheese importer in the world and 98% of our dairy imports come from the EU. Yes we can do a huge amount to replace imports of dairy products to become more self sufficient. However every man and his dog, and led by our close neighbours from Ireland, will be banging on our door to get their product into the UK, especially post Brexit. Then we are unlikely to have the cushion of intervention storage, which prevents prices falling lower.
Uncontrolled expansion of milk production to the tune of an extra 1.9billion litres (+ 14%) in less than three years was a costly disaster for all of you. There was no increase in domestic demand to soak up this extra supply. As supply plummeted prices consequently recovered because the recovery was supply led NOT demand led. I still hear from milk purchasers who struggle with the fact that some producers believe it is their divine right to increase and decrease output without giving any early warning to their milk purchaser. But on the flip side some milk buyers think it’s their automatic right to operate discretionary and even discriminatory pricing.
In farmer language the best analogy I can come up with relates to feed purchasing. If you order 20 tonne of bulk feed and the driver arrives and blows in 23 tonnes and you will go mad because the bin is over flowing. Then, four months later, you order 20 tonnes and he only delivers 17 tonnes because he’s not making any money from the 17 tonnes. That’s a 15% variation to what you ordered on both occasions… a similar variation to the average farmers additional output in three years!
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IP DAIRY FARMER – FEBRUARY 2017
Recently I spoke to a couple of prominent dairy cow auctioneers to try and determine whether the run of price increases had resulted in a noticeable reduction in the number of dispersal sales compared to 2015 and 2016, on the premise that some farmers perhaps have decided to carry on now that better times have arrived.
I was, however, slightly surprised to learn that the majority of farmers wanting or needing to exit accept that volatility is here to stay, and that many are now seriously considering getting out now cow values are higher. When values were around £750 a head - just £100 to £150 above the cull value - they wouldn’t sell, but values are up around £300 - £350 to around £1100 now, and this is encouraging many to consider quitting. Others only just managed to keep afloat, particularly when prices dropped below 20ppl, and it is now clear terminal damage was done.
The feeling is that significantly increased herd values will result in some going into early retirement, or at least hanging-up the clusters, especially those with no one following on. That last price slump went beyond the feeling among many farmers that quitting was in some way letting the family down. Many sons and daughters witnessed what their parents went through, and they don’t want to go through it themselves.
The good news is that if this is going to be the direction of travel at least the farmers involved have control of the situation and their destination, rather than waiting for crippling prices to force a decision on them. So my message to those sitting on the fence is this: please don’t suffer in silence, and if you decide to quit then treasure the memories before it is too late.
I hope lessons were learnt from the last slump and that farmers don’t have short term memories as to what happened, especially how their milk purchaser treated them.
In addition, now that prices are knocking on the door of 30ppl, please think twice before you swallow the idea that putting on extra cows will automatically translate to a better lifestyle, even though it is in a dairy farmers nature to expand.
For those who remain in the industry what is needed now is discipline. Most of you have ruthlessly reduced cost and maximised milk from grass, so don’t throw that knowledge and experience to the wind now that milk prices have increased, use them to regain lost income and start to build a war chest for the next big downturn. It will come sooner than you expect, it will hurt, and it could easily be another three year slump.
The liquid premium is a rural myth and an unfortunate hangover from the old MMB days. Retailers, together with some processors, have certainly put the final nail in its coffin, ensuring liquid milk is commoditised with limited opportunity to add value. Every man and his dog processor fights for every litre of liquid business, and for those involved with the likes of Tesco it’s even on open book accounting terms. The retail giant knows exactly what other contracts its processors have and at what price (or at least it thinks it does!).
One idea to restore a liquid premium is the recent launch of free range milk and its intriguing idea of a ‘Black Top promise’. I am not a marketing guru and personally I struggle with the Black Top idea because to me the colour black conjures up images of death, funerals and darkness. However, the launch has certainly stirred things up a bit in the industry.
I was surprised to hear that the people behind the launch categorised our main retailers into “good, bad and ugly”, having accepted that in order to sell volume they need to sell via retailers. I don’t believe it’s a good idea to openly criticise established retailers when launching a new product, especially if you want or need them to open their door to you. Morrisons was classed as “ugly” at the launch, on the basis that their Milk for Farmers initiative does not see all of the 25ppl going back to British farmers. There is no need to debate that further as you all know my thoughts. If I were the sales person for Black Top milk I think I would delete Morrisons (“ugly”), ASDA and Co-op (both “bad”) from my contact list because their response is likely to end with the word “off”.
Now Brexit. Every paper you open has an article on it. As we negotiate trading terms post Brexit for the dairy industry a key goal has to be to replace imports, particularly of cheese. That sounds straight forward but remember we have a processing industry dominated by non British influences and connections e.g. Arla, Muller, Glanbia, Paine & Partners (AKA Meadow) and First Milk (who have a sales deal with the Irish).
On the cheese side we have a selection of quality farmhouse cheese producers to be proud of, and who should be looking to scale-up to replace imports from mainland Europe and Southern Ireland. But having stated that let’s face reality - those imports are mainly from importers who have what some would term an unhealthy hold on our cheese industry. That makes displacement of foreign cheese more challenging.
Finally, following the release of Meadow Foods annual results for the year end 31st March 2016 - in which MD Simon Chantler received a thumping £2.3m for the second consecutive year - numerous readers suggested I compile league tables showing which milk processors make the most profit per litre of milk (Meadow’s is 2ppl), and another one for the top paid person in each business. Thanks for the idea, but no thanks! Perhaps AHDB would like to pick up the challenge?
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IP DAIRY FARMER – JANUARY 2017
As I write the glacial pace of milk price improvements from mainly liquid milk purchasers is understandably attracting huge criticism from those affected. The liquid market is now almost a millstone, with the liquid premium long gone. The market is being led up by butter and cheese and the liquid buyers might have their work cut out to match cheese prices going forward.
On previous occasions like this producers have blamed imports as the culprit but not this time. Many farmers are convinced their processor is continuing to squeeze its farmers simply because it can.
The differential in price is staggering. For example, the November AMPE was 31.5ppl and the November Muller non-aligned standard liquid litre price was 20.94ppl (plus 2.623ppl retail supplement) making 23.56p. Similarly Arla’s member price was 23.14ppl (including a forecast 13th payment) and some of those on basket prices were under 20ppl. Is the market - particularly the liquid market - functioning so poorly that it warrants an outside investigation / review I wonder. Yes, I hear you cry!
Resignations to some milk purchasers have rained in, and while it has taken time for the penny to drop the affected processors realise they cannot recruit at their current milk price. Sadly for them the loss of large volumes of milk, in addition to the loss of trust and producer support, has resulted in permanent reputational damage. Their only option is to try to retain their remaining core farmer suppliers.
But farmers are not all saints! Listen to these stories of the ultimate milk tarts! The farmer signs a new contract to commence supplying purchaser X before his existing contract to supply purchaser Y ends. But if that wasn’t enough he then decides he wants to supply an ingredients processor, and contacts everyone to say he hasn’t delivered any milk to X, so he can go where he wants – despite having signed the contract! Another had his business rescued by processor Z when he had no milk contract, but as soon as that processor was 1p off the pace to a rival the farmer jumps ship! That’s loyalty for you! Not. Processors should take a very hard line on tarts like this, in my opinion.
How dramatic the U-turn has been on price this year, assisted by the Yew Tree factor. In May at the DIN Conference two respected industry experts commented that “a big milk price recovery was unlikely in 2016” and “the current down cycle will continue into 2017 and beyond”, with a third saying “we won’t see 30ppl for a long time!”.
If prices continue to head north in 2017 and above 30ppl over the spring period and beyond I fear another wave of milk will flood the market like a tsunami, and swamp all but the strongest, financially sound farmers again. Will farmers and processors learn from two years of painful crisis and chaos? I fear they won’t! But uncontrolled expansion, whether it be processor, producer or representative organisation driven should not be repeated. For the UK the recent expansion was a whopping 1.9 billion litres in less than three years…but with no similar, sustained increase in demand.
The implications of this expansion are serious and costly. In the liquid sector many processors on A&B and basket pricing have had to review their offering and have given additional financial support in this fast moving market. Others have introduced penalties for wild fluctuations in forecasting.
One major problem is that some farmers see it as their right to increase milk output without notifying their milk purchaser whose job, the farmers think, is simply to deal with whatever milk comes along and to find a profitable outlet for it. But that isn’t always possible. Processors had to buy large quantities of milk in spring 2016 at 23/34p+, and then sell some of it for 10p to 12ppl! Then the opposite happened – they had to buy at 40p+! Both were financial suicide.
This comment won’t be popular but dairy farmers should not have the freedom to significantly vary the quantity of milk they supply to their processor without agreeing it in advance. Neither should a milk contract force a purchaser to collect 100% of the milk without an idea of the quantity. And the flip side is that processors should not have the freedom to discretionary price.
I believe we have to develop contracts that are geared to a volume and price say +/-5%. Yes it could be a variation on A&B but the fact is processors cannot live with unspecified milk volumes and profiles, and farmers can’t live with unspecified, unpredictable prices. If things don’t change then two or three big buyers will get bigger, because they are potentially better able to shoulder the financial pressure.
Everyone wants maximum flexibility to change what they want with limited price risk, but surely in a mature balanced relationship the dairy industry can crack this simple conundrum and not work on short-term smash and grab rules as they are now. I will be returning to this in a future article, and I thank consultant Norman Oldmeadow for his input so far on these suggestions.
Now First Milk. This time around the firm do not appear to be the main resignation target, having dramatically re-structured the business following the dismissal of the incompetent individuals running the business and the parachuting in of Mike Gallacher. Out went loss making activities and the air of arrogance First Milk once had. Then came major surgery at board level to leave predominantly commercially savvy people who have the ability to seriously challenge the management and who fully understand balance sheets, accounts and cash flows.
Two years ago First Milk tried to keep up with competitor milk purchasers in a rising market by paying a milk price it failed to recover from the market. But then the milk price tanked. Somehow its members clung on by their fingertips, and today many believe Gallacher and his board actually know what they are doing and have faith in them. It’s easy to say but all First Milk needs to do now is produce consistently high quality cheese, particularly for Tesco through the Ornua (formerly Adams) relationship. I wish them well and sincerely hope they succeed.
Finally, all the best for 2017! Whatever comes, it can’t be as bad as 2016 for most farmers!
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IP DAIRY FARMER – DECEMBER 2016
If you heard an unexplained thud recently that was my jaw hitting the floor while I read a recent article in The Grocer magazine relating to Morrison’s Milk For Farmers initiative.
The article quoted AHDB Dairy’s senior analyst Patty Clayton stating that it had crunched the numbers and concluded that the extra 10ppl paid by shoppers had only amounted to an additional £290 per UK farmer. She then went onto refer to these returns as “questionable.” The article did not look at the benefits UK farmers get from income into the business from similar schemes or from brand income from Europe through the likes of Lurpak. On further investigation The Grocer confirmed that it was approached by AHDB and offered an exclusive on the article. It didn’t ask for it.
The article effectively belittled the additional £3.7million additional income, over 12 months, that the scheme had brought to Arla farmers. That figure, though, represents 57% of the total annual £6.5 million levy that farmers pay to AHDB Dairy!
By default the article also criticised Arla’s branded “Farmers Milk”, launched at the Great Yorkshire Show in July, which pays an additional 11ppl back to farmers and has resulted in an additional annual equivalent of £2.2 million going into farmers’ pockets. So the combined annual equivalent going back to farmers from these two initiatives is a not insignificant £5.9 million.
AHDB Dairy takes around £6.5m from dairy farmers, a quarter of whom are Arla farmers. AHDB claim it “provides independent evidence-based information” in four key areas, one of which is labelled “Market Intelligence”. Well there wasn’t any intelligence here! It’s a mystery to me why it believed it was a good idea to pen the article because it certainly doesn’t help move the industry forward. That, of course, is unless its remit has secretly changed to become a lobbying organisation under Peter Kendall’s captaincy, aka him leading the farming Referendum Remain campaign.
What chance does this industry have when its own levy-funded organisation throws hand grenades at an idea that is delivering significant amounts of additional money into farmers’ pockets! It’s worse than the remarkable events that took place at the launch of the scheme when two Tesco producers – one the chairman of the Muller farmer’s group! - went on National television and branded the new product “a shambles” before a single bottle had hit the shelves!
Any initiative that gives consumers a choice whether to pay extra money to dairy farmers has to be applauded and should not be criticised or belittled, least of all by an organisation funded by farmers.
The industry needs more initiatives like these for the non-aligned and should not have successful ones criticised. It is hard enough generating additional revenue to come into the supply chain, so I am now looking forward to AHDB’s “Market Intelligence” department coming up with an intelligent suggestion. I fear I might have to wait a while on this evidence.
And I continue now with Arla, but in an altogether different vein. Like many (all!) Arla owners (and many other farmers whose price isn't going up because their buyer hides behind them or basket pricing!) I am questioning why its farm gate prices isn’t increasing at pace.
Aside from the forward selling issue and the market lag that is affecting everyone (disproportionately, too) Arla’s price is, of course, affected by its currency smoothing mechanism. On analysis of the numbers it is clear that as milk prices were falling between April 2014 until early 2016 the smoothed price was higher than the monthly price so there was a price advantage. Now, though, it’s a different matter: the current farmgate milk price without any currency smoothing – i.e on a floating month by month rate - would put the November price at a very respectable 27ppl plus – i.e a 4ppl premium above the Arla standard litre price of 23.14ppl!
In reality the Arla mechanism is similar in principle to a fixed rate bank loan or a futures contract, in so far as it smooths out volatility. The mechanism is depressing prices today, but there has been an advantage over the long term. That said, the price is the price and it ain’t good enough! No doubt there will be some interesting dialogue when the firm’s boss is quizzed at January’s Semex conference, together with its markets expert from Denmark who will hopefully be giving out some VERY good news for 2017.
The big question for non Arla farmers is this, though: what’s the reason for your farm gate prices dragging their heels when you don’t have a currency smoothing mechanism? Or is it the case that Arla sets the UK milk price for the majority, if not all, non-aligned producers?
By the time you read this article Christmas should be a few days away. If anyone is looking for a £10 stocking filler for someone then the book “Cows and Catastrophes” written by Cornish dairy farmer Brindley Hosken, is one farmer’s story that many will relate to. It is a good read and available from Old Pond Publishing. Alternatively if you are married to a Muller supplier for the same money you could always buy your other half a gift voucher for their first month’s suggested membership subscription for the new Muller Board and representative structure, made out to a Mr Sooty of Aberdeen. But please, if you do, send me a video when they unwrap their gift!
Finally, may I wish all my readers a very Happy Christmas and a more prosperous New Year, which let’s face it, wouldn’t be difficult compared to this one!
And I do appreciate all your feedback, comments and tip-offs. It is, I have to say, telling, sad and shameful that many farmers feel that they can tell me things that they do not feel they could tell their milk buyers for fear of discrimination or reprisals. Keep your comments coming!
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IP Dairy Farmer Article – NOVEMBER 2016
A recent newsletter from Muller’s (former Dairy Crest’s) Direct Milk DPO secretary pulled together some interesting facts on commodity prices v milk prices.
Since April cream and butter returns have more than doubled, and are now at all time record levels. Processing milk into ingredients under AMPE would pay 28.5ppl.
The newsletter was spot on to draw parallels between 2007 and 2016. In 2007 farm gate prices were at 18ppl, and a consequent drop in production resulted in a sudden 7ppl lift to 25ppl. This time around the lift has come from some processors, while others are leaving their farmers scratting about for every crumb like a hen in an abandoned farmyard. The NFU have stated that in just four months farmers have been short changed by £200m+. And this figure is rising!
Yew Tree Dairies (AKA Woodcocks) ingredients contract continues to lead the way, on what most farmers regard as fair and transparent milk pricing. It has declared a minimum 30ppl October milk pay-out after haulage, for example.
Suddenly producers across the UK are sitting up and taking note of Yew Tree. Numerous disgruntled farmers on non-aligned milk prices of around 21ppl or less for October have emailed me claiming that their existing milk buyer has rubbished Yew Tree’s pricing and suggested they wait to see what the price is in the flush - implying it will be under 25ppl. And yes, an AMPE related price WILL be more volatile, for sure. Hence Yew Tree’s forward selling risk management offer.
We could all speculate on what that spring price will be, but the processors who rubbish Yew Tree are naive and miss the point. It has sneaked up on them, hit the fast lane, and the evidence points to a processing business run by a dairy farming family who are honest and up-front. Those processors who are praying for Yew Tree’s price to collapse to make theirs look better by the spring are being stupid and complacent.
I have met several Yew Tree suppliers and future suppliers and the message is clear and consistent: they will accept a poor price if it’s an honest, market related and justifiable poor price and that they know that as soon as things improve they will reap the benefits.
Yew Tree’s monthly statement shows in detail how the milk payment has been arrived at, detailing the cream value, liquid value, processing charge, and individual haulage charge in ppl. In addition, it states the percentage of the milk which has been brokered, and the price. There’s no smoke, no mirrors, no bullshit!
Note Yew trees liquid contract didn’t go under 20p at anytime in the past two years with a straightforward 95/5 AB the B price is at similar levels the ingredients contract.
And that’s where several (mainly) liquid processors get it wrong, because they are not transparent and are simply buying cheap milk from loyal producers because they can. In many cases they have forward contracted too cheaply, and those forward deals are delaying milk price recovery.
An advert in Northern Ireland’s Farming Life seeking large daily volumes of Red Tractor Assured milk prompted the NFU’s Dairy Advisor to criticise the importation. That’s perhaps understandable, but NI is part of the UK and we can’t criticise when milk flows in and be happy when Dale Farm exports the other way at a time when there was no home for the surplus milk being produced - as happened previously.
I genuinely sympathise with those facing an October milk price of c.21ppl or less. In 21 years of writing this article I don’t recall seeing so much pain and anger from so many farming families, with most of the emails coming from women who simply want to help the farming business move forward. Well here is my blunt message: many of you would be better off biting the bullet, cutting the stress and pain and selling up. That’s already happening, and my hope is that several greedy processors - some of whom who have had stupidly low milk prices recently - feel equal pain when they have much reduced milk and higher costs. Below is a flavour of some of the emails I have had in recently:
“One of the reasons farmers struggle to exit is that a farmer knows nothing else. He has likely milked cows since he left school, has no other interests and no idea what to do if the cows are sold.”
Well I say don’t stick with a milk purchaser who promises jam tomorrow! Most of them won’t change their spots. Either bite the bullet and give notice, or sell the cows. Take charge of your own destiny and don’t wait for it to get better.
Another farmer who did bite the bullet commented: “There is life after cows. It might take a while to figure it out, but there is.”
Another said: “I am stuck milking 48 cows for my father and I start at 7am, finish at 11pm, seven days a week without a day off. I used to be proud of this but I am a tired fool with no family time, a lot of debt, milking on a tenanted farm on a non-aligned contract to one of our biggest liquid processors. Help on how to exit would be appreciated.”
And here’s two contrasting emails to end on:
“My husband sold the cows and chose me, our family and our health. We are all so glad about that choice.”
“I refused to sell the cows because the farm had been in the family since 1924 and my father insisted we stay in milk. Now my wife and children have left and moved 200 miles away. I wish I could rewind and have another go but can’t. I am, like my father, a fool married to the cows.”
Now to everyone’s favourite retailer Tesco. An eagle-eyed researcher spotted that all of Tesco’s own label lighter (30% less fat) mature cheddar is displaying a small wording confirming it’s Irish cheese whereas the Tesco normal cheese is all British, presumably from First Milk’s Haverfordwest factory. At the time Tesco moved to First Milk for its cheese it struck me as odd the Irish were on mute. Were they content to lose the business, or is the reality that they lost very little tonnage? Maybe this lighter labelling is the answer and Tesco should be “persuaded” to source its lighter range from the UK!
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IP Dairy Farmer Article – OCTOBER 2016
Several milk purchasers are concerned as to when UK milk production will turn the corner and head north again from its 7% decline against last year. I am sure there are a dozen theories as to why production is dropping, but top of the list by a country mile is this one: A CRAP AND UNJUST MILK PRICE for the bulk of producers! And a price that is being paid at a time when the cream income alone has soared to record highs.
The upward trend in prices has been on-going and obvious since April, and farmers are right to be screaming for significant farmgate price increases. But expectations and trust are being wrecked because there is a monumental disconnect between the farmgate price and commodity prices. With a milk price around or under 20p for some still - when they should be 25 to 28p - it’s no wonder farmers are beyond furious and looking at taking the EU’s 12ppl volume reduction payment. Others will continue to cull cows if only to pay bills, as most continue to suffer in silence. Less milk means less work, less bills and more money. I mean, why would anyone produce expensive winter milk for such a pittance? The fact is milk purchasers can and should be paying more RIGHT NOW! and prices should reflect the seismic improvement in the markets.
The UK is milking fewer cows and next time a milk purchaser, organisation, consultant etc. tells you to invest and expand for a better lifestyle challenge them because this has resulted in the opposite this time, for the non-aligned. Equally important is to remember whether your milk purchaser has treated you fairly, or deluded you. For me, one or two milk purchasers have a case to answer and haven’t treated farmers either equally or fairly. Farmers have largely paid the price for the cost of processors either defending or winning new business at knockdown prices, especially those who scandalously used cheap B milk to mount smash and grab raids. Some processors don’t seem to worry about the number of suppliers they are sacrificing.
One interesting analogy put to me recently concerned aligned contracts. It was suggested that there was a similarity between Tesco, Sainsburys plus the other retailers with aligned suppliers and the best buyers around a livestock auction ring. The aligned retailers and contracts have removed the strongest buyers from that ring. It’s a fair point, I think, because once these were removed the non-aligned among you are left with the other buyers whom - just as in the auction ring - can be poor or bad payers, or just a little bit dodgier.
To really rub salt in the wound it’s a fact the two forces driving the GB spot milk market are Muller and Arla. But neither appear to see any benefit in encouraging existing producers to supply more milk. And yet instead they are likely to be paying 40ppl for spot milk by the end of September, while continuing to pretend they have no milk supply issues. If that wasn’t enough some of Arla’s Board of Reps (BOR) farmers saw this shortage coming in July, and put forward a proposal for Arla to pay a 5ppl bonus on every additional litre delivered over and above the corresponding month a year earlier. But the plans were killed by the top brass, apparently.
This has resulted in pretty widespread criticism from Arla’s own BOR farmers over their company’s “One Settlement” rule, which applies across all of its seven supplying countries. Consequently there are some member calls for Arla to effectively re-nationalise each country’s member farmgate milk price, because one size does not fit all.
The big unknowns in the market right now are how much of the upturn is down to a worldwide drop in milk production, how much is down to rejuvenated Chinese demand and last, but not least, intervention. At what point will the European Commission start to offload SMP from intervention stores, which will dampen upward price movements there, or individual companies move butter out of PSA.
According to AHDB Dairy cull numbers between February and June were 17% up on the same period a year earlier. Their rough calculation shows that the extra animals will result in 310 million litres less milk, and while replacements are in the system they will come nowhere near to compensating for the 17%. In addition, German slaughterings are up 16%.
Now to the thorny issue of credibility and good governance practice. This month the spotlight is focussed on Muller again, and the England and Wales NFU Dairy Board.
Both boards should provide the strongest representation for the interests of all its producers and be accountable to members. But they don’t.
The NFU Dairy Board is heavily co-op, and in particular Arla, weighted. It is not good representation to have both the NFU Dairy Board’s Chairman and Vice Chairman both supplying the firm, and a total of seven out of 12 dairy farmers on its board supplying Arla.
With Muller the feedback to me is clearly that non-aligned farmers feel they are not represented in any shape or form, and that the Muller board is not even in a position to organise their own independent producer meetings to allow producers to express their views. The view from one particularly colourful e-mailer was that if the Board and Muller aren’t careful, and play it right for ALL farmers they will end up looking like the characters from Sooty (farmer chairman) and Sweep (any nominated aligned deputy), with Sue being Lyndsay Chapman and me Butch, the nasty Bulldog. But that can’t be true as no Dutchman or anyone from any nationality will get his hand up my backside and work me like a puppet! I can envisage Muller farmers jumping up and down in uproar at this image of their “representative” Board. But – and this says it all – it will only be those on cushy aligned contracts doing the jumping!
Following on from a recent article I am pleased to see that Yew Tree Dairies (aka Woodcocks) will, by the time this article is out, have launched the first farmer orientated futures trading price contracts. Well done, and about time too! There will be more on how it works in a future issue.
My comments on fixing cows at dairy shows and Holstein UK’s vow of silence kickstarted a debate around issues a few farmers would rather not discuss, or have aired. Needless to say I intend to re-visit that area again soon.
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IP Dairy Farmer Article – September 2016
Last month’s article on futures and hedging produced a basket of emails and all (bar one – staggeringly - from a farmer representative on an aligned contract), believed hedging mechanisms for dairy should be developed.
Several pointed to the fact the former Dairy Crest Direct (DCD) formula contracts has been one of the few successful hedging tools. But this will be axed by Muller on January 31st 2017, because it, and members of its Muller farmer board, want it finished!
On the formula DCD farmers could choose whether to sell a percentage of their milk through a transparent formula contract. Thus it’s a surprise that some of Muller’s customers don’t want to take advantage of the mechanism in a bid to smooth the market volatility extremes, and be seen to pay a fair price. A similar formula has been very successful with Glanbia in Ireland for its farmers and customers.
It is also staggering that the decision has been made by a farmer board where the majority are on cushy retailer aligned contracts which bear little relation to the market. They appear to be more than happy to benefit from a cost tracker like Tesco’s and the Co-op’s but against their fellow non-aligned farmers who they represent taking advantage of similar mechanisms!
Previously I have referred to Ronald Ker’s mission statement of wanting to be the biggest and the best UK dairy processor. Frankly I think there is a lot Muller can, and should, do to develop hedging tools for its non-aligned farmers if it wants to realise the dream. The same applies to Arla.
Lots of ideas are emailed to me each month, but one from Clynderwen and Cardiganshire Co-operative MD Keith Gosney particularly caught my attention.
He has written to both NFU presidents suggesting the legal eagles at the organisations should analyse the main milk contracts and produce a farmer friendly review of them, with the pluses and the pitfalls. He also would like the unions to publish actual payouts for six month to five-year milk periods “to allow farmers to make informed judgements of the likely ability of the buyer to deliver a consistent price”. I support both ideas, although for me the best independent person to produce the averages is www.milkprices.com’s Steven Bradley. Farmers desperately need help in both areas and should not to be seduced into the latest headline deal which will soon be on offer.
Muller, for example, is currently under attack for failing to offer any non-aligned price increases before October 1st. A comparison of their six month to five year paid-out average would be a useful tool to judge their performance by and could provide a solid basis for them to counter the awful PR they are getting now.
Now to Holstein UK.
And the second embarrassing disqualification at this years Great Yorkshire Show (GYS). This involved a different herd with direct connections with the farm which was given a life time ban following disqualification by the GYS in 2013. Once again it was the Holstein Breed Champion which failed to pass the show’s stringent veterinary inspection, hence the disqualification and note no appeal against the disqualification from the offending exhibitor.
A couple of retail milk buyers were quick to ensure the offending exhibitor was not supplying them with milk. They exhibitors weren’t, but if they had been then that would have been their contract terminated.
I have tried to get answers to questions from both Andrew Dutton, Holstein UK Chairman, and Richard Jones, CEO, as the show would have been conducted under Holstein UK rules and codes of practice. The response from Jones can be summarised fairly easily: “F-off.”
But I didn’t, and won’t, and emailed both again (twice). I know the emails were read (by someone), but there has been a deafening silence and no response in more than two weeks.
My questions were pretty simple, I thought:
1) Does the Holstein Society condone cheating, or of practices that could be construed as animal cruelty, by cattle exhibitors in a show ring? If it doesn’t then I asked if I could have a statement to that effect in relation to the GYS disqualification. It hasn’t provided one, which is strange as failure to provide one could, of course, be interpreted that the Society is willing to condone them.
2) I then asked whether any investigations over possible cheating, or possible animal cruelty, were being carried out at the GYS by Holstein UK? After all, SOMETHING on those lines MUST have happened or else a competitor would NOT have been disqualified! And Holstein’s rules (clause 1.4 actually) clearly state such practises will amount to misconduct and disciplinary proceedings against the member.
3) If there aren’t any investigations, then why? A failure to investigate suspicions, or accusations, is tantamount to turning a blind eye, surely! I mean, why have rules and disciplinary procedures if they are ignored?
From the wall of silence I am getting I think the position Holstein UK’s Chairman and CEO is taking on members who cheat is clear: sweep it under the carpet and hope it goes away. But why? Surely it cannot be because one of those banned exhibitors happens to be a Holstein UK Board member who represents Holstein UK and the British flag in European Shows where it would appear Holstein UK’s show rules are ignored by the society. It’s the Dairy show equivalent of cheating at The Olympics.
It will be interesting to see what happens at its own up and coming UK Dairy Day!
Well one solution which merits consideration is that the night before each show all exhibitors dairy cattle are milked out and a vet verifies this by a deadline time. If it’s not milked out it’s disqualified. Do this and every exhibitor who shows in the UK is on an even playing field. "Those who don’t like it can take their cheating, evasive tactics abroad.". Do you have an alternative solution?
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IP Dairy Farmer Article – August 2016
This year’s Dairy Industry Newsletter Conference was titled “Managing the Extremes of Dairy Market Volatility”. It’s a big issue for the sector, given that since 2009 we appear to be on three year peak and trough cycles, and they are likely to continue.
Up until 2007 the tops and bottoms for EU SMP prices were + or –10%, so within a 20% band. Now it’s nearer to + or -50%, according to FC Stone, and this has accelerated since the removal of quotas. Dairy prices are now one of the most volatile of commodities.
This brings me onto the management of volatility and price risk. Basically I’m talking futures, which is a contract to buy and sell dairy products at a price agreed today for a fixed date in the future. Usually this is with no physical delivery of products, but with cash settlement instead. Futures markets are very useful and add price certainty for buyers and sellers, enabling both sides to budget. This is especially important for those who plan to invest.
Few, if any, individual dairy farmers will trade in futures but processors, PO’s and co-op’s could hedge on behalf of farmers to help them fix prices. Trading is NOT about trying to pick the tops and bottoms, it’s about locking into a profit margin in a bid to protect against adverse price movements. Inevitably you will miss the highs…but you will also miss the lows! And it’s those that do the damage! Futures can only succeed if there is a medium to long-term approach, and a mature relationship between the farmer and the person trading on his behalf. It’s about safety and margin for your business. The bottom line is it’s about being able to sleep at night!
Some ill-informed people get hung up about the possible involvement of speculators, as if they are evil people who will wreck the sector. To me the speculator makes for active markets as seen in oil, wheat and cocoa etc. Daily volumes traded in these markets are significant. The reality, though, is there aren’t any speculators in dairy.
Today we have independently verified formula prices, which have been successful for the likes of Dairy Crest suppliers/Direct Milk DPO. Surely the time is right for processors to develop simple contracts with fixed volumes (and solid levels) for fixed periods of time, say a year, for a fixed price.
Farmers cannot manage this price risk but milk purchasers can. GB milk purchasers have been slow to explore this opportunity and I can’t figure out what the barriers are. Perhaps it’s simply education and the need for a team launch effort. It is a fact that, if the UK aspires to be a significant world dairying region we need to develop mechanisms to cope with wild volatility in world prices.
Futures market price reporting is constantly updated and a fantastic source of information for farmers to see what’s happening at the coal face on the farm. Just take a look at www.directmilkdpo.co.uk to see their futures section, which is a must read. Dairy farmers need to be aware of futures market trends just like they are on milk price trends.
That brings me neatly onto DEFRA and (sigh, again, AHDB). DEFRA should, in my view, be a central, transparent, neutral, trusted and accountable source of accurate statistics.
Back in April I, along with fellow hack Chris Walkland, lambasted DEFRA for publishing a February UK average farm gate milk price up by a ludicrous 10.8% (+2.48ppl) from 23.09ppl in January to 25.57ppl. In fact, if you removed the Northern Ireland average February milk price it sent the GB average to a whopping 26.9ppl! This was because DEFRA lumped all of Arla’s 13th payment bonus into a single month!
We challenged DEFRA over what was a misleading and irresponsible calculation, but it dug its heels in and refused to back down. AHDB wouldn’t get involved either saying, basically, that “we can’t influence DEFRA” and that Chris and I were “making a mountain out of a molehill”. The only other person who pushed for a correction of the figure was George Dunn of the TFA.
Chris was so incensed, and could see the long-term implications, that he made a formal complaint to The National Statistics Office, who oversee the DEFRA stats. It duly investigated and concluded that “we agree that the presentation of the statistics was materially misleading” and that “in the light of the lack of contextual information to explain the implications of the inclusion of bonus payments in the February estimates, we have concluded that the statistics do not reflect the highest standards of trustworthiness, quality and value.” It was an emphatic damning of DEFRA. The full letter from the DG for Regulation to DEFRA can be seen at https://www.statisticsauthority.gov.uk/wp-content/uploads/2016/07/Letter-from-Ed-Humpherson-to-Ken-Roy-140716.pdf
This is a serious issue on a number of fronts. First the figure itself. It has already appeared in an official “state of the industry” document in the House of Commons library, which all MP’s – and anyone in the world, in fact – has access to. It shows that your price is over 5p more than the reality for most farmers! It is also known that some land agents are using the figure to justify rent standstills or even, remarkably, increases. That’s instead of what should be the case now, which is rent reductions.
The second major issue relates to AHDB “having no influence with DEFRA”. Blimey! Its recent post-referendum headline was “AHDB leading agriculture through Brexit!” As Chris commented, “if AHDB are leading they way on Brexit negotiations with DEFRA, and it can’t influence change on such an idiotic figure as this, then God help us!”
AHDB’s market intelligence budget is massive, and with levy payer’s money it is supposed to solve market failure. Instead it did nothing to rectify a situation whereby DEFRA had monumentally screwed-up on basic UK monthly milk price reporting, and “materially misrepresented” the facts.
Perhaps the real issue is that DEFRA is in full control of AHDB and is instructing it to toe the line! With humbled AHDB chairman Kendall having led the farming “in campaign” for Brexit (who failed to have much influence on farmers at all, it seems), and with George Eustace who led the “out campaign” (and won) keeping his job at DEFRA, it will be very interesting to see how much influence AHDB really does have going forward.
IP Dairy Farmer Article – July 2016
At the recent DIN (Dairy Industry Newsletter) Conference, which had the title “Managing the Extremes of Dairy Market Volatility”, David Dobbin, the current but soon to retire CEO of United Dairy Farmers, commented that farmers must to be able to survive deep and extended milk price cycles, and that this current down cycle is set to continue into 2017 if not 2018.
He also stated that the survivors will have either low cost or production, or deep pockets. Those with high debts and/or high cost of production won’t survive, and this unfortunately means some of the most efficient who have ended up in the wrong place at the wrong time.
Conference speakers and some delegates were asked by me for their predictions and forecasts as to what the “average” farmgate milk price is likely to be in the next five years, and the answers ranged from 21 to 25ppl with most in the 22 to 23p bracket. This is exactly the price I believe farmers need to budget on.
The European dairy industry has changed since the end of the 30-year quota regime, during which time farmers couldn’t respond to increased milk prices. Now 28 member states can respond to milk price signals as quick as anyone in the world and whether you like it or not the likes of The Netherlands and Ireland intend to fully exploit this opportunity. With quotas gone the only output control is the price. But this hasn’t worked during this downturn yet!
At the Conference Jim Bergin from Glanbia, who processes a third of Ireland’s milk, amplified the Irish (ROI) target to increase milk output by 50%. The example he used was that the average producer in ROI has around 60 cows. To expand the typically mixed farms simply cuts beef back numbers and put an extra six cows on a year for five years. At the end his milk output is up by more than 50%, especially so when combined with genetics and technological advancements. Consequently the 50% target is one they expect to exceed by 2020.
Across the world different dairy organisations and processors are keen to support and relieve a little of the pressure this crisis is putting on dairy farmers and their families at a time when they desperately need it. For example Glanbia is supporting farmgate milk prices by €23 million (at a rate of 1 cent/litre). In Victoria, Australia, there is a $1.5 million (£750,000) support package in place, of which almost £500,000 is directed to counselling services for dairy farmers. My recent involvement in the Dairy Allied Industry forum was in the hope AHDB would acknowledge that funding in this area is necessary, and could help save families’ marriages and lives. This funding, alas, has not materialised and AHDB dairy decided it wanted to focus on better returns, improved feed utilisation and producing the right milk for your contract - as is the case with its current series of workshops. It’s not the key message which came out of that meeting so far as the majority of the delegates present were concerned, including David Handley.
I know I can be accused of being a stuck record but some farmers have to read the tea leaves and decide whether they have a profitable future in this industry. Only recently I was interviewed by BBC Radio Cumbria along with an anonymous South Cumbrian Farmer. He claimed his average milk cheque was just over £9,000 month and his “essential” average bills £14,000 month with another price cut confirmed for June. His position is simple to analyse, because his milk cheque needs to increase by a whopping 50% just to breakeven and pay his essential bills. Whether he is on 18p or 21p his milk cheque will NOT go up by 50% in 2016 or 2017 to cover his outgoings on a monthly basis. He is digging himself and his family a very big hole and must make radical changes or he and his family will continue to haemorrhage cash and asset value and be extremely pressured. He, like many others, needs some independent guidance as to the right road for him and his family to take. That’s the sort of help I hoped our organisations would champion. Again at the conference John Jordan, CEO of Ornva (formerly The Irish Dairy Board) stated that “Everyone has a duty to support dairy farmers in this crisis.” He is right.
Recently there has been discussion about member state compensation to farmers who reduce milk production. In my opinion it would be a nightmare to police, and won’t have any impact on the huge financial hole many farmers face. In the UK one group is even proposing getting 20ppl compensation for litres NOT produced! The problem here is that while the EU have approved the measure it is down to member states to provide the funds from national coffers, and there is Bob hope and no hope of the UK coughing up even so much as £1.
The consensus at DIN was that the troughs are getting deeper and appear to be on a three-year cycle. Volatility is increasing and pre 2007 SMP prices varied by + or – 10%, but now it’s close to + or – 50%.
Futures markets might help. They aren’t for farmers but they give better early warning signals than some of the other rubbish farmers are presented with. It’s a topic I will return to at some stage.
On the second day of the conference there was almost a beauty parade of big hitters giving their views on the industry and the direction of their processing businesses, pointing out that neither processors or farmers are making money. All of the speakers with the exception of one, Andrew McInnes of Muller, referred to the financial pain their supplying farmers are experiencing.
However while the three co-operative head honchos (David Dobbin, Jim Bergin, and Peter Giortz Carlsen of Arla, focussed on inadequate returns to farmers McInnes did catch my eye when he said his question to suppliers is “what are you doing differently?”. He stated that most give no answer. It’s likely to be the same for a significant number of dairy farmers who sadly keep plodding on, burying their heads in the sand hoping things will improve. They aren’t prepared to play their part and make any changes to become world competitive and profitable and will, in many cases, wither on the vine and loose more than money.
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IP Dairy Farmer Article – June 2016
Good news! Milk production is easing across the UK, and most importantly, across Europe and globally! UK volumes are dropping by 4% and 5% against last year, equivalent to around 2 million litres/day. Futures markets and auction results are slowly trending up, and WMP and cheddar prices are nudging North. Cull cow numbers are up 20% in March and, according to AHDB Dairy, are at their highest level since 2006 - the time OTM cattle were allowed into the food chain.
We are, I believe, at 6.35 on the clock having already passed the bottom at 6.30. The trend is now up, but remember intervention stocks are worringly high and the increase in Europe SMP intervention stocks is scary ! It’s only a slight U-turn and a distant glimmer of hope in a market, which some analysts are now predicting will not pick up until late 2017 or early 2018. Remember a pick-up does not, in my opinion, mean a return to 30ppl.
There is now the option for EU member states to provide state aid to dairy farmers for up to three years to a maximum of €45,000 (£35,000+), which could be directly linked to a freeze in production on a farm. There is even talk of financial incentives to those who cut milk production. Just don’t bank on DEFRA doing this and paying out any money!
AHDB has published an activity review report, which confirms it has a lot of work to do. But at least it accepts its shortfalls and recognises it needs to demonstrate a return and a benefit on the investment made by levy payers.
Under the heading of “Communication” the report refers to “A very strong view expressed across producers about AHDB’s communications…”. On reading this one dairy farmer commented that AHDB Dairy “is guilty of producing masses of information, which us dairy farmers pay for and don’t use or understand. It’s about as much use to my business as tits on a bull”.
The report also acknowledges that “the organisation should provide more forward looking market insight and analysis in addition to historic price reporting”. That’s a bulls eye for me, and I, for one, was very unhappy that AHDB Dairy shied away from giving dairy farmers strong signals on dramatic milk price falls months before farmers realised. It remained in hibernation and failed to give notice to farmers to prepare for a downturn while others, including me, were lambasted for talking the industry down.
AHDB Dairy has to think differently, be brave and communicate the signals - both positive and negative - to farmers whether the medicine is tasty or bitter. Just for the record, and no doubt to the delight of one or two top brass in AHDB Dairy, I have confirmed that if they communicate more hard hitting commentary on the industry I’ll shut up shop and retire! Finally, on the topic of export development the organisation has realised it needs to do signficantly more work and the budget has been boosted. That’s good news too!
First Milk’s fortunes, under Mike Gallacher’s captaincy, have improved and in the last year the business has moved from a £20m loss to a £4m surplus, before one off restructuring costs. Critical to this is the cost savings made. Yes there have been milk price cuts, but mo more than others and its price is comparable to other commodity buyers now.
Gallacher inherited hundreds of members who desperately wanted to leave First Milk but couldn’t, and staff who feared they would have to. It was perilously close to having its doors closed.
But the senior management has focused on how it can mitigate the impact of the market on members’ milk price – a tough job in the current market. His predecessors got away with paying one of the lowest milk prices for years, but at least today the business no longer suffers the pain of balancing on behalf of the industry now that it is out of Westbury. He has made the big plays and now the focus needs to be on the simple stuff. The signs are cautiously encouraging. He will have to continue to find further cost saving and efficiencies across all areas of the business, which will be tough and painful.
The recent move by Tesco to dump its COP cheese model, which automatically encouraged farmers to increase production, has received limited analysis. When TSDG piloted its cheese group with Parkham Farms’ producers in 2012 the premium was 1.6ppl above a ‘top secret’ undisclosed basket price. Today it’s allegedly 2ppl.
Parkham backed Tesco to move from COP as it was convinced the new model is more sustainable and, on balance, I tend to agree. Yes, the move is a financial blow to the farmers but sensible farmers involved with Parkham and First Milk are likely to support the move and want a long-term direct relationship with the retailer, and will listen to Tesco’ s requirements. The reality is that if Tesco offered the same 2p milk for cheese premium today First Milk and others would grab it with both hands.
But the Tesco move to have dedicated First Milk suppliers to the Haverfordwest Creamery, and the switch of 200 million litres of liquid milk from Arla to Muller, sends a clear signal that Tesco doesn’t want to share their premiums across all co-op members.
So where does the cheese model leave TSDG liquid suppliers currently on a COP model, which is now not market related? The producers involved will fight to retain the status quo, but will surely acknowledge the warning signs and clear direction of travel in that Tesco wants to slash the costs of its TSDG pool. And quickly!
It may pay well at the moment, but the price gap between the non-aligned is narrowing fast! When Arla opened up a final window of opportunity for its members supplying Tesco to leave the co-op and become Tesco directs, few farmers actually jumped ship. For me this sent a powerful message that those farmers joined Arla to be part of a 13,000 strong EU co-op which owns brands and invests heavy in new product development. They declined the invitation to have all their eggs in the Tesco basket and I reckon they were right!
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After a clamour from the industry, AHDB Dairy have revised their three-year strategic plan and given the green light to invest up to £3.5m in market development. The result is they are now working with Dairy UK to maximise the bang the industry gets for its combined bucks for this area.
The money has come from freeing-up some of the levy money, dipping into reserves and squeezing cost savings, and it’s a great start. The two organisations are aiming to put forward a robust plan to support an application for EU co-funding by February 2017, which could boost total funds by 70% (80% for a multi-country campaign) and could create a fund worth more than £20 million. Now that would achieve something REALLY positive! That’s, er, provided the UK doesn’t go it alone on a Brexit!
Securing the funds won’t be easy, and it will be a competitive process, but promotional funds is what many producers wanted to see; is (I think) essential, and is a joint collaboration. As Minette Batters commented recently, though, such development money has to be targeted at specific areas, and the industry “has to inform its customers why they should stay loyal to buying British Red Tractor Food.”
Heaven knows we need to do something to encourage consumption and to promote our high quality dairy products both at home and abroad - if only to defend our corner against the Government’s (first) bombshell of the Eatwell Guide that stunned the industry last month. Just when most dairy farmers are struggling to stay above water because of the economics along comes the Government to dunk you under with new National dietary guidelines for health professionals, stating the recommended dairy intake should be halved. So instead of promoting and celebrating our great products there is a new public health campaign to ensure consumers eat less dairy, we sell less and the industry suffers more! With friends like that who needs enemies!
My recent articles have produced a much appreciated flurry of mostly short but well thought out emails. All bar one agreed that producing more milk to maintain a high value milk cheque was a financial disaster. Sadly one reader stated his cost of production was 21ppl and his “modern day Robin Hood of a middle ground processor milk buyer” was intending to pay him 9p on his B litres. He commented “I don’t understand how cutting my production would make me financially better of.” It would be interesting to see him present his case to Peter Jones and his associates in The Dragons Den. They would take him to the cleaners!
Next month I aim to review the multitude of emails I received under the heading of “is there life after milking cows, and does giving up mean you will be badged as a failure.” (Which it doesn’t!) In addition, I aim to look at the significant role women play (or should play) - and I don’t mean cooking, cleaning and ironing for grumpy dairy farmers. As I’ve said before, behind every successful man there’s a woman booting him up the arse.
The drop in average farm gate milk prices between 2014 and 2015 is 7.2ppl and still increasing. That’s as near as dam it at £1.1 billion cut in turnover for dairy farmers in the last twelve months alone. Note for every 1ppl drop the cost is £150million. That’s some serious money. For those of you anxiously looking to spot the first signal that UK processors believe we have reached the bottom watch out for one or more of them announcing that prices are fixed for the next two or three months. That’s when they have calculated we have hit rock bottom.
If the Eatwell Guide was Bombshell number 1 last month then Number 2 was the utterly jaw-dropping number crunching by DEFRA where, for February, they added Arla members’ 13th payment to record a milk price increase for the month of 2.48ppl. Despite widespread ridicule and anger DEFRA dug their heels in and stood firmly by their calculation. But despite it making them a laughing stock it’s serious as these figures feed into the Commission’s Milk Market Observatory.
The Intervention Board made a similar gaff in 1996, however they did subsequently issue an apology. Well many in the industry are up in arms at DEFRA’S refusal to back down, and also at industry organisations for being impotent to change a wholly misrepresentative calculation. We will have to see what happens ultimately because my often partner in crime and industry hack Chris Walkland has lodged an official complaint with the National Statistics office, which is presently under investigation (pending, probably - and knowing civil servants - it all being swept under the carpet.)
According to my calculation if you strip out the published Northern Ireland February farmgate milk price of 18.54ppl the GB February price, on DEFRA’s methodology, was a jaw dropping 27ppl (26.9ppl). That’s the aligned price PLUS the non-aligned, but that’s another segmentation story for another article.
That brings me onto current league tables, which are today simply “smoke and mirrors” and in no way reflect the real situation. Even if we ignore the ridiculous DEFRA figure we have aligned prices making the average price look significantly better than it is. Then there is alphabet pricing with A, B and even C milk prices, yet published prices do not reflect the real money received. I accept it’s a big project but surely its high time there was a wholesale review of our published milk prices to ensure they are real and relevant.
Finally, and to try and brighten up an otherwise gloomy industry, I conclude with a genuine complaint to a local council: “The toilet is blocked, and we cannot bath the kids until its cleared,” they wrote. Brilliant!
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The recent announcement by the EU of a doubling of the intervention ceiling for SMP, plus the additional 40,000 tonne ceiling increase for butter, are useful market management tools. However, at an Intervention farmgate equivalent price of around 14ppl or less this is unlikely to encourage many European dairy farmers to produce more milk but will help us get through the flush, hopefully avoiding distress milk returning under 10ppl. It’s a safety net that is significantly below any UK farms cost of production.
Intervention buying for the Commission has previously proved to be very good business. Last time it offloaded its stocks it netted around €1.5 billion profit, and I hope it delivers similar winnings this time so they can be invested back in the sector at some stage.
and our near neighbours in Southern Ireland has already declared that it’s highly unlikely it will have sufficient processing capacity to handle all its milk and it will have to ship some to the UK. Meanwhile the UK processing industry has calculated that we are unlikely to have sufficient capacity - hence the talk of distress milk at 6 to 8ppl. What a mess!
Even the most efficient sharp-eyed cost conscious non-aligned dairy farmers are struggling with a milk price under 19ppl. For most, continuing to produce milk at under 19ppl means more losses, which will simply take longer to recover from. And remember, come April, some farmers might be receiving only 11ppl!
On the back of a high milk price, a lot of dairy farmers found expensive ways to produce more milk. Sheds were erected and land rents and land values rocketed. It was a great party when prices were high, but we’ve one hell of a hangover now!
On top of this the more competitive milk producers in Ireland, Holland, Germany and Denmark are unlikely to pull back on production and will continue to grow their dairy businesses. This leads me to conclude that this crisis is more of a structural change in world dairying and NOT simply volatility. I believe we will eventually see a five-year “average” non-aligned milk price to 2021 of around 25ppl. In fact it could be quite a bit less than 25ppl, having averaged 28ppl in the past five years.
I don’t want to be negative but it is better to be a realist than a fantasist. The worst any commentator or analyst can do is to give dairy farmers false signals, to build up expectations that they can ride it out, and suggest a recovery to near 30ppl is down the line. It’s not any time soon!
In fact I’d say that farm gate milk prices have not reached the bottom yet, and there is certainly more pain on its way especially in the cheese world. However - slowly but surely - falling milk prices are starting to control supply.
It’s going to take skill and guile to manage this situation at farm level, and some different disciplines will come to the fore. In one instance I know of a bank agreed an extra facility with a farmer to pay his silage contractor, but only if the bank paid him direct.
A period of 12-18 months at under 20ppl will take several years to recover from. It’s for this reason I have suggested to AHDB that as well as milk price league tables what’s required is a tool farmers can use to calculate a worse case scenario. Call it a “What if and a milk price stress test”, which could give answers to questions such as “if I receive 18ppl for 18 months what average price do I need over the next four years to cover my average COP of xppl…”.
My last article triggered the most responses I have ever received in 25 years of writing!
Several respondents were concerned that some of the allied industry representatives, who are asked for help and advice, will shy away from suggesting that exiting the industry could be the best outcome for some farmers. Others aired concerns that a delayed decision would seriously erode net worth, that family relationships would break down under the stress, and the feeling of failure would weigh strongly on individuals (or even worse there could be lives lost).
Husbands and wives emailed me (with some in their 40’s and 50’s) saying that fathers, mothers and in-laws still dictate what happens in the business, and exert pressure on the farming family.
And I was delighted that the overwhelming response was the recognition that family, health and happiness must come before the cows, the farm and what parents might want.
Sitting down with the family is key, and having a third party involved in family meetings to me is essential because they bring a structure to the decision making and in their absence the likelihood of fur and feathers flying within 30 seconds of the start of any meeting is usually high. It doesn’t need to be a professional, and can be a trusted unbiased family friend.
How would I start if I had to do it? That’s easy: I’d give family members a pen and a blank sheet of paper on which they write what they want to achieve in the next 10 years. Then I’d compile the lists, find common ground and pin the combined list up in the board room (AKA the kitchen) and everyday work towards the delivery. Writing the list is step 1, step 2 is far harder to implement!
The crux is, though, that if some farmers don’t decide on their future then their future might be decided for them. Many face the prospect that they will be removed from the industry, and going voluntarily might be less painful than being forced.
To conclude, I leave you with the words of one reader: “There is life after cows. It might take a while to figure it out, but there is and more often than not, it’s a happier life”.
1. Have you the mind-set to take control of your own destiny? Or do you feel bewildered and a hopeless victim of circumstances?
2. Is dairy farming right for you and your family? What are your plans for inheritance? Are you doing the right thing for your non-farming family members?
3. What will you need to invest in your facilities in the next 10 years? How will you fund it and justify it?
4. Do you REALLY know your cost of production?
5. What is the realistic future milk price? Are you looking at the evidence or living on hope?
6. Have you worked out whether you are producing what your milk purchaser really wants? i.e. Are you maximizing your return under your milk contract?
7. What are you really paying yourself per hour? What can you afford to pay yourself and remain competitive? Would you be better off paying someone else and trying to add value to other parts of the business? What are your other skills? How much could you earn off farm part-time or full-time?
8. Might there be a day when you will find yourself stranded without a milk purchaser at all?
9. Are you buying all your inputs at best prices, and when did you last check alternatives?
10. Are you ruthlessly and honestly benchmarking your performance and constantly trying to identify ways to incrementally improve performance?
11. Have you got your eyes open for niche opportunities even if they start small?
12. Do you have the right skills for the technologically and market driven global dairy industry of the future?
I suggest every non-aligned farmer living in the real world goes through those questions with your partner and family members.
Today, most dairy farmers face the most financial pressure they have ever encountered, with income crashing. Individual performance may have improved, but workload and bills are increasing.
Dairy farming and life on a farm is full of pleasures and challenges and for many it has been a dream of a profession and an ideal place to bring up a family. But now it’s time for many to face up to the fact that their lifestyle is under threat and it could be the end of the line.
It’s no longer possible to succeed by getting up earlier, staying out on the farm later and pushing yourself harder. The number of hours you work outside will NOT determine your success or failure as a dairy farmer, but it will push you and precious relationships to breaking point. Faster or harder working hands are unlikely to turn around a loss making situation, and to those of you who have asked me when prices will return to normal, and quoting figures of 30 to 35ppl, I say this: you could be in dreamland. Nothing, but nothing, says normal will be 30 to 35p. Normal could as easily be 24p going forward.
Too many farmers I know, if they were honest, are married to their cows and the farm and in second place comes the children, followed by the wife and the marriage unless (as in some cases) the dog comes in at number 2 position!
At what cost do you intend to keep the family dairy farm going? Are you prepared to sacrifice everything – for example your own health and happiness, your family’s happiness, your marriage or will you sacrifice the dairy unit to retain them all? It’s a massive decision to give up dairy farming but it’s not the end of the world. It’s more you taking control and having a change of direction with new opportunities and challenges. Sadly, recently I have heard of dairy farmers cashing in their pension just to keep the wheels turning. Please… don’t be afraid of change, its part of surviving.
Oh, and if you are aged c.40 plus and still reporting in to your father, who realistically still looks upon his son or daughter as a glorified farm worker who still needs his guidance, then my advice is to not put up with this situation and get out now. And don’t get me started on those who have never had a proper holiday away from the farm, thinking that 30 years or so of consecutive milking is a badge of honour. Frankly that is tragic.
One dairy farmer once said to me: “When I drive my car up hill I simply push down harder on the pedal.” To do that in an attempt to maintain your identity and dignity as a dairy farmer is unlikely to succeed. Another reader asked me this: “Do I listen to my heart, my accountant/consultant or my family?” Easy answer this one: your family.
The questions and this article won’t give you all the answers but I hope it stimulates debate and questions for you and your family. Remember, you are NOT letting anyone down if you change and get out of dairy farming. But you will be letting you and your family down if you don’t change and do the best thing for your family. Whatever you decide to do, good luck and I hope it works out for you.
IP Dairy Farmer Article – February 2016
IP Dairy Farmer Article – January 2016
IP Dairy Farmer Article - December 2015
Things are on the up! Alas, though, not milk prices. It’s the level of fighting, bickering, name-calling, threats and plotting between farmers I’m talking about. Farmers working AGAINST other farmers, for example, exemplified by one farmer who, for some inexplicably stupid reason, stuck a spanner into the incredibly successful Morrisons “Milk for Farmers” brand.
Whilst FFA and others push retailers hard for every last 0.1ppl a Mr Richard Brown - a farmer “with a lifetime experience” from Derby, and believed to be aided by a dairy nutritionist from Nantwich, has complained that Morrisons has misled the public, through the fact Arla is a co-op and not all of the extra money goes to British farmers.
He was dissatisfied with Morrison’s position, so complained to the Advertising Standards Authority. In addition ‘a shopper’, named “Mr H”, but possibly Brown himself or the nutritionist, sent an email chain of his dialogue with Morrisons to The Farmers Weekly which regurgitated it in full under the headline “Morrisons slammed over ‘misleading’ milk for farmers?” The opening two words of the article were “A supermarket shopper.” On top of that, and much more significantly, The Sunday Telegraph picked-up on the article and printed the same anti-Morrisons angle.
How the hell did just ONE complaint result in The Farmer’s Weekly deciding to publish this article and potentially undermine everything going on in the industry to get more money from retailers? It is irresponsible, and FFA and all other dairy farmer organisations should ask questions of it.
Thus, while some dairy farmers work hard during the day and stand on freezing cold, wet picket lines at night to try and get extra money, others are undermining successful initiatives. It is staggering! Perhaps Mr Brown & Associates would like Arla to repatriate back to Denmark the share of the profits from Lurpak, Castello and other EU retailer’s money which UK farmers enjoy a share of. The fact this happens was conveniently overlooked in The Weekly’s article, though.
Now, it’s nearly 2016, so what do I predict for next year? Following the sale of its liquids division to Muller I bet 2016 will see Dairy Crest’s remaining cheese business taken over. My money is on an Irish flag flying over Davidstow, with 2nd favourite being a French, and a German flag more of an outside punt. If I were the Irish I would want the Cathedral City brand because, as I have previously said before, the brand doesn’t actually have to be made with British milk.
Milk price wise, you all know it is going to be a long haul. Global production needs to fall in line with demand, but it is currently still increasing. The EU28 are producing 3% more milk, for example. There is no shortage of milk in the world, and the buyers know it.
For First Milk 2016 will obviously be a very tough and pivotal year. Last January CEO Kate Allum stated that “First Milk members should be confident” and that “the business is in very good shape”. She didn’t tell the truth, though, and the financial situation was serious with no basis for any improvement. The first hurdle is for it to negotiate its re-financing with its main bankers Barclays & Lloyds, but it is confident. I wish Gallacher and his new commercial team the very best. May the force be with it! (to quote a film out soon.) For the members I guess having your milk collected and being paid for is a bonus compared to those who have no contract.
Finally, AHDB Dairy. And I make no apologies for being like a terrier with a rat on this. I am getting a LOT of emails on the subject. A former vice chairman of a major farmer organisation sent a two word email (which summed-up what many others went to great lengths to say): “Scrap it”, he said. Another stated that if AHDB Dairy were privatised or the levy was voluntary it would struggle to stay in business.
On recruitment, for example, I was surprised to learn that AHDB Dairy do NOT follow Government guidelines (either by law or in principle or spirit) and the Board decide who is employed and on what pay package. My concern was whether its recent appointments process had followed approved guidelines, were fair with open competition and that there was accountability. I was, for example, utterly staggered to see that it will “produce a recruitment policy shortly”. In other words it ain’t got one NOW! This is unbelievable given AHDB’s total wage bill is £22 million – a whopping third of its income!
The job as head of AHDB Dairy was ONLY advertised on FWi (Farmer’s Weekly Interactive) and promoted via AHDB’s internal intranet and website for three weeks, as well as AHDB alerting sector board members and senior management to the position. Not surprisingly this flaccid advertising campaign resulted in only SIX applications, and just TWO interviews, and in front of a panel of four AHDB senior people. Interestingly, and more professionally though, a further nine senior director and senior positions were more widely advertised in the Irish Farmers’ Journal, The Economist and Guardian online.
Its duty must be to strive to find the best talent in the country. In its response AHDB stated that “The online advertising route (for the Strategy Director for Dairy) was pre-evaluated as the most cost effective route for these parts.” Maybe so, but cost effectiveness isn’t what’s wanted here. The best talent is! It is little wonder that the acronym “FOP” is now gaining traction to sum-up the requirements for anyone who wants to get in, or on, at AHDB: FOP = Friend of Peter! (as in Kendall, the ex NFU chairman.)
Finally, Merry Christmas to all readers. Despite everything, I hope you have a good one. Heartbreakingly and tellingly, I have more than one or two emails saying they’d like their AHDB levy to go to putting more food on the table for their kids at Christmas, or buying them more presents. And that explains why I’m like a terrier.
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IP Dairy Farmer Article - November 2015
Following my last article on AHDB and a subsequent flurry of interesting emails in response, I was encouraged to look into the background behind AHDB’s free consultancy for farmers who have a cash flow or liquidity problem.
In order to qualify for a share of the £300,000 pot, farmers had to either be unable to pay invoices, about to breach their borrowing limit, or have no idea of their financial current position. Of the £300,000, however, only £120,800 was utilised, and by just 151 farmers, all of whom used the maximum £800 + VAT available. In total 27 consultancy firms were engaged, with one accounting for 18% of the jobs (27 forms).
Few farmers, I hazard to guess, actually knew about the fund. However it was publicised on the AHDB website (not that anyone would find it there unless they knew about it) and in the First Milk newsletter. Questions have been asked whether this is the role of AHDB and a good use of levy money; whether the cash injection helps professional farmers or was just social help for inefficient ones; and whether the money will actually change how they operate and/or help create the right conditions for them to prosper, or just help them limp on for another month or two.
Yes, farmers’ cash flow is the big problem, especially for those on a very poor milk price or with high costs. Most farmers will be eager to receive an early, vital, December SFP payment. It’s staggering that last year 42% of dairy farmers’ net profit came from the EU subsidy, and this year the percentage is sure to be well over 50%.
Currently the vast majority of EU dairy farmers cannot survive without that money, but economists like Sean Rickard regularly highlight that part of these payments end up capitalised into land values and rents. A few who are aggressively competitive are quietly suggesting a dramatic reduction in EU payments would shake up the industry and allow the competitive farmers to grow quickly. Those same farmers also hope the recovery is slow for the same reasons. These farmers are unlikely to back AHDB’S support fund.
The emails (from some very high ranking people too) also suggested I probe further into recent AHDB appointments, and the process adopted, and I certainly intend doing so.
AHDB Dairy has also recently recruited six new members to their extension officer team. This is also on farmers’ radar’s because they are taking on more staff at a time the industry is seeing farmer numbers reduce and processors cutting jobs e.g. Fonterra cutting 750, Muller 486, First Milk more than 70, and Arla 100. The board’s income has increased to £7 million and along with that its staffing. Is AHDB Dairy as lean and mean as the rest of the industry? Again, one for it to defend.
Now to the supplementary payments from retailers to processors, which are slowly filtering through. Many retailers stepped up to the plate but some have still done nothing, especially on cheese where some still buy own label from all over the world. The question I have is whether the promised money is all real and new.
Perhaps what’s needed is for AHDB economists to not only list the retailers who have pledged support but for them to audit each pledge. In the event they are unable to accurately determine what retailers have paid in full, and processors have passed the money on to farmers, they should call in Christine Tacon (The Grocery Code Adjudicator) to flex her muscles. If no such analysis is done we will be seen as a lazy industry who isn’t really bothered whether the money was handed over in full by retailers, or where it went. Public commitments were made which attracted positive PR but the money needs following and checking. For sure FFA don’t have the resources to do this next stage.
Since I last wrote the Commission’s so-called Dairy Aid package means €420m will be paid direct to dairy farmers out of a €500m allocation. But this is only 50% of the Commission’s super levy income from 2014/15. So it’s not even new money!
Out of this some £26 million is for the UK and while it’s still more money than other farmers in other sectors have received it amounts to diddly squat on a per farm basis. Perhaps it should have been better targeted towards marketing and milk promotion, since it is clear we desperately need it to build demand and our market, and we’re not going to get it from anywhere else.
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IP Dairy Farmer Article – October 2015 – UNCUT VERSION
AHDB Dairy as it is called now (and indeed AHDB) are certainly copping some criticism at the moment. And so far as the dairy sector is concerned their stance appears to be evading those who challenge them, including some dairy farmers.
One issue raised with me by several farmers is the one of David Ball, who was made redundant as manager of a Gloucestershire dairy unit last year. After being unemployed for a while, though, he now has an attractive position with AHDB Dairy as its farm buildings senior technical advisor - effectively working under his wife Amanda. The job specification stated AHDB was “seeking an experienced person on buildings”. However, according to comments I have received from within AHDB and one of Ball’s friends, his Linked-In CV did not remotely mention expertise in this area. Ok, so he worked on a farm with very big sheds, but I’ve sat in some very big planes and it doesn’t make me a pilot.
This prompted me to make enquiries to establish the background to the appointment in terms of how many applications and interviews there were. The response I received was: “it’s not information we would normally disclose”. When I responded asking whether the position had been advertised in the Farmers Guardian, Dairy Farmer, Farmers Weekly or the like my two requests were ignored. Yet I am led to believe that none of these publications were used.
Allegations of nepotism may be uncharitable, but levy-paying farmers can be forgiven for pondering the thought. The appointment may ultimately be a case of AHDB delivering value for money and working smarter, and time will tell. But some levy payers think there’s something not right there.
Aside from the individual there’s also the issue of the actual job. Employing an expert in buildings right now has been described to me as hiring an expert on how to blow out candles on a birthday cake while the house burns down. A number of farmers desperately need one-to-one help on how to exit the industry, or to involve fresh blood in their businesses. Help here would be very useful. But (say critics) new sheds are largely about expansion, and more cows is about more milk. And with more milk comes more levy money. And on top of Mr Ball’s appointment comes another job vacancy for an extension officer with expertise in forage and grassland management, and another one in market Intelligence, and another senior one in AHDB strategy (Tom Hind). AHDB Dairy now employs well over 30 people I reckon, with the chairman on a pro-rata salary of over £80,000 a year.
AHDB’s credibility is hanging by a thread among a lot of farmers, who say it sits in its new ivory tower in Stoneleigh spending levy payers money on what it think is needed rather than on what levy payers actually want.
And in fact some of its work is turning out to be deeply damaging! For example its August research informed farmers that “there is very little connection between the price of milk in supermarkets and the price farmers are paid.” According to AHDB Dairy this “supports the argument the supermarket price war on milk is not to blame for the current crisis”. Really? So there’s no connection between the amount of money that comes in the top of the hopper, and the amount that goes out the bottom? And if the retailers feel guilty enough to throw some more money at farmers now then they must, by their own admission, be part of the problem! If I was a retailer I’d have thrown AHDB’s line back at the farmers and not paid anything. Indeed you would have expected the British Retail Consortium, which represents retailers, to have done such research in an attempt to break the link and derail the work of the likes of FFA.
Then there’s its latest August cheddar price at a jaw dropping average of £2075/tonne - down 8.8% in one month. I tried to obtain from two of its senior dairy analysts clarification as to how such a low price had been calculated. I gave them a list of UK cheese traders asking them to confirm who they had contacted, how many tonnes they said had been traded (i.e one tonne or 1000), how the average had been calculated, and exactly what question had been asked? And the response: “It’s commercially sensitive information, however, AHDB do consult other publications to ensure their £2075 figures is true”.
For what its worth, my research showed that some contracted mild cheese is still selling at £2300 to up to £2500/tonne, while, yes, some spot trades are below £2000. But I just can’t come near to a £2075 average. In fact the EU average price is quoted as £2175 or £100 higher - and our cheese is far superior to EU stuff! David Handley and Michael Oakes (the two chief negotiators for UK dairy now) need all the help they can get in negotiating prices, and they DO NOT need overly low figures undermining their efforts!
The next eye-brow raiser involves Promar, which has been awarded a contract to collect data to provide a costings, and for these costings to be aggregated and presumably published. Why? This is duplication and, to my mind, AHDB Dairy is spending the money because it has it to spend! After all we have TSDG, Sainsburys, Kite, Kingshay & Promar all doing costings! There is NO market failure for AHDB to address! And besides, if it comes out with costings less than Tesco and the others, or does anything to undermine the work of FFA & NFU, there will be even more hell to pay!
Private Eye touched a few raw nerve cards recently and highlighted the concern among farmers as to how AHDB spends its £70m/year budget. The article questioned whether it has outlived its usefulness with a third of the money going on staff salaries and one farmer having described it as “a lucrative gravy train”. Levy payers (and I AM one) have a right to challenge the cost and the benefits, and AHDB has a duty to respond. It has a LOT of work to do to convince levy payers it is fit for purpose.
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IP Dairy Farmer Article - September 2015
There can be no disputing the fact that farmer protests have highlighted the desperate financial situation UK dairy farmers face ahead of the rapidly approaching winter. This time FFA was very pro-active, and spotted the exact time to go for maximum publicity.
Following an intense spell of protests the four UK regional Farming Unions met for an emergency summit on the 10th August and announced a five-point plan of action, with calls of action for Government, Europe, consumers, retailers and farmers.
However in the press release issued by the English NFU under the “farmers action point” it simply stated “we know that many of you are going through desperate times and we are working on your behalf. Keep being visible. Keep the British public on side.” This, to my mind, means that the NFU endorse peaceful protesting under FFA’s umbrella. I smiled when I saw calls to action for the other organisations but a limited call to action for the farmers, who are clearly desperate to see real leadership from the organisations they pay subscriptions to. Did the NFU simply pass the protesting task over?
Farmer campaigning and protesting is controversial, and you may agree with it or be totally against it. But it has yet again got results. So hats off to the farmers who came out – a difference was made. Well done! You may not agree with what they did, but some retailers are coughing up more money. And spare thought for those people on the various committees of these organisations who spend an incredible amount of time striving to make a difference for dairy farmers. I know how much time it takes me to write this monthly article, plus my weekly bulletin and to deal with the press and media - and that will only be a fraction of the time that David Handley, and recently “retired” Paul Rowbottom have devoted over the years. And yes, the various NFU’s committee members put the hours and the miles in too, for little or no reward. Some days the work can be over-whelming and leaves little or no time for normal family life. It’s a huge strain and those who get dragged into it often find it impossible to find a way out without feeling they have perhaps let people down. Don’t take these people for granted.
Out of the various meetings came the Morrisons gimmick, with a new brand of milk being launched that costs an extra 10ppl more than the usual milk, with the money going direct to Arla members. The NFU welcomed the move, but for me memories are short. Tesco tried “Local Choice” milk to help Dairy Farmers of Britain, but the idea bombed. Morrisons will be quick to delist the new “Milk for Farmers” brand if it doesn’t sell. And, of course, whether it does sell depends on how much it stocks, and where – at eye level or at the bottom of the fixture shelf.
Its time to back British, many farmers and industry leaders are saying. The French have effectively waved two fingers to the Dutch and the EU Commission who are demanding they respect the EU single market principles and allow foreign dairy imports into France.
But in France their agriculture Minister has urged consumers to be patriotic in their dairy purchasing to help save the livelihoods of the 25,000 French dairy farmers. “All must favour French products,” he said. In my opinion we now need a campaign to promote the buying of British dairy products using British milk.
AHDB responded to last month’s article about the six yearly New Zealand dairy levy board referendum required for the levy to continue. They pointed out that during any three month period if 5% of levy payers (about 650) sign requests for a ballot then it has to be held, and the result of that ballot then goes to UK ministers to make the final decision as to what happens. From our recent research of over 400 levy payers it is clear farmers want immediate changes as to how Dairy Co/AHDB Dairy spend their levy money. They don’t want it to shut up shop, but do appear to be almost unanimous in calling for some levy money to be diverted to a professional promotion agency emphasising the buy British element.
Let’s face it DairyCo has received in excess of £1 million extra as a result of the increase in production, so it has already had AND SPENT the extra money. But on what? Cynics say it spends the money on encouraging more production because that generates more levy money for it…and so on! However DairyCo told the Radio 4 Farming Today Programme on the 13th August that it can’t promote British Dairy products. I think farmers will want to know exactly why that is. I have heard one Tesco farmer would prefer to give his levy to Tesco if he could to help it promote British milk. That makes sense to me if DairyCo won’t!
The next big farmer demonstration will be on the 7th September at the EU Agriculture emergency dairy crisis meeting in Brussels, where there will be calls for the EU Intervention price to be raised. However this is a complex move. Increasing the Intervention price could have a negative impact if it stimulates milk production and exacerbates an already overloaded market. Remember the intervention price is a safety net, and if it were anywhere close to the cost of production it would spell disaster. Please note that although product is now going into intervention it is no guarantee that prices wont fall further.
The only REAL solution is to cut production and bring supply and demand back into balance. How low milk prices will have to fall before we see a sizable cut in production is the million dollar question. However the reality is that switching the milk taps off in the UK will not solve the problem - it has to be a global switch off!
The Competition and Markets Authority’s 65 page report on Muller’s acquisition of Dairy Crest (DC) liquid business contains some interesting statements and intentions, especially for farmers supplying its Foston and Chadwell Heath factories.
The report is surprisingly open and transparent and details DC’s plan B if the merger does not proceed. That said, it now looks inevitable it will be given the thumbs-up, and it could be all change on January 1st 2016.
Plan B is for DC to downsize to its Severnside factory and to close both Foston and Chadwell Heath. It will also exit its national multiple contracts with the likes of M & S and Waitrose. Their reason is simple - the business has lost money in the past four years. Plan B makes no reference as to how the two factories would be closed or how the staff and supplying farmers would be dealt with, however.
Irrespective of whether the deal proceeds the staff especially have a huge black cloud hanging over them, worried that Muller will decide these two factories are surplus to requirements and will thus immediately close them down to deliver “synergies”? The farmers, however, have a reassurance from Muller that contracts will be honoured, should they want it. They’d sure find it nearly impossible to find a new milk purchaser right now if they don’t.
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IP Dairy Farmer Article – August 2015
Last month’s article concentrated on Tesco. And so will this one, following its decision to review its TSDG pool. Back in 2007 Tesco made a pledge (which they enforced in a March 2011 press release), to recognise the true cost of milk production “with additional provisions for making a profit including capital investment and unpaid family labour.” According to the company the TSDG was started “to address the huge uncertainty faced by dairy farmers caused by continuing volatility in the markets, and to ensure farmers are paid above the cost of milk production.” Another subliminal reason was to remove the company from the radar of FFA and its protests, which were rife in 2010 outside its distribution centres. In response to these protests Tesco board Director Lucy Neville–Rolfe said “Tesco remains committed to ensuring British dairy farmers receive a fair price that is above the cost of production.”
So the big question is this: where does this leave Tesco and the TSDG farmers involved in the “comprehensive and thorough” review of the TSDG. Although Tesco has recently stated “we want to pay a fair price” there is NO reference to COP.
For Tesco aligned producers to defend the status quo in my opinion is pointless. There WILL be change and the farmers involved are likely to take a haircut, given the retail milk price war and the amount Tesco loses on milk. If they don’t engage with the review then it could be more a head shave than a back and sides.
As one of my regular readers and a Tesco man stated “A milk buyer (least of all Tesco) cannot afford to pay more than its rivals without gaining value in return.” Tesco farmers, to date, have delivered little, if any value, to Tesco, despite numerous advice to do so.
As part of the review the gathering of the costings information by Promar and exactly what costs are included will be explored, along with the profile of the typical Tesco farm. Recent press headlines referring to the UK’s richest man’s (the Duke of Westminster) “American style mega-dairy” with 1400 cows as being Tesco’s biggest supplier is not a headline it will have liked, forgotten or ignored. No matter how good the unit, if I asked 100 Tesco shoppers whether they’d like to see premiums go to the Duke or to 10 family farms instead I’m pretty sure I know what most would say. I remember the criteria used by Dairy Crest when it recruited 25 farmers for its aligned Tesco pool for delivery into the former Amelca plant at Foston. To be eligible for consideration farmers had to produce less than 2 million litres and be a traditional, professional family unit.
While referring to Tesco the NFU do appear to swallow everything drastic Dave Lewis, CEO of Tesco, tells them. Only two weeks ago Dave informed the NFU of its 100% British vegetable souring policy after the NFU asked Tesco demonstrate it was delivering on its 2013 NFU Conference promise. Despite Drastic’s assurances the next day I examined carrots to learn Tesco failed in three out of 10 outlets I surveyed. They were selling French ones.
The Dairy industry’s lack of funds to properly promote the nutritional benefits of milk is a hot topic among several enthusiastic producers. One of my weekly bulletin readers felt that the industry recently missed an opportunity when the TV and press homed in on the ‘sugary drinks effect on children’s teeth’ issue. She believed the industry should have been involved in the debate and promoting the positives of drinking milk. Perhaps its time for GB farmers to seek change in how AHDB operate. And that brings me to the New Zealand approach to its levy.
Every six years New Zealand dairy farmers hold a levy referendum when they decide whether the levy continues. This keeps the levy board on its toes, ensuring those handling the funds have robust accountability and transparency, and are efficient and fair in the levy’s spend.
If farmers are dissatisfied with the levy board’s past or future spending plans they can vote against its renewal. They can even force an interim vote. I can hear some diehard Dairy Co (or AHDB Dairy as it is now called following a whopping and unnecessary £60,000 rebranding exercise!) Kings and Queens wincing at the thought!
Levy paying dairy farmers have the right to challenge AHDB Dairy on whether its various ideas deliver real benefit. Some farmers are more radical, believing that the levy should be removed and AHDB Dairy should be self-funding and charge those who choose to utilise their services in the same way as consultants or other private companies do. The theory is simple: if it is good then farmers will pay them!
Back in early June the intimidation of Café Nero hit the news and while the instant reaction of some of our industry bodies was to condemn the company I looked through the telescope from the opposite end and took a different approach (see www.ipaquotas.com/QUOTA NEWS.htm 5th June). Almost all who read it could see my point of view, with the exception of the vocal husband of a Dairy Farmer columnist! Two of the many people who were fired-up and tweeted should, in my opinion, have paused for thought before they did. One was the NFU Dairy Board chairman who called for a boycott of the chain. Another came from Amanda Ball, Head of Marketing and Communication at AHDB Dairy. She tweeted: “Made my coffee drinking choices easier. As it happens I prefer Starbucks UK or Costa Coffee No more Nero.”
To me both of them should have known better and the industry’s reaction reinforced my view that we should have helped and supported Nero because they were not the enemy and TB is not their battle. One person who correctly spotted that the Nero bashers were wrong was NFU Deputy President Minette Batters, who actively worked behind the scenes with Nero. But where was the rest of the industry in Nero’s hour of need? Were its processor, or our representative organisations rallying round? No. Where was the crisis management plan? There wasn’t one. Is there one now, for the next time one of our customers gets targeted? I damn well hope so, but somehow, alas, I doubt it.
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IP Dairy Farmer Article – July 2015
Now this will not be popular with a certain elite section of the industry: the gap between the so-called have’s (on retailer-aligned contracts) and the have not’s (those without) has widened to, in my opinion, totally unacceptable levels. It’s now 10 ppl or more, and for me it’s the elephant in the dairy room and has to change. Retailers are now battling to compete with cheap milk from the discounters, which has sunk to new lows in the Midlands of a gut wrenching 35ppl for two litres (17.5ppl)!
Let’s just look at Tesco, with an aligned pool involving Arla and Muller farmers, which is costing them upwards of £80million per annum, and rising! Tesco’s results were the worst on record and its share price almost halved between June and December last year before partially recovering.
Tesco’s producer price is fixed until November 1st and abandoning its commitment to its farmers is certainly not a credible option. But a variation most certainly has to be in the wind, and I think it might be imminent. Some Tesco farmers haven’t helped themselves, preferring to crow about their investment and what Tesco are paying for instead of focusing their efforts on demonstrating the benefits that the extra £80million brings to the retailer. Why haven’t the farmers who benefit, especially Muller Wiseman aligned and Arla directs, stepped forward to promote a common message? Some are even brazenly saying that what Tesco pays for includes some non-dairy costs, which they believe they have been smart in lumping into the cost of production! Presumably Promar doesn’t spot this!
Through this column I have previously issued warnings like this because the situation is simply unsustainable. The likes of Tesco and Sainsbury stepped forward in 2007 with a much needed sustainable model, but it’s now time for an overhaul.
I do believe that Tesco’s, Sainsbury and others would not be foolish enough to seek a way out altogether, but they will be acutely aware that it is time for a review because some of their aligned farmers are piling on the extra cows, feeding more concentrate, paying higher rents to grow maize in the belief that it can continue without them giving anything back. On the other side of the fence are my farming friends Mr Envy and Mr Jealous who are receiving anywhere between 15ppl and 24ppl and they would love to see their aligned neighbours milk price fall closer to theirs. I think, on this occasion, it will.
Those on non-aligned contracts are being forced to change how they do things to reduce cost. Those on aligned contracts receiving 30ppl+ are not, and are highly unlikely to be the most efficient producers! Change is in the air and Promar and the processors need to engage with the retailers to be a catalyst for the change rather than sit back. In that case something more drastic might come. Either the farmers’ deliver more of what the retailers want, or the retailers WILL review the cost of production model. In New Zealand there is a school of thought that low prices will deliver a long-term benefit because it will curb expansion, especially from EU farmers on housed systems. When milk prices were flying high there was talk of New Zealand farmers moving towards housing more cows and abandoning their low cost grass based cornerstone.
Back in the summer of 2003 there was a joint press release issued by Milk Link (Barry Nicholls), former MMB Board member Allin Bewes, yours truly, and freelance journalist / my occasional partner in crime Chris Walkland, with the headline “Should we, could we, get the Milk Race back.” The four of us set up a company called “The Milk Race Limited” and I won’t go over which industry organisations and personalities ensured the idea was binned, but they succeeded. Fortunately, though, only for a decade. However, back in May I was delighted to have a great day out at Nottingham to see first hand this year’s Milk Race, the third in a row. And what a success it was! The race is very much back on track, and even supported by one or two of the organisations who rubbished the re-introduction in 2003.
For 35 years The Milk Race was a 10-day round Britain international cycle race and a cornerstone of the dairy industry’s milk promotional campaigns before de-regulation. It has certainly risen from the ashes and I was pleased to see Arla, Dairy Crest and The Dairy Council / DairyCo promoting their milk, milk products, farming and the countryside to 50,000 +people of all ages from 5-85 at a major national sporting event. Cycling is now the country’s third most popular recreational activity, with an estimated 3.1 million people riding a bike every month.
Congratulations to all who made it happen and I hope its success is capitalized on. I am not qualified to verify whether it’s a cost-effective investment of dairy farmers’ money but to me there are three things which sell products today - pop idols, sex and sporting personalities. The industry has forked out for the first one but not the second! I am very much behind the benefits of using sporting personalities and cycling is popular and topical.
I do believe as an industry we have to promote the sales of all our dairy products. In addition, I wish more was done to promote the professional image of dairy farming to consumers. That’s why the new Arla TV advert is so fantastic! I wish more companies would do it. The public like dairy farmers and want to support you but some of you are sadly poor, grumpy ambassadors for this exciting industry, which has a great long-term future and real potential. The Dairy UK strap line “Proud of Dairy” should strike a chord with all of you.
Milk prices continue to fall and as I pen this article spot milk is back down at 12ppl and its five weeks past the UK’s peak production. It’s grim but heaven knows how bad it would have been if Woodcock’s new state of the art 500 million litres/year capacity hadn’t absorbed a chunk of this milk. Most, if not all, dairy analysts accept that prices will certainly remain low for all of 2015 and some are suggesting it will run through most, if not all, of 2016 until supply and demand are re-aligned. It’s going to get tougher and regrettably there will be casualties. For all involved there will be lessons to be learned.
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IP Dairy Farmer Article – June 2015
Just as the crisis in milk prices is proving to be a pressure point to drive on-farm change and efficiencies I hope the same will be true for First Milk. I make no apologies for returning to that business because, along with appalling milk prices, they are the second most popular talking point among farmers.
Mike Gallacher is the new pilot on the First Milk flight deck. He has checked the instrument panel and realizes he is in a storm, is low on fuel, with poor engine performance, a demotivated crew and disillusioned passengers. He also has far too much milk for his tea, and it’s slopping around the cabin and dripping through the floor. It’s up to him to land this plane.
He has inherited a loss-making business, with loss making assets, and with resigning members – more of whom will go when other companies start recruiting (if they do!). Normally such circumstances would trigger a merger, but First Milk’s historical track record in this area of business is poor.
Credit to Gallacher so far, though, he has laid all the dirty washing and bad news out so the members know where he is starting from. He has informed members the business lost in excess of £16m in the year to 31st March so despite paying one of the lowest farmer milk prices in the country it still paid too much for the milk! What was the previous administration doing?! He realises engagement and honest straight-talking with members is essential if they are to stay on board and trust him. He has not been brought in as the change and fix it person or the maintenance man he is the turnaround person and he needs results quickly. He will have to ignore noisy protestors and those who get in his way and simply do what MUST be done, and quickly.
Whilst First Milk issues are not on the same scale as those of Tesco there are similarities. Drastic Dave Lewis, the new Tesco CEO, inherited a mess and immediately got all the Tesco dirty washing out in the open, including the biggest corporate write down in history.
Gallacher’s problem is the co-op has limited free-cash (if any), hence without the help of a partner like Adams (aka Ornua Foods) and investment in First Milk’s cheese plants the co-op simply cannot, and will not, find money to invest or reinvest for several years. That something many of its members will relate to, sadly. Many of its hard working, honest, family suppliers are also struggling for exactly the same reasons: they don’t have the cash either.
Accompanying Gallacher’s first announcement of around 70 job losses and differential pricing came the news from Chairman Jim Paice of an independent review in to the co-op’s governance (its board) and commercial learnings from its “recent disappointing performance”. That’s an understatement if ever there was one! The independent review is the Board’s brainchild, and I hope it will be a hard-hitting Lord Myners type review of The Co-Operative Group business.
In his 2014 review Myners ruffled feathers stating The Co-operative’s board “isn’t up to the job” and he recommended the board of farmers, nurses etc be replaced with people who had the right skills and experience to run the organisation. He said none of them had the ability, with one member’s experience extending to only the local golf club. Myners also stated that it was “a cosy board” with several who simply didn’t want to give up their pay and power. He confirmed they were stuck in denial as to their near ruinous failure of governance which led to the co-op’s near collapse. “The board’s directors have to accept responsibility for what has gone wrong,” he said.
Myners also rejected the idea the board could be trained, going on to say “being led by eager, earnest but unqualified amateurs is no way to run an organisation.” I can see First Milk members rolling back their eyes knowing the current board are unlikely to escape conviction for the current dire situation, despite the fact one or two would like to create a smokescreen dense enough to cover up their failures. However, the last thing First Milk needs now is a post mortem or a witch-hunt.
I will be keen to see how hard hitting (or cosy) the First Milk review is. Let me nail my colours to the mast. I have NO desire to see First Milk fail and end up like its predecessors DFOB, Westbury or Amelca who exited the industry in spectacular style having clocked-up catastrophic losses and taking heaps of farmers’ money with them. Gallacher and this review could be a turning point, but to make an omelette you have to crack eggs and while I recognise the odd one or two First Milk board member has skills beyond the farmgate some are enthusiastic amateurs. First Milk Gallacher needs hard-nosed commercial expertise on the board who can assist with the turnaround.
Fortunately there are few, if any, members who still have their blinkers on as to how serious the situation is. They rightly expect and demand more from their co-op. Let’s hope the changes made work quickly, and I hope the review is not a distraction.
Now prices. There are glimmers of hope that global milk production is slowing down in response to very low prices (although not in the UK just yet!). It’s a step in the right direction but significant product surpluses have built up in the last 18 months, which will be slow to clear and bring the market in balance. Going forward volatility will be a permanent feature in world dairying, and to cope with it farmers will have to refrain from unnecessary spending in the good times.
The spending spree is over and it’s belt-tightening time. Those who are highly geared and made significant investments in 2012-2014, many having stress-tested their milk price at 30p! (and failed), are in serious trouble. Those who have prepared for the worst and squirrelled away some emergency money will come out of the end of this very long tunnel in reasonable, if not a good position. For the borrowers I say take note of comments made by New Zealand’s Federated Farmers Chairman Andrew Hoggard about New Zealand farmer’s debt levels. In 2003 average debt levels were NZ$9.50 per kg of milk solids, and at the end of last season it had doubled to NZ$18.90. Almost 25% of dairy farm debt is owed by farmers who are in debt to the tune of NZ$30 per kg or more. The total debt at NZ$34 billion is concerning its Government.
Hoggard is urging banks not to view farmers with high debt as bad farmers but to check if they are actually “good farmers who have been caught out by the timing of their expansion and the downturn.” Are they a good asset to the future of the industry, he asked them to question. At the time they expanded such a dramatic turndown was not foreseen and, let’s face it, the banks who loaned them the funds to expand didn’t see it coming. He has a very good point.
IP Dairy Farmer Article – May 2015
Passport and visa in hand, vaccinations up to date, and protection minders in tow I recently decided to cross the border – the River Tamar - and pay a visit to Dairy Crest’s (DC) Davidstow cheese factory, in particular to see first hand the progress of its £68m investment in a state of the art de-mineralised whey (DWP) powder plant (for making into infant/baby powder). It will be commissioned next month and, when at capacity, it will produce around 26,000 tonnes of DWP (80 tonnes/day) plus 13,500 tonnes of GOS each year (another technical, profitable product but space constraints mean I can’t explain it!). The plant was supposed to have a five year payback, but probably won’t at current prices!
Basically, the process removes 90% of the minerals from the milk and the DWP leaves the factory in 1 tonne or 25kg bags. It requires 500 million litres of supply (60 tankers a day) from 400 farmers, which is effectively 60% of all Cornwall’s milk output. Dairy Crest will never be a big gun in the world of infant formula, but it is likely to have one of the most efficient DWP processing plants in the world, thus adding value to its farmer’s milk.
DC has spotted the obvious advantage of the highly successful collaborative trading models that Fonterra has across the world, and decided it is the number one partner to market all of its Davidstow infant formula. As I have stated previously on more than one occasion in this article processors like DC do not have to be a co-operative to co-operate, a fact some GB dairy farmers struggle to comprehend.
Asia, particularly China, is the target market but getting a new product into China would be a huge challenge to DC. It’s not a case of filling a container and picking the telephone up and saying we will deliver it £100 tonne less than the competitors. Fonterra is the best route to quickly overcome trade barriers. The Chinese market is huge, and sales of baby powder to China are predicted to rise to £17billion/year in two years. DC is not the only one investing significant money in DWP processing, though, and I hope the world will not end up with excess infant formula processing once everyone is up and running.
I believe this joint venture with Fonterra is a very smart move by DC. If it was to attempt to penetrate the infant formula market and go head to head with the world’s biggest infant formula producers - Nestle and Danone - it would only devalue the product. This deal will facilitate Fonterra adding value to the powder and allow DC to focus on what it does best at Davidstow - collecting quality milk from a very tight, traceable milk field and processing it efficiently. Devon and Cornwall have a solid reputation for quality food products with geographical prominence, and this should be a great selling point of difference for DC’s infant formula, and comfortably satisfy Chinese requirements on tradability and provenance.
Meanwhile, quotas have ended at a time when world and UK farmgate milk prices are under extreme pressure. There is no point calling for the government or the EU to interfere with the market place. At the moment we simply have a worldwide imbalance in supply and demand of milk and milk products. It will correct itself, but at a financial and, in some cases, unquantifiable family cost. The volume of milk we are producing, excluding organic, can be absorbed by the world, but not consumed. Basically, only a fool would pay producers more than can be earned from the milk processed, hence prices are under severe pressure. April and May will be very tough for some producers, even more of whose price could dip under 20ppl.
For decades the price the British farmer received for the milk was determined by the market the milk went to, with the Holy Grail being the magical liquid premium. That has gone, however, and now all smart GB dairy farmers take their pricing signals from the GDT auction and mainland Europe, especially Friesland Campina and Arla (whether you like it /them or not). While major players in the UK dairy market need to extract maximum benefit from the home and European market all involved in the industry need to now look globally.
The national news is almost on election overload with UKIP’s Nigel Farage entertaining / infuriating Joe Public in equal measure with his ideas - some of which often receive quiet support even if they don’t translate to ballot box votes.
It’s not quite the same but it left me wondering whether David Handley and FFA aren’t the new UKIP in dairy farming political circles! The established parties try hard to box him out of meetings but he is gaining supporters, won’t take no for an answer and can be relied on to pull a crowd 10 times bigger than the established parties & organisations with their Prime Ministers and Ministers of dairying when it comes to dairy farmers turning out on an evening.
Handley regularly has stones lobbed at him from very well funded opposition while he takes centre stage on a shoestring budget. It won’t stay like this forever, though, because you can’t keep the peasants down forever! They revolt and force change.
The show season will soon be in full swing, and for me that means my annual two-day pilgrimage to what I believe is possibly the best county show in town – The Royal Cornwall.
At the risk of clogging my email box up with comments like “Potter has swallowed a packet of Dairy Crest happy pills this month” I am going to mention a little publicised initiative I benefitted from.
At last year’s show DC and DCD offered a free health MOT to its farmers and its favourite industry commentator. I perhaps wasn’t DC’s favourite at the 2014 show, but I could be by June 4th 2015! I took one of the health checks just to be sociable because I was perfectly, perfectly healthy. Or at least that’s what I thought. Actually I wasn’t, and my blood pressure was off the scale. I ended up having an ECG - the very same day - and visiting my doctor as soon as I returned. I felt normal, and on this occasion miraculously nothing had happened. Maybe it was the thought of an Uncle Arthur Reeves grilling for giving DC a hard time!
As was commented by DCD at the time, most farmers spend a lot of time and energy providing first class care for their animals, but when it comes to looking after themselves it appears to be lower on their list of priorities. I can assure you it’s at the top of my priorities now. Make sure it’s at the top of yours is my message!
Finally, as supermarkets battle it out offering 4 pints for 89p or less, my wife noticed Sainsburys selling branded cat milk for £5/litre. You could scratch some eyes out, rather than purr at that price!
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IP Dairy Farmer Article – April 2015
One time, hopefully sometime soon (I am sure it is thinking) First Milk won’t be making the news. Alas it isn’t this month though. After six years in office, and more ups and downs than most CEO’s would ever want to cope with, the firm’s boss Kate Allum is leaving and being replaced by Mike Gallacher from Mars (that’s the company, not the planet). He’s the second person from that company to take the helm in the dairy industry in recent years. Let’s hope he does a much better job than his predecessor Rob Knight, the former Chairman of DFOB.
Gallacher has no dairy industry experience or network of relationships. Instead he’s used to the dog-eat-dog (actually dog-eat-biscuits) world of petfood. But maybe he’ll turn his clean-sheet, zero-baggage into an advantage. He needs to, as the track record of executives who come in from the outside to take high level positions is not good. (All that said, though, DFOB’s old boss did have the attitude that they couldn’t be told anything, and that they knew it all. Their arrogance was beyond breathtaking, so maybe it’s probably unfair to compare.)
Nevertheless he boards the First Milk ship in choppy waters and it will need luck, skill and expert navigational skills to ensure it does not run aground.
It will certainly be very interesting to see what he does with the business. Will he, for example, oversee a controlled shrinkage to ensure it retains the right supplying members in the right locations for its more profitable outlets, and cuts costs? Or will he look to marry it off in its entirety? Or sell assets to get the debt down? Or even grow it, over time! Downsizing would almost certainly mean losing producers, but that wouldn’t necessarily be a bad thing if it took control and proactively managed the situation. The worst outcome would be for it to be left with the wrong producers in the wrong locations, which would potentially add to its cost base unless some sort of cost-reflective remedial policies were introduced. Gallacher had better quickly figure a way to improve the deal First Milk members receive, because, for many, it will be a case of seeing the spring out, and then seeing if the net price received has improved. If it hasn’t then I foresee a lot striving to find a new buyer or, if they can’t, packing-up.
It’s now in excess of two months since the co-op published its much-delayed financial accounts for the year ended 31st March 2014. The financials were available to all its 1200 members. When I received them one of the pages that particularly caught my eye was page 23 and the section headed “Director’s Remuneration”. Here it shows that Allum received £340,531 in the year ended March 2014, including £11,730 (almost £1000/month!) in bonuses. Those figures are pretty tasty, and while no detail is given as to why a bonus was paid it surely was galling to many members. In addition, the figures confirm that Finance Director Ian Forgie received £232,185 for his nine months work, including £121,557 compensation for losing his position.
They are, by any stretch of the imagination, massive figures. But clearly the figures weren’t galling, because not a single member from First Milk’s 1200 base raised the issue with me. I would understand this if First Milk was top of the milk price league table, but not when it is rooted to the bottom.
Are the members punch drunk and fed up of the bleak financial position of their co-op, or do they simply not care and just hope the milk tanker turns up regularly to collect their milk?
Now to Scotland, and the aspirations of the newly elected NFUS Milk Committee Chairman Mr Graeme Braveheart Kilpatrick, who wants to “drive demand for Scottish dairy products at home in Scotland and abroad.” Nothing wrong in that, but one of his goals is to see Scottish dairy products displayed “on the middle (eye level) shelves of supermarkets across the UK, not just in Scotland”! Now hold on Mr Braveheart, let’s just get this straight: Scotland produces significantly more milk and dairy products than it consumes, so you have to export to places like England and Wales. But English and Welsh supermarkets are simply not going to give prominent middle shelf space to branded Scottish milk and dairy products and pay a premium as they try to with Scottish beef!
If that’s the Scottish game plan I want to know who is going to go into battle for English and Welsh milk and dairy products, or will we just roll over and say “it’s your idea Scotland, by all means be our guest and take that space”. It’s amazing that the English and Wales NFU are on mute and haven’t challenged the NFUS on its aspiration. At the end of the day, though, if it has a Scottish label on it then English and Welsh housewives will have the final say as to whether they buy English, Welsh or Scottish product.
After 31 years milk quotas come to an end on the 31 March. As to what happens next it is a near certainty that EU production will increase irrespective of the current price volatility. The final superlevy bill, which could be as much as 1 billion Euros, coupled with the fall in farmgate milk prices, has slowed down production this year but come the 1 April the brakes will be off.
On the day quotas end I will be in New Zealand ready to line up on the grid with 60 classic Mini’s to drive 2,500km in six days from Kaitaia in the North Island to Invercargill in the South Island in aid of two children’s charities. It is the trip of a lifetime. Daily details and photographs will be posted on my website for those who want to follow my adventure.
For those who would like to contribute to the charities please log onto:
Thank you in advance for your donations. For those readers who would like me to go on a one-way trip I apologise because I will return. I informed one industry guru that I was going ski-ing for four days and guess what? He suggested I did a whole ski season, where I couldn’t pen my bulletin and then added “I hear Syria has some lovely ski resorts!” With friends like these who needs enemies!
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IP Dairy Farmer Article – March 2015
The results of DairyCo's latest annual farmer intentions survey for 2015 were once again released at the Dairy Breakout session of the AHDB's annual Outlook Conference in Westminster.
While the majority of media and press centre on London it's certainly not a farmer-friendly venue, and I wonder how long it will be before AHDB and DairyCo cut costs and move out of London as the NFU did so boldly a few years ago. Remember when the NFU made the move Gwyn Jones and Sir Peter Kendall were both at the front of the cavalry, and both are now at the forefront of change at AHDB, along with new chief exec Jane King. Already there are signs of a change of emphasis from the top three, and Gwyn Jones doesn't seem to be a chairman who hides behind the Dairy Co remit defence-shield, telling producers what he can't do rather than what he can do. There is clear evidence he is starting to help promote British dairy products, which will at least boost levy payers opinion of where their levy money is spent.
This year's Intentions survey has one headline worthy of cross examination. From a survey of 850 GB farmers a staggering one third plan to increase milk production during the next two years. Assuming they do as they say Dairy Co's survey translates to an eye watering 6% increase in National production. As Dairy Co pointed out, the ambition to increase production comes on the back of a record production year.
I have no doubt the 6% figure has been accurately crunched by Dairy Co's bean counters, but does the message, and conclusion, best serve its dairy farmer levy payers who pay around £7.3 million to fund it? My question, simply, is this: will processors and retailers see the figure and think there are no long-term concerns over the effect the current low milk price is having on farmer confidence, and that whatever happens the milk will still flow? The message could result in retailers and food service customers taking the attitude that it doesn't matter what they pay, there will never be a shortage. The detail of the survey, in that it was done in December and before milk price cuts had really hit milk cheques, will be lost.
Milk prices for the majority have headed further south since December, so surely it's a sensible idea to do an up-to-date poll immediately prior to the conference slot to check whether prices, new developments (such as the reality of the ending of quotas and the certainty of A and B production limits [and for some A, B & C] has dented ambitions. Personally I think the initial poll should be 400 farmers, with 100 done two weeks before the conference. I don't think there's a need to pay thousands of pounds surveying 850 GB farmers, plus 150 in Northern Ireland each year. That's 8% of GB producers! Remember, only 1,000 people are surveyed by pollsters to determine the likely general election results for a population of 64 million!
Nevertheless it's useful to have an annual confidence barometer, plus farmers' thoughts as to their future investment and production plans. But the results do need handling with care, even if recent survey intentions covering planned production have been way off the mark when compared to actuals.
By the time you read this article there will only be a few days left until the 31st March, and the ending of 31 years of milk quotas. During that time the UK has paid wholesale super levy in 15 years, with the most being paid in March 1996 when the levy rate was 31.43ppl and the total paid was £44 million - an amount boosted more by the introduction of the butterfat adjustment, because we actually only exceeded our national quota by 1%. Since March 2004 the UK has been under its wholesale quota for the past 11 consecutive years, during which time our quota has increased by more than 1 billion litres. The total wholesale super levy paid amounts to £235 million, and including that paid by producer-retailers gives a grand total of £276 million. From 1st April it's a free market for 28 EU countries, and inevitably the boom to bust and back again pendulum will prevail.
The drastic producer haircut by First Milk in January to reduce its debt is still prompting numerous e-mails from across the industry. Not only was it a deferral, until further notice, of monthly member milk cheques plus a back-dated conversion of milk revenue into capital contributions, it was also a tax blow to producers. For those First Milk members who pay income tax (and I accept they could be in the minority today!) the capital contribution is treated as net of tax. That means a 40% tax payer has to earn 3.3ppl before tax to pay the 2ppl capital contribution.
The next news from First Milk simply has to be good, and will hopefully confirm that business conditions have improved. It has to show its balance sheet has been rebuilt on a solid and sustainable foundation. It also surely has to offload loss-making ventures, possibly including recent acquisitions in order to reduce its debt further, as well as cutting its own costs further and deeper, like Arla did recently (with 100 job cuts). It cannot keep coming back to farmers expecting them to fund a shortfall accruing from its situation / poor selling / lack of business competence. If its outlook does not improve in the next six months it could easily find itself in another dicky situation, especially if selective recruitment from others coincided with another run of member confidence. I know the company doesn't need reminding that its recent decisions have pushed several loyal members over the edge financially, mentally and in terms of family relationships.
The last thing anyone wants is another DFOB, United Milk or Amelca. Good honest hard working dairy farmers who are members of a Co-op should demand the same calibre of professionalism as expected from managers in PLC and private dairy businesses.
But it's not just First Milk members who have taken a kicking. One farmer has had his milk contract renewed on the condition he sells 500 of cows. If he doesn't then he has no milk buyer! He appears to be one of a number who took a short-term view and switched from a long-term secure contract that paid an OK price into what looked like a straight forward, but higher priced one. These were mainly offered by brokers, of course. Many of those farmer are now in a worse pickle than First Milk men.
In my opinion too many dairy companies, brokers and farmers have all their eggs in one basket. Whether you like it or not that brings risk compared to those companies with diverse outlets, and globally traded products or brands. Whether we like it or not, it will not be anything connected to our much loved / hated liquid market which will push farmgate milk prices up. Such a change will be instigated by those processors exposed to global markets, and the liquid processors will be like sheep following them. Fingers crossed the GDT auction continues to rise, especially if it's boosted by a lift in the Russian import ban and China starting to buy again - because they have to and will. The only question is when!
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IP Dairy Farmer Article – February 2015
As I write this article First Milk’s accounts for the year ending 31st March are due out. They are long due out, in fact, and certainly have not been published to timely plc standards. When they arrive they will be heavily scrutinized and the co-op’s management cannot complain about this.
The company cannot hide behind some of the issues it has to address. For example it has to look at the remuneration of senior people and link them to their individual ability and achievements. They cannot escape conviction.
Even some of the co-op’s strongest and vocal supporters are admitting they are nervous, simply because they are not convinced the recent drastic actions alter the underlying viability of the business. The co-op’s management and board are barely giving members enough oxygen to breathe, and at best the farmers face a long period of relegation zone milk prices and extended payment terms. For years First Milk members have settled for below average performance and for their loyal support they should expect superior performance.
The ramifications of its cash crisis are endless. Two traders who have surplus milk have informed me they will not sell milk to First Milk on any spot or short-term contract to go into Westbury for processing, fearing they may not be paid for it. That means it loses the opportunity to secure cheap milk and to utilise any spare capacity at Westbury.
The announcements by the co-op in January destabilized and demoralized farmer members in a matter of hours. I have huge respect and sympathy for the majority of First Milk members who have resigned themselves to the fact that no matter how many hours the family work, how hard they cut costs, how hard they push themselves and their business, they realise they will struggle to keep their heads above water, with the lowest milk price and deferred payments for their efforts. For some they are pushed to breaking point, and this is a cost that is not reflected in the bank balance. And scratching around with the hens in the farmyard, so to speak, is even more galling when you know some of your friends and neighbours are soaring high with the eagles on price.
Co-ops in the UK have a chequered history, what with Dairy Farmers of Britain’s failure and First Milk’s current woes. At least Milk Link saw the writing on the wall for small co-ops and made the right move with Arla. But there are numerous European, US and Canadian dairy co-ops that have succeeded. In fact there are four dairy co-ops in the top eight positions in the world league table.
Co-ops are no different to any other business, in so far as if they don’t have a sound business plan they will fall over. Farmers join co-ops in the belief they will profitably process all their milk and they will maximise its value. But they want the co-op to be professionally and commercially run in their best interests. Most dairy farmers do not join a co-op expecting to receive the top milk price in town. They forego short-term price promises in favour of a long-term, secure purchaser. And normally they invest in it in the expectation of a higher price and strong performance, and not to be forced to invest/cough-up because the co-op has run out of cash to pay the monthly milk cheque.
I don’t blame dairy farmers for looking elsewhere if they are not convinced their current milk purchasers’ business plan is sustainable. Today, though, few can change milk purchaser. But for First Milk the time bomb is ticking quickly. If it fails to convince members that its plan will not only guarantee survival but lift them to above average performance in terms of returns it will cost it very dearly, and quickly, when recruiting recommences.
One of the first steps First Milk should do in my opinion is to dump the Voluntary Code 30 day notice of price movements asap. It’s a millstone around its neck and is way off being a level playing field across processors. Keeping to the 30 day rule is doing what is right for those who coined the code; it has seemingly not done the right thing for it members.
And here’s my tip for everyone else for 2015 and 2016 (for what it is worth). Remember what happens in this crisis, and how your milk purchaser treats you. Those who play fair with a straight bat should be applauded. If you are subject to an opportunistic milk buyer who drops the milk price when he can, and sneaks in other scheming ways to drop your price further, dump him as soon as you can - and don’t forgive or forget. As Alan Wiseman stated in 2010 “Treat people the way you would like to be treated. That’s a simple rule which has built our business to what it is today”. In summary, remember those who support you in this crisis.
Finally the mass media have certainly given the UK dairy industry its quota of coverage in January. Apart from First Milk, the main point they have centered on is how come water costs more than milk, with four pints for a ridiculous 89p or less? Well my jaw dropped when I was alerted to the 22nd January 2015 issue 38 of DairyCo’s Dairy Market Weekly.
In it was an article headlined “Is the price comparison between milk and water hiding a bigger point?” The article went on to state “As the graph shows (DairyCo love graphs!) if we take the branded and non-branded weighted average prices for both water and milk sold by retailers we can clearly see that, in both cases, milk sold for more than water.” So while the mass media have been lapping up the story that water is more expensive than milk, and filling the airwaves and papers full of stories about it, DairyCo (to whom producers pay £7m each year) in levy, have carried out some fantastic research to prove that milk is, in fact, more expensive than water – thus taking away one of our greatest headline grabbers ever! I ask you. Where’s the PR nous? There’s surely some brains there somewhere! After all, the head of AHDB’ Market Intelligence Section is paid close to the salary the country pays George Osborne as Chancellor of the Exchequer! (That said, though, DairyCo’s all-time words of wisdom surely have to be from its “Forage For Knowledge” bulletin once when it said “Variations in grass growth results are down to local differences in moisture and temperature.” Never!
Let’s hope Jane King, as new CEO of AHDB, has a big milk shake up in DairyCo’s comms and intelligence departments. She needs to ruffle some feathers and might even ruffle DairyCo Chairman Gwyn Jones’ resplendent hair-do in the process!
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IP Dairy Farmer Article – December 2014
The Muller deal to acquire Dairy Crest’s liquid and butter business is certainly a good news story for the industry. Consolidation in the liquid sector, particularly, was much needed.
Theo Muller has certainly made a big impact in British dairy processing in the past three years, with the purchase of Robert Wiseman Dairies in 2012 (for £280m), the building of a new butter plant in 2013 (£17m), the purchase of the Nom and Minsterely factories in 2013, and now the new Dairy Crest liquid and butter operation (£80m) – subject to regulatory approval, of course.
Muller’s total GB spend in three years is thus around £600m. But I doubt he will stop there! Where will his next shopping trip take him? Will he bid for Dairy Crest’s profitable cheese business, or will a takeover bid come from another processor, probably Lactalis? There is lots to play for, and it’s game on in GB re processor consolidation.
The Irish Dairy Board and its cheese processing arm Adams Foods are only a few miles from our offices in Leek and are a popular destination for late night farmer visitors, shall I say, when cheese prices head south. Adams pack 90,000 tonnes of cheddar a year there, split roughly into 40,000 of Irish and 50,000 of British primarily from Parkham Farms, South Caernarfon and First Milk.
The popular opinion, though, is that cheap Irish cheese floods into our market to undermine it, so I decided to check out just how much extra cheese the Emerald Isle has landed on our shores this year.
UK cheddar imports totalled 105,000 tonnes during 12 months ending August 2014 down 38,000 tonnes (26.5%) on the tonnage imported a year earlier. To my surprise Irish cheddar imports to the end of August were down 5,420 tonnes (6.2%), with imports from New Zealand and the USA up markedly instead. So the Irish are not flooding our market. With UK cheddar production up a staggering 22,000 tonnes in the first nine months of 2014, this is a self inflicted problem and not an imported one. On the flip side of the cheese balance sheet UK cheddar exports are up 2.5% year on year.
Mature cheese made six to nine months ago was made with milk at 30ppl plus, and now it is coming out of store on a much weakened market. The result is some of our cheese processors are having to sell cheese at significantly below the cost of production. If retailers and others expect the cheese at prices based on today’s milk price they will only drive down farm gate milk prices further. And retailers will not want to have their name associated with taking money off farmers!
Interest in, and talk of, processors introducing A and B pricing / “quotas” is gathering pace. The idea is based on having A quota milk which will be paid at a contracted price on (say) +/- 4% of an agreed production level, while above that there will be the B milk price, which will be paid at a realisation price with the aim being not to dilute the average total milk price. The other big advantage of this scheme is it helps farmers to focus on what return they can achieve from any extra milk production. Perhaps if such a mechanism were in place today, and with B milk paid at 17ppl and dropping, there would be much less milk around!
It’s likely two tier pricing will initially suit liquid processors, especially those in the fiercely competitive middle ground, with A milk contracted at a liquid price and B milk paid at a manufacturing price. The European Milk Board continue to call for a supply management mechanism post April 1st (less than four months away now) with the aim of controlling milk production to ensure the avoidance of a complete milk price collapse and crisis. An A & B system could tick their boxes.
The idea that EU milk production will level or even fall in 2015 seems farcical given that from April 1st there will be no super levy penalty. Some member states will have to apply the brakes to reduce their super levy bill this quota year, but the brakes will be off in April.
As I close for 2014 I apologise for the fact I can only see a small glimmer of light on milk prices at the end of a very long tunnel. The medium and long term prospects for growth in world dairy demand, and driven primarily by population increases, are excellent. But the prospect for the 2015 farm gate milk price looks grim, especially come the spring flush. We need to manage supply better and accelerate demand for British dairy products.
We simply don’t have profitable markets for the extra 1.5 billion litres plus of milk we are producing, and even worse I question whether we have the peak processing capacity to handle it all come next spring. Then there will be distress milk with no home. This could easily last for most, if not all, of 2015 after which there should be more light at the end of the tunnel.
The EU’s extra milk – up 6% this year - has to be destined for international markets, but China can’t take it all, plus the rest that farmers are producing in Australasia. In addition, EU cheese producers are fighting to find new markets for cheese they previously sold to Russia. It’s what’s known in posh technical marketing speak as a bugger’s muddle out there, and it will last some time before it sorts itself out.
I recently received a copy of the International Farm Comparison Network (IFCN) 2014 Dairy report. Normally reports like this get filed, but this one caught my eye.
IFCN pull together information and data from over 100 countries, which represent 98% of the world’s total milk production. The report certainly gives readers a better understanding as to what is happening on the global dairy scene.
It’s a staggering figure that 1 in 7 people in the world live on a dairy farm, compared to 7 billion consumers and 1 billion people on dairy farms. The report includes cost of production comparisons from 54 countries who represent 91% of the world’s milk production.
Torsten Hemme, the MD of IFCN, refers to the abolition of quotas in the EU and comments that there will be very fast structural change to larger farms, with lower costs. Whether it’s the removal of quotas or the collapse of the milk price that does restructuring it’s a near certainty there are going to be numerous casualties and tears in 2015 - both at farm and processor level. Another of the comments related to which farmers used the favourable milk prices from 2013 to build up a war chest in preparation for the drop. I wonder that too. At least we can be buoyed by the conclusion: “Demand will continue to grow due to market recoveries and possibly will not be satisfied by the milk supply’. Then the volatility wheel will turn again! Let’s hope it doesn’t take too long!
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November 2014 Dairy Farmer Article
By the time this article is published bank balances will be feeling the effects of the price cuts. Many farmers will be eagerly awaiting their (lower) SFP money, too. But part of that will need to be reserved for the tax bills due at the end of January and July. Cash will be short in 2015, and the spending spree is over.
Some processors are guilty of bringing on some of the production problems themselves. Paying production bonuses to new and existing suppliers until April 2014 lacked foresight, for example. And farmers were encouraged by organisations they pay subscriptions and levies to to “grab the opportunities”. So they did, and it’s they who are paying the price. UK farmers have produced up to 9.5% more milk than they did a year ago, only to find processors do not want it, irrespective of the end product it could be turned into.
But here’s the question: can you name one business which produces 10% more and expects buyers to buy it ALL? It doesn’t happen in beef, cereals, pigs, or lamb. Most produce to the market, and until producers and processors match anticipated demand such extreme volatility will continue.
Many farmers ramped up production quickly without talking to their milk buyer, expecting them to automatically take every litre they produced. This has to change and both parties have to agree limits. For some this may include something like A and B quotas or volumes. The current problem WILL return unless we try to do things differently! After all, if you do what you have always done you will get what you have always got. At least FFA’s David Handley is coming up with ideas, like the A & B. It’s a constructive suggestion in my view, and will have merit for some processors.
To my mind farmers have three options:
(a) Kill some cows to cut production
(b) Try to cut production without culling
(c) Sweat it out and take the pain
But I think I know what will happen. Many will look to produce more milk to maintain incomes, thus adding to the problem.
There is minimal light at the end of the tunnel. In fact, to me, the tunnel is getting longer each month. Winter forage is good and if we have a good spring that’s when the casualty department will fill up both at farm and processor level. As this article goes to print Arla have announced that there will be no price adjustments for November. Good for them, but don’t read too much into that because the fundamentals have not changed.
It’s a blood bath wherever I look, particularly in cheese and the middle ground liquid sector where the extra milk is sloshing around and several are hawking cheap milk around, chopping the legs from incumbent processors and, in turn, dragging the whole market down. On cheese most processors in 2013 were increasing farm gate milk prices on a monthly basis, which actually left few with little, or no margin. For them it is grim, as milk costing well over 30ppl has gone into cheddar which is still maturing and which will come out of store to face customers demanding lower priced cheese. Processors had to put milk prices up when the market was surging, but now it’s flooded out and milk prices are falling.
Some farmers are under notice to find a new milk purchaser with many under instruction that if they can find a new home they can leave at the end of the month as opposed to having to serve their full notice period. The NFU president talked about some producers only getting around 25ppl in a press release in early October. If only his information was correct! Some are on just over 17ppl, with only one option of where to sell their milk and some are our very largest producers! But then again they did have the option to sign long-term secure contracts but chose to ride it out on shorter seemingly higher price ones! Greed over sense, maybe.
On that note there is one financial winner out of this mess – DairyCo - because the extra milk produced in the past 12 months has netted them an extra £600,000. Questions are already being asked about how it will be spent. I hope its new chairman spends it wisely for the benefit of all the industry and not telling farmers how to produce more milk!
Questions are also being asked about The Tesco TSDG model. It works for farmers but does it work for Tesco? Yes they gain the PR high ground and are less attractive to FFA and its protests, but does that make it worth it? No it doesn’t, and TSDG farmers in my opinion need to stop focussing on the cost of production and their milk price and come up with additional, tangible benefits for Tesco if they want to maintain the aligned pool. A difference of 9ppl plus between TSDG and First Milk “liquid” is THE elephant in the room. Do I believe Tesco, Sainsbury’s, M & S or Waitrose will ditch the aligned concept? No I don’t, in fact I believe the likes of Morrisons will have to follow suit and come up with a similar scheme. Morrisons is on the radar and its commercial team is squeezing processors and playing ducks and drakes with its sourcing policy. Until Morrisons demonstrates it is as serious as others about supporting UK dairy farmers it will remain firmly on FFA’s radar in blue flashing lights.
Those retailers who have no clarity will be under suspicion for buying dairy products cheaper and exerting more downward pressure on farm gate milk prices. It’s the hunting season, and FFA is rooting out retailers, food service companies, discounters, caterers and any dairy customers who are exerting downward pressure. Those who declare their position as supporting the industry get a get out of jail free card while others may find their name is associated as one taking money off farmers, and with that comes the attention of Handley and an army of angry farmers.
Finally, hats off to Arla for its high profile and positive “Support our farmers” campaign to link its owners, with its brands, with consumers. It’s a brilliant campaign and I wish it well. We need more like it. DairyCo take note!
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October 2014 Dairy Farmer Article
The dairy industry is in crisis. Globally farmers have responded to higher milk prices by producing 5% extra milk than normal, which has outpaced the predicted annual increased demand (+2.5%) by a factor of 2 to 1. Marry this to the Russian ban, plus a Chinese cooling in demand, and prices have gone south big style.
With Russia it’s a political ban that has created a vortex all farmers are paying the price of. The Russians buy the equivalent of 1.5% of total EU milk production, predominantly in the form of around 300,000 tonnes of cheese and butter.
The Commission has stepped in, agreeing Private Storage Aid (PSA) to include most types of cheese. Note, though, PSA for between three and seven months (the maximum) will end at the same time as the EU’s spring flush, which is not smart. Consequently the Irish are lobbying for a one year storage period to coincide with what is hoped will be the end of the ban. It’s a good shout, but it’s of minimal value to any processor who needs cash in the bank now. Cheese in storage is not the same as cash in the bank.
There is now serious lobbying by various member states for the Commission to do more to bring stability, and a more confident outlook for the industry. A front-runner is to remove butter and SMP to intervention but at an inflated price, as opposed to the current 17.5ppl IMPE price. The Irish are calling for the IMPE safety net to reflect current production costs with others suggesting a revalued IMPE north of 23ppl. There is also a push for export refunds for processors seeking alternative export markets to replace lost Russian sales.
PSA and intervention will help balance a depressed market, however, in reality all they do is take product off the market now, only for it to reappear at a later date when the market conditions have improved.
There are even rumblings of pressure to retain milk quotas beyond the 31st March 2015. This has triggered a mini run on milk quota to the point that we now have buyers outnumbering sellers by a factor of 9 to 1. Add to this the imminent 21st October deadline for trading single farm payment entitlements and a host of claimants keen to realise some cash for their 5ha or less of entitlements and our office is buzzing!
Not long ago significant numbers of dairy farmers pushed for their milk price to be linked to commodity prices. Many succeeded, but now the cream has turned sour and some of those very same farmers are claiming we are “an island of fresh milk consumers and are divorced from world prices”. That’s called picking and choosing when it suits!
Others took advantage of short-term contracts linked to commodity prices. Some simply joined the growing numbers of milk tarts who signed-up for the extra money, and as soon as someone offered them an extra 0.5ppl in went their notice. But for some it has ended in tears: large and small producers who are either out of contract or under resignation have nowhere to go, and no processor really wants them. Few, if any, processors are recruiting.
Those who have secured a safe home for their milk need not worry. For some of the tarts it’s a simple choice of either accepting a poor world commodity linked price or exiting the industry.
Processors are not exactly sitting back smiling, because some have invested heavily in new facilities, which need to be full to capacity. They don’t want producer confidence dented to the point farmers either cut back on production or leave. Sadly for some that decision has already been taken, though.
Those who went public last year with the claim that we should increase domestic production have now either gone on mute, or gone all together. Some clearly aren’t here (in the real world) at all. And this brings me to a press article from Mole Valley Farmers only days after a dozen or so milk price cuts, including the infamous 3ppl First Milk one! The headline was “Drive for more litres in light of low feed costs”. In the article I was gobsmacked to read the conclusion that “it is well worth pushing for extra litres this winter, despite the recent drop in farm gate milk prices.” Dr Chris Bartram, Mole Valley’s Feed Solutions, Head of Nutrition, went on to say that, at current feed prices, “That brings an astronomical possible milk price to feed cost ratio of 2:5 to 1 based on an average milk price of 30ppl”.
Well Dr Bartram, it may be good for your employers to push for extra litres in the hope it helps maximise the output from Mole valley’s feed mills, particularly the new one in Ayrshire, but it is NOT going to help processors, or the milk price right now! The days of an average UK paid out milk price of 30ppl have gone for most and the evidence was before your eyes prior to the article!
In this edition I was hoping to write about the review of the Voluntary Code but more than seven months since its announcement and all is silent. Yet, initially, it was “expected to be concluded quickly, by the Spring.” Surely the review chairman didn’t receive a postbag of farmer comments? On that score I have asked for details on the number of submissions he received, excluding the staunch defenders of the code eg the NFU and NFUS. More on that soon!
Finally, two requests: first to First Milk. Please rename your so-called liquid contract, or merge liquid and manufacturing and just have one. It’s not a liquid contract any more it’s predominantly an ingredients or commodity one. My second one is for everyone to keep an eye on comments relating to Morrisons. It is currently out to tender for its liquid milk requirements. If Dairy Crest retains some of it, for instance, and then issues a comment to the City similar to when it retained the Sainsbury’s contract in 2013 (“Although the conditions of the contract will change from 2014 our on-going cost reductions are expected to offset any financial impact on our business” i.e they got the milk much cheaper!) then we will know Morrisions have screwed the processors. And we can’t afford for that to happen to the liquid processors. It is also not right or ethical for Morrisons to assume that the processors will simply pass the shortfall back to the farmer. That’s the attitude that prevailed before SOS Dairy, remember.
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September 2014 Dairy Farmer Article
I open, again, with milk prices and what is a never-ending stream of bad news. Chinese demand has cooled and the 12-month Russian export ban is a disaster, with 1.6ppl wiped off the milk value in a matter of days simply on the back of cream values crashing from £1380 to £1100 a tonne. And that’s before we consider other commodities!
Around 300,000 tonnes of EU cheese has to find a new home. For processors with ageing cheese in store its value is dropping daily. We all know that as prices tumble rejections increase for failing to meet quality standards. That results in distress sales in fragile markets, and this usually means dairy farmers pay the price.
Dairy prices were relatively stable until 2007, but major volatility is here to stay. These are very tough times, and the only partial relief for farmers comes from falling feed prices. We are in the era of extreme volatility, which mirrors that seen in energy, equity and currency markets. Lower prices will result in restructuring, consolidation, mergers and acquisitions but for those in trouble buying will not be an option. It will force out both weaker and uncommitted processors and farmers. Be warned.
As we head closer to 2015 and the end of quotas dairy farmers need to be in-tune with world price movements because additional EU milk output will have to be exported. But I do have an issue with those who should explain to dairy farmers exactly what’s coming down the road. Currently some shy away and don’t say it as it is, fearing criticism. But the information is there for all to see, and just needs to be interpreted in straight-forward farmer friendly way that links commodity prices back to farm gate prices.
Although the Commission has dismissed outright any continuation of the quota regime, unless production slows down it will soon be under immense political pressure to come up with an emergency plan, whether it’s private storage/intervention or a voluntary quota/supply management scheme. Most of you will be glad to see the back of EU quotas and we could argue the pros and cons of what nearly 30 years of quotas have delivered. The question is, though, will you enjoy greater prosperity in the new non-quota world – one that is certain to be anything but a soft landing.
Some farmers will wake-up and find they have nowhere to go but to exit the industry. Others have expanded, having ambitiously (and foolishly) stress-tested their milk price at 30ppl, and who are now facing the winter knowing it’s going to drop below this level with some potentially facing a 25p / 26p milk price by the end of the year, or next Spring. Throw in an interest rate rise and the odd struggling processor and it’s time to buckle up. Oh, and don’t shoot the messenger. As one reader said: “I find your observations interesting and sometimes quite frightening. We as farmers are very good at just burying our heads in the sand and hope things go away or just hope someone else will come along to sort it out.”
Farmers across the world were confident and increased milk production by chasing the rainbow of growing global demand, particularly from Asia. When they got to the end and found the pot of gold they were mesmerised. But it was too small to go round, and now it’s only fools gold to be found.
And it’s no good moaning and groaning: we’re in the global market now! Which brings me to the NFU Scotland’s recent press release headlined “Milk price cuts must reflect market place reality – Union calls on processors to pay based on performance”. This really did have me scratching my head. On this basis a 40%+ drop in global prices in less than five months means the NFUS effectively endorses further cuts!
To pay a milk price based on company performance is, on the face of it, outrageous and naïve and means a poor performing company would be justified in dropping prices, leaving farmers to take the pain. But having thought about it further perhaps NFUS were sending a very clever coded message that it would be better for a poor performing buyer to drop the farm gate milk price and risk losing suppliers, so long as that gave it a better chance of successfully restructuring and repositioning itself for the future. Certainly some buyers found themselves very stretched recently.
Naturally when times are tough there’s a lot of focus on the senior management of a business. None more so than First Milk, as readers of The Scottish Farmer will know. In a recent issue David Handley demanded that the co-op’s Chairman and Board should all resign en-mass. In my opinion the only people entitled to call for the resignation of its senior management are First Milk’s members. They decide who runs their business. Personally I think we are in stormy, unchartered waters, and I’m not sure it’s right to change the people in charge of the ship at such a time, or that the outcome will be different with new management. Inevitably Handley’s comment brought a response from one of the firm’s area reps and second row bruisers, this time from Willie Lamont. He likened Handley’s call to a tired old football chant, and one akin to that of Manchester City fans calling for the removal of the Manchester United board. Now come on Mr Lamont, Handley is no Man City, but more like Brian Clough! And come to think about it, you can’t make out First Milk is a Man Utd. As I’ve said before I reckon it’s a Millwall!
Meanwhile, in the office, quota trading is very unpredictable with around one deal a day on average. Entitlement trading is far more active as many farmers attempt to match the Entitlements they hold to the area of land they farm ahead of the 19th October date. Just like milk quota, it’s a buyers market and offers a sensible return in less than a year for those in the market.
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August 2014 Dairy Farmer Article
Back in February 1999 a dairy farmer gave a paper at the RABDF conference stating that “leadership in the British dairy industry has, with few exceptions, been poor.” One exception has been the brilliant David Dobbin, chief exec of United Dairy Farmers in Northern Ireland. At this year’s Dairy Industry Newsletter Conference he made another telling remark (one of many in his career): “our industry is great at producing strategy documents, but few of the authors have the leadership to deliver”.
The latest document is the UK dairy industry’s ‘Leading the Way’, which was unveiled in Westminster recently. We also have ‘Compete to Grow’ - a vision and strategy for the British dairy industry, which was billed as the culmination of “ground breaking consultation on the future of the sector”; ‘The Dairy Survival Plan’; several Dairy UK White Papers, and ‘The Dairy 2020’ sustainability inactive, to mention a few recent ones. In most cases the document sets out a plan, a vision and a strategy.
We seem to have an annually recurring addiction for someone in the industry to produce a strategy document, and for all involved to pat themselves on the back whilst they drink wine and eat cheese at the launch event. But Dobbin questioned what, if anything, gets done – and I agree with him.
Having a plan or a strategy is fine but putting the words into action is something entirely different and demands real commitment. It needs personalities who make things happen, not ones who are seeking short term PR brownie points. “We used to build cars and ships now we launch Dairy Strategies,” he said.
He then talked about our perceived gold standards and the belief some farmers and their representatives have that we produce to higher standards than Johnny Foreigner, and that British is best. But what, exactly, do foreign consumers associate with Great Britain? We have had, he said, BSE, FMD and the burning Pyres, The Horsemeat Scandal, TB in cattle and more recently negative headlines from the fact we were daft enough to take the Chinese Inspectors to an English cheese factory that doesn’t export to China - which failed and resulted in all exports being temporarily banned. Perhaps we are not as clean as we think, and we are great at scoring “own goals.” If any of these strategies are going to succeed our image has to improve, and the own goals must stop.
Now milk prices. Oh dear. On the world scene the news has been dominated by the disastrous July 15th GDT auction results, which saw another 9% slashed off the auction’s average price in just weeks. And this is despite the fact that Chinese imports of WMP in June were double those in 2013. Talk of prices bouncing back was killed overnight, and prices have now dropped around 40% in less than five months. That’s meltdown that’s is! Prices will bounce back but it will be several months, not weeks before it happens probably.
We were all warned that dairying would have to cope with volatility but this is looking like extreme volatility - and that’s while quotas are still in place! Let’s hope 2015 brings a price boost because the remainder of 2014 is starting to look dark and grim. Having said that it’s the margin which matters and falling feed prices will offer some relief.
Different companies have different strategies for communicating milk price movements to their farmer suppliers. Some are direct and factual with no spin, some seek to deflect attention towards competitors, others roar with indignation about the injustices of the Voluntary Code, and some attempt some crafty creative accounting in an attempt to curdle the milk cheque. Two recently caught my attention:
First Milk were the first milk purchaser to drop their standard litre price bellow 30ppl. The reasons given behind the move were sound, but in communicating the drops to its members chairman Jim Paice once again chose to fire another shot at Arla. The letter read:
“As you may have seen Arla have reduced their price from this week, almost a month earlier than us, citing the negative trend in global markets. Our analysis of their price and the deductions which they apply means that our actual price paid will still be more than the Arla AMCo price for most of our producers.”
This claim over-egged the pudding and was poorly researched and while I do agree that Arla’s headline price is not the paid out price for AMCo producers its price is certainly not below First Milk’s. However two other points crossed my mind in connection with Sir Jim’s claim to his members.
Number One is that the more accurate comparison between the two company’s prices should be between the First Milk price and that of Arla Milk Link, as both have been in existence for exactly the same amount of time, began life at a similar size, and in the same political environment (unlike Arla Foods Milk Partnership, which migrated into AMCo this year.) Number Two is that this is the second time their Chairman has had a poke at Arla, who, are after all, are a fellow dairy co operative. OK, so one whinge at a competitor everyone can live with; two pops (without another competitor being highlighted) and it looks like a gripe: if he makes a third one-directional whinge it will look like an unhealthy obsession.
The next milk buyer to cross my radar was Freshways. It has shocked a number of its producers who have had cell counts and Bactoscans in the penalty band, with the sting being that these producers will have deductions rolled back to 1st January. Two suppliers claim the move has hit them with deductions of £24,000 and £30,000, and say that the company turned a blind eye before when milk was short, but is now making the move to generate cash. It appears some of the so-called farmer representatives have refused to get involved.
Other milk buyers in this situation send a fieldsman to offer assistance and advice to the farmers on how to improve. Why can’t Freshways do this instead of hitting the farmers with a huge bill, I wonder? I guess that wouldn’t generate anything like the same amount of cash, but it would generate goodwill, and that is hard to place a value on.
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July 2014 Dairy Farmer Article
It’s now only a matter of days before this year’s NEC/RABDF Livestock Show and while I do subscribe to Darwin’s theory of evolution it does appear that a number of the RABDF’s changes are moving the event further away from its origins as a grass roots Dairy Show.
This year Arla, which processes a quarter of the UK’s milk, has pulled out and will be concentrating instead on consumer-facing promotions with its new Anchor cheese brand. All eyes will be on whether our other two big processors, Dairy Crest and Muller Wiseman, decide to return to the event in 2015 because it’s a certainty that it’s not a cheap event to attend, especially given it’s a two day event and it is migrating away from its core roots. Some of its events are bordering on the type featured at the CLA Game Fair later in the month. But let’s not pre-judge, and I hope the RABDF’s direction delivers a successful show.
This year’s DIN conference was once again a unique gathering of a number of the world’s dairy brains who debated “The China Dimension”.
The consensus was that the future of the European dairy industry will be driven by world milk price levels, as governed in particular by China and Russia, where the dairy power lies. To keep abreast of the current increase in demand the world has to add the equivalent volume of the whole of New Zealand annually. So in 10 years time the world will need to produce 10 times the annual output of that country today.
EU milk consumption is more or less static, so any increase in production, post quotas (in ONLY nine months time), will have to be sold on the world market. Indeed one speaker at DIN predicted that the EU will become the world’s largest net dairy exporter in a global dairy market which is currently equivalent to around 50 billion litres per annum, and which is predicted to rocket to 90 billion by 2024. However, with the statement came a wealth warning. We are in for very volatile prices, which the European Commission is unlikely to manage unless we end up with a serious crisis.
China is rich in natural resources, and has a huge population where quality dairy products remain aspirational to their consumers. They believe dairy products are an integral part of a healthy diet, particularly for children.
China consumes a serious amount of the world’s milk production - one more cup of coffee a day for even a few of its 1.3 billion population would send global dairy markets into orbit. Equally, a sudden slow down in the Chinese economy would be a disaster, and potentially kill dairy markets overnight.
In recent years adverse weather conditions, outbreaks of Foot & Mouth & TB, together with high prices for beef cattle have resulted in a reduction in Chinese milk production, which for 2013 amounted to a fall of 5.7% to 30 billion litres. The hike in beef prices resulted in thousands of small back yard dairy farmers quitting at a much faster rate than the larger commercial farmers could match.
Couple this with the acute shortage of fresh water and irrigatable land and Chinese businesses have decided to produce dairy products in other countries.
Dairy companies like Yashili are piling into countries like New Zealand, and are building factories to ensure they control the production and can guarantee quality to their standards. Yashili alone are now exporting 1,000 tonnes of powder from their factories in New Zealand to China each week, and it is one of a number of Chinese investments in the New Zealand dairy industry which will see 13 new infant formula plants built in six years.
New Zealand, and other countries, could soon become satellite countries with their land and resources used to supply high quality dairy products to China, where consumers do not trust their own dairy products. This could easily leave a shortage of good quality food for their own country.
Chinese dairy companies, particularly those producing infant formula, have had a number of food scares to contend with and while they have tried every trick in the book to persuade their housewives to buy home produced dairy products the reality is the damage is done and the trust has evaporated.
Let’s all pray that China’s insatiable appetite for powder and milk products continues, as it is the global milk price setter. It looks that way for now, and the next 15 to 20 years look very exciting for the world’s dairy farmers. Predictions from IFCN suggest that China will be responsible for buying around 60% of the world’s traded dairy products. Whether we want to be involved in the global dairy market or not is a big question for us, but domestically the magical liquid premium has almost vanished overnight as we all look to China where a staggering 20% of the world’s population reside. It’s mind blowing and all roads now appear to lead there.
Some of our processors are chasing the opportunities, notably Arla, Woodcocks and last but not least Dairy Crest, which is investing around £45 million to manufacture de-mineralised whey powder. This is a base ingredient for baby food and much of what Dairy Crest makes is likely to end up in China. And for good reason - 20 million plus babies are born each year! Production will start at Davidstow in less than a year and, given the mechanics of getting product into China, it is inevitable that Dairy Crest will partner with a local agent to open the market. It’s not simply a case of producing infant formula and shipping it to China. Chinese standards are the highest in the world and for baby powder it has to be produced to pharmaceutical grade standards. Dairy Crest is likely to have one attractive USP in its ability to export product from nominated farms from a tight geographical area.
As for the majority of the UK, and its farmers, well I have to agree with a comment made over a year ago by Mr Jim “Now You See Him Now You Don’t” Paice, who could not understand why the UK imports dairy products from countries where they have a higher cost of production and higher farm gate milk prices. He commented that as a net importer we should have a high milk price, just as Italian farmers do. If we are going to capitalize on China, en mass, we have a lot to do, and need to get our market sorted out first perhaps!
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June 2014 Dairy Farmer Article
Last year I attended the third NFU Producer Representative Summit, and took a particular interest in a talk from Bridge Ability Ltd, on the topic of “Conducting Professional Negotiations.” I recall the speaker stating that “you can’t change the hand you are dealt but you can change how you play it”, followed by the line that “a negotiation has three stages - propose, repackage and agree.”
At the meeting I declared that all those in the room who claim to represent producers and do any sort of negotiating should attend a course and achieve a standard. I then decided it’s no good me getting on my soap box, so having communicated the training idea to DairyCo I was pleased to see a range of AHDB training days on offer over Christmas and the New Year. So I duly signed up to test the water at Stafford for the negotiating skills course funded through RDPE. Attending it left me feeling that perhaps DairyCo and AHDB were flogging a dead horse with a farming industry who either think they know it all, or feel training courses are a waste of their time and they would be more productive shovelling corn or shit. Only five farmers turned up at the course I attended and attendance numbers elsewhere had evidently been disappointing. I was pleased I went, though. I learnt a few new tactics and tricks. What a shame quota trading ends soon, I hear you shout!
In April I wrote about Arla and posed a few questions on its pricing. A big thank you to all readers who took time to email in response. Whilst some responses were clearly written through gritted teeth and clenched fists all agreed Arla was having a positive effect with quotes like “at last we have a progressive cooperative in the UK, which is long overdue".
A significant number of emails came from Arla members and were related to the controversial butterfat reconciliation deduction or Fat Tax.
Most questioned why is the 0.75ppl fat tax/butterfat adjustment, which many stated was a covert price drop, applied across the board to all producers, as opposed to targeting those who are producing low fat milk. On 1.6 billion litres it’s worth a cool £12 million which farmers are losing until butterfats improve. The thinking was along the lines that it would be fairer to charge the offenders, in a similar way to how seasonality operates. The alternative view was why doesn't Arla simply cut the price by 0.75ppl and offer an incentive to produce more butterfat. No doubt the arguments will run and run!
A few months ago I visited its new Aylesbury plant for an at the coal face non-tourist look around the facility. One word sums it up it: incredible! Especially the robots which pick up the milk trolleys and take them to the store for dispatch. The factory is super-efficient.
While there I met Ake Hantoft Chairman of Arla Foods amba, who’s enthusiasm is infectious. In his own words “It’s an extremely exciting phase for us in the UK.”
When you talk to him about Arla he does not think Denmark, Sweden, Germany, Belgium or GB (and now The Netherlands, of course) he thinks of the whole company, and its "big family" of 13,500 farmers. Ake placed considerable importance on his values among the board members, particularly on their behaviour and the importance that they conduct themselves professionally. Arla’s progress since 1970 is impressive, and it is now the 6th largest dairy company in the world employing 16,000 people. The UK is its biggest market accounting for 26% of Arla’s global turnover. It welcomes a new boss in the Autumn, of course, but I can't see much changing.
During recent weeks I have encountered two very different milk buyer attitudes. Paynes Dairies claim to have had only one producer leave them to supply a competitor in the last 20 years. But recently it received another request to leave from a significant producer who believed he could achieve more money per litre with another buyer on a manufacturing contract. Paynes agreed with him, had no reason to be awkward or to argue with the farmer, and decided that if he wanted to leave he could have the option to leave earlier, by mutual agreement. The date of May 1st was offered, for obvious reasons. Alas, at the 11th hour, the decision by the producer was that it's the better the devil you know than the one you don't, and that the grass on the other side of the fence wasn’t as green as it looked, and part was, in fact, Astroturf. He went back.
Contrast this to the bizarre stance taken by Dairy Crest, who rejected any resignations received by email, insisting they must come by post or be hand delivered! Two of their Sainsburys supplying farmers were so incensed they jumped in the car and drove from Devon to the firm's London HQ in Claygate on resignation deadline day. It was a trip of 300 miles, and the comment was made that they used no fuel for the trip because the vehicle was jet propelled with anger used as the fuel! It’s crazy that Dairy Crest should, on the one hand, insist on all applications to supply milk on its formula contracts be made via email, yet refuse to accept email resignations.
It’s a fact that many notices are tendered without a decision having been made to commit to a new buyer. In many instances a few weeks of cooling off and a reassessment of the facts leads to the retention of the supplier. In Dairy Crest's case it will need a lot of water to cool the discontentment fire in situations such as the one described above.
As I write spot milk prices appear to have levelled at around 17/18p and production is showing signs of levelling a few weeks earlier than expected. We can only pray production drops because more milk = more problems = lower farmgate prices.
Irish dairy farmers are cursing us for dumping our distress milk on their doorstep and impacting on their fragile market. Oh, and I daren’t even look at the impact the extra cheese we are making will have on cheese prices in a few months. But, for sure, someone will blame the Irish if prices collapse!
Whilst the long term future on a global level looks good the reality that we will experience very volatile pricing is now upon us and there are no immediate signs of a U-turn as prices continue to head south. Middle ground processors and their corner shop, garage and convenience store customers are taking a beating with the 4 pints for £1 offer. Processors may not be losing customers but they are losing volume.
One told me their volume was down 15%, but they still send the same delivery lorry on the same round incurring the same costs just for fewer litres. The small shops and bottle milk buyers/doorstep milkmen are finding it tough retaining liquid customers when faced with 4 pints for £1. So it’s a win win for the big retailers. They squeeze out the small competitors plus doorstep delivery milkmen and some middle ground processors. It’s the dairy equivalent of ethnic cleansing. And it's working quicker than we may like to admit.
April 2014 Dairy Farmer Article
Firstly I have to congratulate the Woodcock family, who trade as Yew Tree Dairy in Lancashire for having the foresight and commitment to build a large butter-powder plant alongside their existing new liquid dairy. The plant will be up and running by mid 2015.
Carl Woodcock told me that the dairy world is changing and the business simply has to change to survive.
It would be brave if not foolish for Woodcocks to continue to have all its eggs in one basket relying on liquid milk alone. With the new plant they will produce butter, WMP, SMP and concentrate and the plant can be run flat out to process just over half the milk Westbury processes. Alternatively it can be shut down for periods.
Up until now Woodcocks has remained under the radar, but slowly growing and recruiting farmers. Now it has firmly launched itself onto the UK, and the European dairy map.
Recruiting farmers is not necessarily the goal so don’t go beating down Woodcock’s door because, post quotas, there are likely to be lots of options with the plant in terms of contract / toll processing and buying spot milk in the post quota world.. I wish them every success.
On the 31st January 2014 Arla Foods increased the milk price it pays its 2,800 British owners by 0.74ppl. Under normal circumstances this would have instantly triggered price rises from competitors, typically within 48 hours. But not this time - with only one milk buyer (Barbers) announcing a substantial price increase. I am excluding Dairy Crest’s formulae price rebasing too.
By the time you read this article it will be at least 56 days since Arla’s increase and there hasn’t been a flinch from its competitors. Not only that, but on the 25th February Arla directs were notified of a 1.23ppl 1st March increase. Again not a murmur.
Two years ago we had milk buyers dropping the price 2p, followed by another 2p and farmers weren’t happy. And here we are, now, two years later, and one company is keeping the milk price high and stopping it falling and some farmers are still not happy. In 2012 it was the differential between the cream price and the milk price that triggered the successive price drops. And yet that same differential exists today! It is ONLY through Arla’s actions that the milk price hasn’t fallen by a similar degree.
Following my last article and recent news items in my free Friday news bulletin, I received a few emails questioning my objectivity as regards Arla. A few asked me if I was in bed with the firm. This really annoyed me. I would therefore like to know how widespread this view is across the industry: to help me would dairy farmers therefore read the following three questions and reply by email with the answer (to firstname.lastname@example.org). Pick “1” if you agree with the first question, “2” if you agree with the second or “3” if you agree with the third:
1) Arla’s milk price increases have prevented the UK milk price from falling this spring. This is a spiffingly good thing for dairy farmers, and worthy of a bouquet or two.
2) Arla’s price increase has prevented the UK milk price from falling, but that’s a very bad thing indeed. (Please elaborate on your answer to explain why.)
3) Arla’s price rise has made no difference whatsoever to milk pricing.
Believe it or not I have had two very long emails from two farmers wives who believe that number 2 is the correct answer!
The fact is that non-Arla farmers like their milk prices being kept high, but hate the fact it is Arla – a farmer owned business – that is doing it. Why is that? It’s the same mentality that some have of “I’m not bothered what my milk is, so long as it’s higher than my neighbour’s.”
I have never shied away from controversy in my articles and as much as it won’t suit some readers I wish to put on record that I can’t currently see a flaw in the Arla strategy. If you can, then email me. That’s my challenge to you. I ask people who hate Arla the same question, but those who really understand its strategy reluctantly admit they can’t see a flaw either. Their only vulnerability is to volatile global markets. But Arla hasn’t got all its eggs in one basket, as most companies in the UK have.
I am praising Arla at the moment, because it is doing a good job for ALL farmers, not just their owners. Anyone who doesn’t see that doesn’t understand what is happening. But there will be a time when the market turns, Arla drops the price, others will follow, and the comments won’t be as positive. If the moaning farmers who had spent time emailing me because I have written about Arla had spent the time writing to their own milk buyer instead, asking for the same price, then maybe the UK price would be moving forward a bit more!
The recent price war battle between retailers with 4 pints for £1 or less is causing pain to many, particularly those operating in the middle ground where most can’t purchase the milk from their supplier at that price. Corner shops are pressing wholesalers for milk at lower prices and price support to retain business. It’s a disaster - they all want to pay less for liquid milk. This time, though, with the Arla factor, it won’t be the farmers’ paying.
Meanwhile, production continues to rocket north at over 10% on last year. Surely it can’t continue though? There are pundits and farmers believing production will continue at these levels throughout the flush. I doubt it, and it could be the cows have milked exceptionally well whilst indoors and the so-called spring flush will be smaller than predicted (I can only pray this will happen). One bean counter has calculated that at peak there could be an extra 100 of our biggest tankers seeking an outlet for the milk. That’s an eye watering additional 2.3 million litres/day, which will see the current spot milk price of 31p/32p plummet and exerting more pain and suffering. If that materialises it’s likely several farmers and processors will be on the brink of a disaster. A price correction is coming our way. but let’s hope it’s gradual and not an overnight big bang.
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March 2014 Dairy Farmer Article
This year's show season will be soon be with us. Last year, though, was not a good year for showing, public image wise. I refer to the extensive negative national media coverage of a cheating investigation involving at least one exhibitor at The Great Yorkshire Show. An announcement on the outcome is long overdue and has been delayed - allegedly - due to a wee chat of the legal sort between the Show Society and an exhibitor. We will have to see what those gritty Northerners, headed by show director Bill Cowling, end up doing.
The Daily Telegraph headline was “Mystery of super glued udders grips farm show” and it damaged the image of the whole industry. We have just over 11,000 GB dairy farmers of which around 300 plus enjoy showing their animals across the country. Yet among those 300 we have a handful of five or six hardcore dairy exhibitors, a similar number of stewards and show organisers who are selfish and continue to play hide and seek with cow fixing. In doing so they put at risk the image of the whole industry. It’s the same with a football crowd of several thousand at a match where a handful of hooligans steal the headlines and tarnish all of the fans.
The RABDF were the first to take a firm stance on cow fixing following which, in 2012 and 2013, they encountered no problems. Holstein UK as an organisation is shoulder to shoulder with RABDF, with both aiming for all cattle owners to be able to compete against the professionals on a level playing field. This includes the careful selection of non compromised stewards and vets i.e ones who can’t be influenced, shall we say.
It’s almost a year since the 2013 Borderway UK Dairy Expo, following which several farmers and trade exhibitors contacted me alleging that some of the show cattle there might have had their udders fixed. I gave a number of people involved ample opportunity to address the accusations, in particular both Canadian judges, and the organisers. But they choose to remain silent and, while a statement was issued, it did not specifically reject the accusations.
On March 8th the 2014 Dairy Expo event with judges from the US, Canada and Holland will be held. This marks the start of the 2014 dairy show season. The indications are there will be increased covert surveillance at shows from farmers, judges, organisations and vets who are all keen to protect the image of British dairying and who will blow the whistle on any cheats. Show organisers you have been warned.
The review of the Voluntary Code by the Rt Hon Alex Fergusson has caused a bit of a stir. Expert dairy lawyer, William Neville of Burges Salmon, gave the Code a beating at this year’s Semex Conference with several of his comments and claims irritating both George Jamieson (NFUS) and Mansel Raymond (NFU E&W).
The announcement of the review was coupled with the requirement that all submissions be made to the Code’s staunch supporters as in NFUS, NFU and Dairy UK, rather than direct to the Chairman. This has resulted in several comments that the review will be a waste of time because they have “almost certainly agreed what the report will state and will sift and vet any adverse submissions”. After all, not all processors or farmers are members of one of the organisations and it’s a certainty that all farmers need a voice in the debate.
For what it’s worth today the Code is holding back prices and freezing farm gate milk price movements from processors who are under the Code who fear the three month resignation rule. The word is that the NFU’s are touting an alternative option for co-op members to sign up to.
Arla’s recent decision to utilise Westbury to process milk concentrate from Germany following a factory fire at its Pronsfield plant is understandable, but has caused a few shivers among GB processors.
Yes, it will cost Arla members money to transport the concentrate from Germany to Westbury. Equally important, though, is the reality it will also result in less GB milk being bought by Arla and First Milk during the flush. This is likely to exert even more pressure on weak spot prices for those with no or insufficient processing to deal with the increased peak volume of milk. That’s not Arla or First Milk’s problem because their duty is to their members and that’s the end of it. Judging by at least two emails I have received the penny has not dropped for some producers that Westbury is for the benefit of the members of the two co-ops and is NOT for the benefit of all, like some British industry charitable organisation. A co-op’s aim is simply to extract the maximum value from each litre of milk it processes or trades and to pass back the financial benefit to members to ensure its farms are sustainable and viable long term. Nothing more.
This winter is delivering record milk prices, however, I recognize the battle some are having with the severe wet weather and TB. The signs are that confidence is slowly emerging and in some instances I would almost state some appear to be over confident. Domestically prices are holding firm on account of the Arla factor who, in my opinion; now influence all GB liquid milk prices. High international commodity prices are cultivating confidence and the main fear is whether they will change overnight only to be immediately followed by downward farm gate price movements. As one leading industry guru commented to me its fantastic that dairy farmers are at last talking about return on capital. This was followed by a progressive first generation dairy farmer who commented “Ian I am now doing forward figures for the taxman, having only done them for the bank for decades.”
Where industry bodies and officials are encouraging you to produce more milk you need to satisfy yourselves that, post quota, such production is sustainable. But I say investigate their reasons for believing in that increased demand and that your buyer will be genuinely able to capitalise on it. Before you put a long term noose around the farm's neck or saddle it with significant borrowings make sure you understand the potential negatives and any uncertainties.
Many dairy farmers have been demoralised for years and I agree the outlook looks more positive, but collective expansion of GB dairying needs careful planning, especially in terms of processing - in particular our lack of drying capacity which is an issue. We certainly have no requirement for liquid processing capacity, where closures seem inevitable. And remember, EU milk consumption is more or less static which means any additional EU milk production after the ending of milk quotas will need to be globally traded. Let’s hope those Chinese continue breeding and have the funds to pay!
Finally, I want to give a red alert warning for all of you to carefully check your RPA 2013/2014 Start of Year Producer Notification. We have come across several which are incorrect, ranging from one which showed 8,664 litres more than the producer was entitled to, to one which short-changed the producer by a whopping 108,347 litres. Check your figures, in particular the recent quota awards and if in doubt contact requesting it re-checks your 1st June 2013 Notification and confirms the statement is accurate.
Whilst on the subject of quotas I wish to lay to rest yet another rural myth. The total UK National Reserve milk quota is 547 million litres and in the unlikely event we exceed our quota the relevant National Reserve litreage is added to the available quota to reduce or eliminate any superlevy. Whether the UK will pay superlevy at the end of March 2015 is up for debate by some (but not so far as I am concerned) unlike, the position in Southern Ireland where it is equally clear that farmers will pay superlevy in 2014 and 2015 as a cost of expansion to ramp up production post quotas.
February 2014 Dairy Farmer Article
“Milk production globally is exploding mainly because increasing milk prices has brought about an almost insatiable appetite for expansion.” That was one of my opening statements at this year’s Semex Conference. Fortunately, the signs are that the increased flush of European milk is set to be matched by increasing global demand with January to July GDT product prices holding firm and, in the case of butter and cheese, significantly increasing. For as long as China continues to hoover up the world’s powder supplies it is likely prices will remain strong.
The likes of Arla and Dale Farm are certainly maximising the global trading opportunities, especially after Fonterra has suffered some nightmare product recalls and damaging PR. Only two weeks ago it had to recall several batches of branded fresh cream. Its press office tried hard to claim the recall was positive and demonstrated that “it shows our consumers that a company owned by thousands of Kiwi farmers puts food safety first.” But traders claim that not all customers take that view, and for some it’s one recall too many as they seek out trusted European product.
Arla’s 3rd February price increase of 1 Euro Cent a litre was fantastic news for all UK farmers and should silence the critics and anti-Arla suicide bombers who were convinced that come the New Year it would drop its milk price, and thus give others the opportunity to follow. The increase came at a time when some processors were gagging to see Arla drop. But its move has effectively stopped prices from falling dead in their tracks. The question now is will, or can, others follow the lead and increase their prices?
If Arla succeeds in holding, or dare I say further increasing farm gate prices through the European flush then other buyers will be forced to keep up. If they don’t and a buyer blinks and cuts their milk price they are likely to solve Arla’s ambitious recruitment targets in days with a gift wrapped present. How long then before it closes the recruitment door, I wonder? As it is Arla has delivered this latest milk price increase based on its very strong global performance. It hasn’t increased it only to be forced to go out and retrieve it from its notoriously hard-ball playing liquid customers here. And that’s a huge difference to the situation it was in two years ago.
Domestically the problem now is whether we have sufficient peak processing capacity to deal with any distress spring milk. This distress milk could drag some producer prices down or even put one or two processors out of business. That’s my worry, because some processors have realised their milk intake cannot be handled. They are the ones set to be caught with no trunks on when the tide goes out. And, other than First Milk, nor can they pick-up the bat-phone to Westbury and expect to have their surplus milk toll-processed, allowing them to capitalize on global powder prices too. The days are long gone when Arla or First Milk were so charitable.
At least one processor is rumoured to have discussed its dilemma with a farmer representative in an attempt to do some crafty creative accounting to adjust the pricing schedule without being seen to be adjusting the price. Incredible. Meanwhile Arla continues to send positive signals to all European dairy farmers, and a standard litre price of 35ppl might not be too far away.
In the space of a few weeks the COP milk price setters of Tesco and Sainsburys have almost slipped off the radar. In March Tesco will crunch the numbers for a 1st May price for its aligned suppliers. It looks like they will reluctantly end up adding another market related top-up, based on the Muller Wiseman standard litre price and either the Arla co-op or Arla directs price as part of the deal to pay at least the price their processor pays to its non-aligned farmers. If Tesco were to stick rigidly to its COP formula then its price will fall. My question is whether the retailer aligned COP model is broken. Is it indeed fit for the future? Will it survive? Will there be another fudge? Can, or will, retailers continue to have direct relationships with dairy farmers in the future, especially post quotas?
Arla selling Westbury produced powder at the fortnightly GDT auction also facilitates very transparent and honest pricing, and a direct link between world prices and British prices. It’s time for those buying liquid milk to wake up and smell the coffee. Powder prices are not under pressure to fall, but liquid prices are under pressure to increase thanks to them being dragged-up by global commodity prices. IF UK retailers won’t pay a market price for the milk, developing countries will. We didn’t realize it at the time but the Milk Link merger and the subsequent AFMP integration with amba in late 2013 looks as if it they were pivotal turning points for the UK dairy industry, where dairy farmers gained a bit more power, respect and critical mass. The anti Arla-ities won’t want to hear that, but it’s an absolute fact.
It’s a new competitive world and perhaps it has taken some processors and retailers by surprise. The target needs to be recognized by all in the dairy chain, and it is to pass back a fair price to grass roots producers, which encourages investment and long-term sustainable fresh milk supplies. It is not to pass back what’s left, as has been the case too often in the past. That’s called scratching in the farm yard with the hens and that has been the case for far too long. Now is the time for dairy farmers to soar high up in the skies with the eagles. I hope no one tries to shoot the eagles!
The pressure no longer comes from the retailers at the top pushing down on others and squeezing farmers until they squeak. Now it’s time for farmers and their representatives and processors to push from the bottom, upwards. For those with plans in place to expand to capture this potential I say go for it and I wish you every success. This industry is far from stagnating. It’s moved from its obsession with liquid prices, strategies, contracts, COP contracts and the Voluntary Code into the real global world, and, as I said at Semex, I’m more optimistic for farmers now than I have ever been. This is indeed the closest I have seen to a thriving, growing, sustainable industry and long may it continue.
Finally, I have to comment on the surprise spike in the quota market recently. At its source was a rather unnecessary, wholly misleading press release from Townsends Chartered Surveyors, which ignited the market. The clear inference in it was that we could hit quota as early as March 2014. I thought it was an early April fool, but several farmers panicked and quota shot up from around 0.1ppl to 0.6ppl. For the avoidance of doubt it is impossible for us to hit quota this year, and next year there will also be a huge hill to climb to fill it. The utter garbage of the press release was printed by several of our farming press (in this case comics) without so much as a sanity check. The only positive is that at least it helps to prove there’s only one place to go for sensible advice on quota! Next month I’ll find my address book and tell you who it is!
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January 2014 Dairy Farmer Article
The New Year begins with Arla continuing to roll out its UK strategy, in what looks like another shrewd move - to acquire the freehold of Westbury Dairy from the Lloyds’ receivers. There can be no doubt that this plant, which came at a cost to many farmers who invested at the start, is Arla UK’s pathway to the currently buoyant Global Dairy Trade Auction and will be needed more than ever this spring. With a giant flush expected the dairy industry would be in one heck of a mess without it, with distress milk everywhere. Some might still prove to be a problem if production overtakes our processing capacity, especially if it is coupled with milk coming over from Ireland.
With Arla now owning the freehold First Milk (a J/V tenant partner) has two choices: it can continue to be part of the J/V with Arla, or could sell its share to Arla (or perhaps another party), which, with SMP prices being what they are, will now be worth a lot of money. First Milk could then utilise this capital elsewhere in the business. A lot will depend on how much milk they have to put through Westbury, having committed more than 40% of their milk to cheese destined for Adams Foods (Competition Commission allowing, still).
During the past year or so I have done a bit of travelling, in particular to two challenging areas for milking cows – Norway and The Shetlands.
In Norway I visited one of the largest herds (120 cows), producing 1 million litres via robots.
The farm’s margin was considered "OK" at over 8ppl. However, the cost of production fails to account for any family labour costs, a point I suggested they should address ASAP.
Dairy farmers there face special challenges, where three consecutive dry days for silaging are considered a luxury. Marry this to the huge challenge of attracting good employees due to the huge competition from a strong oil economy, which pays exceptionally high wages in comparison, and I am sure you get the picture.
The smaller farmers receive dairy cow headage payments (excluded from the 8ppl margin) - with up to 16 cows at £400/head, decreasing to zero for 50 cow plus herds. It’s called a multi-level subsidy with rates in the less favoured northern parts higher than those in the south. I guess one thing in Norway’s favour is the fact its oil industry produces significant tax revenue, which is why its agricultural subsidy is three times higher than the global average. Tine is almost a monopoly milk purchaser, and processes 95% of the country’s milk with annual farmer price agreements made between it and the two farmers’ unions.
In The Shetlands only four dairy farmers survive now, with a total of 300 cows on islands with no trees or badgers, but on very disadvantaged land indeed. This (at best) can only be grazed from mid May to mid September. And they also have to contend with over 1,000 Greylag Geese, which hoover up their valuable grass in front of your eyes. The best land is worth £2,000 acre. The milk goes to their own co-operative processing plant, which has limited capacity, and when it’s full they have to dump the milk. Their current price is 37ppl.
In both The Shetlands and Norway there will simply have to be policy measures to protect dairy farmers, especially from the inevitable price volatility. These farmers need a subsidy. For Shetland farmers who are under CAP reform the move to flat rate area based CAP payments looks to be painful, and likely to have a massive impact on their future farming policy. Certainly few, if any, mainland farmers would swap places with a Norwegian or Shetland farmer.
In Norway the entrepreneurial farmers appear to pray for fortress Norway, much the same way Canadian farmers did with import protection. And in The Shetlands they wish Tesco would shut up shop or stop selling non-Shetland Isles liquid milk and cheese in their Lerwick store for the identical price we pay in middle England, for example. They want it, and others, to promote and support local farmers rather than crush them out of existence.
I have always kept a watching brief on organisations like Compassion in World Farming (CIWF). Just before Christmas I received an email which was its take on the 12 days of Christmas song. I confess it was very professional, and showed what those who promote large scale units are up against. Our marketing and dairy promotion teams are not in the same league as those of CIWF (or indeed the promotional films I have featured on my website in 2013, as produced by dairy promotion agencies around the world). In Britain we just don’t seem to have the flair and creativity.
I also keep an eye on the RSPCA’s activities. For sure its press coverage in 2013 has slid from bad to worse. Radio 4 did one of its Face the Facts programmes on the organisation recently, where it was dubbed as “heavy handed and abusing its informal power”. According to the researchers RSPCA prosecutions have escalated “out of control” in the space of two years from 2,500 (in 2010) to a staggering 4,000 in 2012, as have their joint raids with the police. Only the Crown Prosecution Service (CPS) brings more prosecutions than the RSPCA. It’s little wonder some suggest the publicity from the prosecutions is viewed as helping to raise funds.
Like me you will be aghast to hear the case of the 68-year old lady who was ousted from her cottage during an RSPCA raid and told to sit in the garden in her nightshirt, or of instances where it has seized animals and destroyed them (following which it was proven there were no welfare problems). The interviewer also talks to a vet and a lawyer both of whom have successfully assisted in defending people the RSPCA has prosecuted. Their experience is that if you are successful against the RSPCA you are “persecuted” and subjected to numerous referrals to your professional body until you eventually back off.
But what riles more than anything is the organisation’s insatiable appetite to stop the badger cull. Its CEO publically called for farmers involved to be named, and for a boycott of milk coming from the cull areas, remember. This was, was in my opinion, bang out of order and should be condemned by all dairy farmers. Perhaps its time for the CEO of the organisation to be invited to give his side of the story at either next year’s Semex or NFU Conferences. I was a previous winner of an RSPCA Freedom Foods Award. However given its negative 2013 press coverage I think I will remove this from my CV. Instead I will sit back and watch with interest to see if the organisation will ensure its reputation sees a U-turn in 2014 and whether its campaigns are well-thought out, or whether it will further deteriorate.
Finally, all the best for 2014. There will be plenty to write and comment on!
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December 2013 Dairy Farmer Article
“No one likes us, we don’t care”: such is the famous chant from the Bushwhacker firm in the Millwall Football Club Den. It could also be the latest karaoke song for First Milk, which new chairman Jim Paice has added to his list of hit songs following his remarkable public outburst against Arla and Muller CEO Ronald Kers through the pages of the esteemed The Grocer magazine recently.
The interview took place at the First Milk AGM only hours after Sir Jim was confirmed as the co-op’s new chairman with The Grocer’s fresh foods editor Julia Glotz, whilst yours truly was ushered next door to interview Kate Allum and Adams Foods CEO Ian Toel. There were no fireworks there!
If anyone thought First Milk’s politically experienced new chairman would use the opportunity to set out his vision for the co-op’s future, and how he would stamp his mark on the business, they’d be very wrong: “Jim Paice picks a fight as he takes over First Milk helm” ran the The Grocer’s headline! He certainly landed with a bang!
Before I come to some of the comments, and responses, one of the rather surprising admissions from him was that he knew the co-op had lost the ASDA business before he accepted the job as chairman. Given that he accepted the job in July, or at the very latest early August, with the official announcement made on 13th August, it begs the question as to why First Milk only told members it had lost the contract some nine weeks later on the 15th October. It’s a significant time lapse, and, crucially, after the deadline for resignations to be filed.
Jim claimed that Arla’s “aggressive bidding” had damaged the whole of the UK dairy industry by undermining cheese prices for farmers - pointing to the fact the only way Arla could make a profit from the contract is to lower the price it pays to the farmers for the milk.
When I highlighted the interview in my free weekly newsletter a number of First Milk members responded, with, naturally, the majority in support of Jim’s attack. One of the best comments was from one of its Scottish members: “We have a situation where two milk buyers (Arla, Ronald Kers / Muller Wiseman) are doing a lot of willy waving stating they want to be the biggest,” he said. Note, that’s not a ‘William’ trying to attract producers’ attention but the 2013 Dairy Willy Waving Competition. I wonder who will be crowned the UK Dairy Industry Willy Waving Champion.
But it also prompted counter comments. I quote: “Today First Milk’s www.milkprices.com 1st December milk price for cheese is 32.5ppl and the Arla Milk Link comparable price for 30th October is 33.83ppl. On that basis if under-cutting the market delivers a 1.33ppl+ advantage one month ahead of the competition then crack on lads and let’s have everyone under-cutting the market! In addition it has to be noted that since the ASDA deal was awarded to Arla they have increased producer milk prices by 2.33ppl. I guess Jim is really a politician and as one person suggested you can’t take the politician out of the man. By nature with politicians it will usually be someone else’s fault.”
Jim also claimed that “First Milk is the only true British dairy co-operative.” As I will come to later that is an erroneous claim. Indeed some state that First Milk are now not so “pure” and are both British and Irish. There is, for example, South Caernarfon Creameries, and what is now arguably the largest British dairy co-operative (certainly the most profitable) United Dairy Farmers of Northern Ireland.
He is quoted as saying: “There are people who would be very happy to see First Milk fail ...” Personally I haven’t heard anyone say, or even imply, that and having had the catastrophic collapse of DFOB, Amelca and Westbury the last thing this industry wants is such talk because it costs more than just money.
Let’s hope this rant was a playground slap from Jim, because he has picked a fight with two heavyweights at the same time, and to succeed he, his co-op, and its milk price needs to be a chart-topping heavyweight in peak fitness.
Meanwhile, next month will see the Oxford Farming Conference kick start the year and the pre-conference after dinner speaker is non-other than Mr Paice himself! And yes, you guessed it, the dinner’s quality cheese is kindly supplied by Arla! Will Sir Jim enjoy finishing off his meal with Arla’s cheese slipping down his throat? I doubt it! Julia suggested that Jim should start by fixing problems closer to home instead of lashing out at rivals. She has a point: he has plenty on his plate including the high cost the co-op will incur in closing Maelor which, with 230 plus staff, will be a multi-million pound hit on their accounts. Ultimately Jim will be judged in 2014 on the performance of the business, its end of year results/accounts and the milk price it pays to its members. He will not be judged on the basis of how he apportions blame around the industry or on a war of words.
Now to United Dairy Farmers (United) and its Dale Farm processing business. I recently had the opportunity to meet and question the co-op’s senior management team.
UDF is a 100% British farmer-owned co-op which only occasionally crosses the radar, preferring to quietly get on with its job. You don’t hear David Dobbin, its CEO of 14 years, and whose previous PLC background was in business included turn-arounds and acquisitions, looking over his shoulder and criticising others or trumpeting about what he intends to do. Instead he concentrates on tangible achievements, like the fact he has presided over 12 acquisitions while at United - not one of which has failed.
United and Dale Farm have both national and international presence. They are a real global player in the dairy world with six processing plants (four in Northern Ireland, one each in England & Scotland), and, after substantial investment, have what they and others say is the most advanced cheese and whey processing plant in the EU.
If they are not already the largest indigenous UK dairy co-op owned by English, Scottish and Northern Irish dairy farmers employing more than 1,000 people they soon will be. United has a milk pool of more than 1 billion litres of milk with a projected Group turnover of £475m in the current year from its combined operations, with Dale Farm reporting a 35% increase in turnover in the first six months of the year. The United Group consistently make £5m or so profit each year with the co-op’s main focus on returning the best milk price it can to its members. Dale Farm’s cheese output has increased to 45,000 tonnes of cheese this year and they expect to grow this to 50,000 tonnes by 2015. They company have moved away WMP and SMP milk powder commodities to producing added-value enriched powders and whey proteins. United are simply a story of growth and success and their ambition is to continue to grow in volume and value. Turnover at its Kendal factory has doubled in the past 10 years and at its Scottish plant it has more than trebled, for example.
Preferring to stick with a farmer chairman, the largely farmer board’s focus is firmly on expansion in consumer products across the British Isles (largely cheese, butter, desserts, yoghurts and cottage cheese) and specialized dairy ingredients on a global basis realizing that expansion potential is very limited in the small Northern Ireland market. Dale Farm will export over £100 million of dairy products to 42 countries worldwide this year making them one of the UK’s largest dairy exporters. On direct supply recruitment they say they will continue to pay an above average GB milk price.
The Dale Farm’s GB plants have grown their milk pool to 60 million litres of direct suppliers and is recruiting to grow this to 100 million by 2014. With no capital contributions to become a full co-op member, a 0.25ppl x 5 year’s share purchase (which if you leave is paid on full within three months), plus a fixed 0.5ppl annual co-op bonus payment, it would seem one of the most tempting contracts in town. It’s certainly a business with a bright future and one with a realistic target to double in size in the next five years.
Finally Happy Christmas to all readers and fingers crossed for a happy and prosperous 2014. The signs, I’m afraid, are that dairy farmers need to buckle up their dairy seat belts for what looks like a choppy ride. And by that I mean on price. Not from another tongue lashing!
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November 2013 Dairy Farmer Article
There is only one subject on which to start this article, or rather one company. First Milk is regularly topping the news agenda, but for the wrong reasons. The loss of the ASDA cheese contract, the closure of its Maelor packing plant and the potential 231 redundancies, plus its disappointing year-end results has sent shivers down the spines of many of its members, including some of its die-hards.
The ASDA contract loss and the 300 million or so litres of milk it accounts for will certainly be a challenge for the co-op to address, but it doesn't mean it's the beginning of the end like some have unfairly suggested. First Milk's cheese will still be in in big demand, providing it hasn't got metal in it! And the situation is nowhere near as bad as it was for Milk Link when it lost the same contract back in February 2005. Back then the contract went to Dairy Crest to be made at Aspatria (Cumbria). Subsequently it proved to be a deal which helped oil the wheels of Dairy Crest’s sale of its commodity cheese business to First Milk.
Milk Link’s business plan was scrapped on the Friday and a new one started on the Saturday. They re-shaped the business and changed it having lost their largest single customer. It wasn’t easy but since then, many would say, Milk Link never looked back.
So, can the First Milk board and senior management re-group, cut once and cut deep with cost savings and come out of the other end smiling? By the time First Milk hold their AGM at the end of October and this article is published we'll have fully digested the details of a deal with the Irish Dairy Board, news of which was breaking as I wrote this article. It’s to be hoped British Kate (presumably now British + Irish Kate) can prove there's a glimmer of light at the end of this long pretty dark tunnel. We also look forward to seeing what the new chairman, Jim Paice, will bring to the party in addition to his rallying cries to members to “keep the faith” and to “think twice before jumping ship”.
Also on the subject of change, AFMP is now in the fast lane towards full Arla membership. However, since my last article one unwelcome element has been flagged-up to those contemplating signing - a temporary 0.5ppl price drop from 1st January 2014 resulting from a butterfat adjustment.
Basically, AFMP members are mainly paid on white-water contracts, while Arla amba producers are paid on constituents. As part of the transition an across-the-board deduction of 0.5ppl, irrespective of the milk quality supplied by individual farmers, will be made because the current AFMP quality is on the low side.
When the average butterfat lifts to 4% this deduction will disappear. It is, therefore, the responsibility of all members to lift butterfats to 4% but the onus is especially on the current lowest fat producers. For many its unwelcome news, but hopefully temporary.
I don’t think it will be a deal-breaker for many farmers because, frankly, if the headline-grabber on day one had been 8ppl to join as full members (I.e the 7.5 announced cost plus 0.5 for the butterfat) then few producers, if any, would have flinched. It’s still a great entry price. Any farmers who do balk at the deduction and/or the fact its spread evenly across all farmers, and dont join on the back of it, are possibly the non co-operatively minded ones that amba probably won't mind being filtered out early.
The real question now is whether AFMP members or Arla directs, and those waiting to supply Arla, decide that 7.5ppl is a good investment on which they will be rewarded with supplementary (13th) payments from a strong-performing cooperative. There are inevitably pockets of AFMP members who are indicating they intend to leave and not be on the bus driven by Jonathan Ovens (some simply because he is involved!). But only time will tell how many, and (for those in the latter camp) whether they cut off their noses to spite their faces.
Last month I joined the EU’s conference which looked at life after quotas – note its now only 17 months to the end date! There’s lots I could write about. For example, Ernst & Young did a report for the Commission, basically stating there is no place for quota or production buy-out schemes or the various so-called 'post March 2015 supply management proposals'. Surprisingly their report was almost side-lined at the Conference. The French Minister, in particular, seems convinced that the European milk market cannot be left to market forces and that production controls are required immediately post 2015. The European Milk Board pushed their flexible supply management concept, which I call Milk Quota’s version 2 , with demands that the Commission must have the power to actively control the supply of milk to the processors and market.
The Commissioner has agreed to set up a European Dairy Market Monitoring Agency, which he seems to believe will provide an early warning to the Commission when the market is in crisis and some intervention needs to be considered. I question this move because for me the early warning signals are here, but sadly some of our organisations and representatives fail miserably in sign-posting those signals to grass roots dairy farmers to allow them to make informed decisions. It’s been one of my biggest gripes with DairyCo, and its Market Intelligence Datum department, for example. To date, I have seen no clear signals from DairyCo/Datum signalling what is likely to happen to farmgate milk prices next year. The same was the case in 2012. Levy payers expect Datum to keep them up to date with the latest information on the markets and with clear messages as to what that translates to at farm level. So, once again, I will step forward as the doctor to do a bit of diagnosis and administer some medicine. Milk production across the world is improving and at a pace, especially in the main exporting countries; feed costs are easing and the economists with a proven track record are pointing towards a spring 2014 price correction/adjustment. Yes that’s right, I am saying that milk prices are almost certain to ease across the world in April/May 2014. Until then increases in production will be absorbed by increasing demand from the likes of China and Russia.
So the big question is by how much will UK milk prices increase before they peak and ease back? If they go from say 34p (1st November) to 36p by 1st January and ease back to 34.5p in April it won’t be a crisis. So it’s time to stand-up and push for higher prices so that when the correction comes it will be from a higher level. Let’s hope all dairy farmers have a good profitable winter.
The Pro-Supply Management Conference speakers focused on the plight of small family dairy farmers in more remote and disadvantaged parts of Europe. It’s a topic I hope to revisit next month following trips to Shetland and Norway.
Away from the speakers and among the conference delegates there were very mixed feelings as to how successful Producer Organisations will be. One thing everyone involved in the conference agreed on was that volatility is here to stay, and so are powerful retailers.
The Commissioner Dacian Ciolos was sitting in the audience and towards the end his frustration boiled over as he directed the final 40 minutes challenging delegates to come up with solutions and practical ideas rather than ideologies. “I want results not unhappy (whinging) people,” he said. In other words he wanted proposals with reasoned arguments to put to his experts. But the result was few solutions, lots of whinging and plenty of homework for Ciolos and his experts to do.
October 2013 Dairy Farmer Article
Milk prices for some GB farmers have broken the magical 40 euro cents a litre (34ppl) mark, and as I write others are moving onward to 32.5ppl. If you don’t push hard for price rises now and then you won’t have a chance come next year, as all the pointers are for price falls in Q2.
As I write the October league-topping price is the Muller-Wiseman formula price at 34.55p which even eclipses the amount paid by the two regular chart coppers of Waitrose and M & S. This is the first time a non aligned milk price has leap-frogged these two since their two pools started more than 12 years ago. Several MW farmers signed-up 100% of their output on the formula, so for now it’s happier days for them. The MW farmer board, having agreed to a formula whereby 25% is based on a basket of competitor prices, will be wishing this element was removed because without doubt it is holding back the price for hitting 35ppl.
Formula prices will, in my opinion, eventually be joined by fixed prices for a fixed period of time. We have that now with the Tesco and Sainsbury’s aligned producer contracts, only I see these extending to 12 month fixed prices for a percentage, or all, of a producer’s output. All in all these positive developments should deliver fairer market-related prices. Processors who rely on long notice periods to entrap producers will eventually wither on the vine.
One of the main industry talking points right now is the invitation for Arla Foods Milk Partnership and direct suppliers to join Arla amba. AFMP director Arthur Fearnal chaired one of the roadshows recently and declared that all AFMP Directors were fully committed to signing-up to the deal for their own farms. The next question is whether AFMP/direct farmers take a short-term view (not joining) or a long-term one (paying and joining). Will they place their faith in joining 12,000 other European dairy farmers in determining how their milk price is calculated, or leave it to the vagaries of the GB market? Will those who intend to supply Arla in the future decide that paying the investment money will be rewarded with a higher, more secure milk price? It’s a fact that some First Milk members would gladly swap places with AFMP farmers to have the opportunity to join Arla amba, because they have emailed me.
There are a couple of downsides, though. One relates to volatility – the amba price, although higher over the years, does have higher peaks but lower troughs at times. Make sure you can cope!
The biggest downer I can find relates to the low share value for those who are not joining. They will receive around 30p per share. That’s a blow, but the value has no link to the deal.
By the time you read this article Arla should have stepped up a gear on milk prices, assuming at least 1 billion litres looks like being committed to amba by mid November. By January 1st 2014 the AFMP price will have to match the amba price, of course.
That sounds simple, but in order to hit this target Arla will have to recover all of that extra money from it’s UK customers because failure to do so could lead to some significant head-scratching on the continent. Some Danes and Swedes have questioned why they need all these British farmers on what looks to be a clever discounted deal, but they sure won’t subsidise the AFMP milk price from central coffers. Let’s get real – they will be expecting additional revenue flowing from the GB business into the main piggy bank, if only to fund the collective 13th payment estimated to be around 1.5ppl.
The result is Arla will have to quickly drive prices up at farm and retail level, and others will be forced to follow with some buyers kicking, screaming and struggling to match them if the EU price outpaces the UK one. All eyes between now and Christmas will be on the monthly upward movements in the amba price and, how AFMP will catch up.
I recently attended an excellent Westminster Food Nutrition Conference on CAP reform, at which there was an interesting list of delegates. There were only two farmers and a number of key commercial companies sent one delegate, eg Kite, Andersons, NFU, Saffery Champness, Roythornes, ABP who, like me, took notes to circulate to others when they returned to the office. I couldn’t help but notice three delegates from the AHDB levy board, and no less than 18 from DEFRA however. I guess that’s the difference between the commercial and civil servant world, who are funded by Government and quangos. What was more of a shock was the fact there was not one delegate from the RPA, who will have to deliver the reform. You couldn’t make it up! It’s a complicated deal, and even one English official involved in the negotiations has been quoted as stating “it’s a bit of a dog’s breakfast but not as bad as it first was.” A staggering 8,000 amendments were voted on by a committee of 43, for example. That’s scary!
On the positive side the exchange rate used to calculate the CAP payment will no longer be based on one day, and will be based on a month’s average, and all member states will have a flat rate common single area payment post 2020. On the negative side, especially for English farmers, is the ability for individual member states to recouple payments to production. This is the Commission hitting reverse gear – an accusation the Commission reject.
It was trumpeted as a done deal, but for each of you there will be little, if anything, gained and the question is how much money will they take off. It will be 2014 before farmers know how Owen Paterson & co intend to implement the reform, and how hard they hit your bank account. As one of the speakers accurately pointed out “The SFP for many farmers is the difference between profit and loss.” But payments will be cut, and it will hurt.
There was lots of debate over Pillar 2 money and what the Government will decide to do. The TFA asked a very interesting question: “How much of the Pillar 2 money ends up with farmers after administration and consultancy costs have been accounted for?” If the Southern Irish give their dairy farmers a better deal on Pillar 2 funding than we get it will be handing them more ammunition for them to penetrate our dairy market further. It will happen, I think!
At the conference one of the speakers was a representative of the YFC, and eyes rolled when she declared that “for every farmer under the age of 35 there are 20 over 55”. Following Potter questioning, their appeared to be no firm basis for the statement, which was simply another rural myth. Farming and involvement in food production is now “sexy” and exciting, and those involved are more respected than they were 25 years ago. In my opinion the main problem with the young entrants is the old sods who won’t let go of the reins and who persist in dictating the farm’s future policy. It has always been the case, but I sense it’s improving – slowly.
Quota wise the proposal to introduce (or continue) with supply control was rejected, and no doubt this will be a topic which is vigorously debated at the Commission’s Dairy Conference on 24th September. I continue to believe the likelihood that milk quota will have value in determining future payments is slim and so far as English farmers are concerned I would be stunned if they didn’t take the easy option of rolling forward existing entitlements in to the new scheme.
At the UK level there is a lot still to play for and negotiate and to complicate matters there is the issue of devolution, which will delay matters. And we could even see a referendum on whether the UK should remain in the EU! Lord help us if we left, because one thing is certain: English farmers would take a sharp intake of break knowing London would be in control!
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September 2013 Dairy Farmer Article
Last month I made it clear that in my opinion the Voluntary Code was potentially working against farmers and holding back any price increases, and cited Arla/AFMP and their Roadmap to amba membership as being one example. That was because, from July 1st when AFMP adopted the purchaser discretion position, if Arla was to move its AFMP price by so much as 0.1ppl up or down it would trigger the resignation option and a potential loss of suppliers in three months time, during the trough. It's not a risk Arla could realistically take with a new factory being commissioned and the roll-out of the "Arla Amba offering" so close.
Once the AFMP Roadmap to full membership of Arla amba is agreed then the ball game changes completely. AFMP then become defined as a group of producers in transition to becoming a co-op and with that comes exemption from the three month clause within the code, in line with that for other co-ops. Note, this transitional co-op feature was actually conceived specifically to get Arla on board with the code, and to breach what was a huge log-jam to the launch of the code at last year's Livestock Event.
But it doesn’t end there. That's because once the road to full membership is in train it will, as was the case when Milk Link members joined the slip road, mean that potentially all 3,400 or so Arla/AFMP/Arla Milk Link members will receive a milk price which is calculated according to a formula calculated every month by Arla Amba on terms agreed by the farmer Board. All will be on exactly the same terms as amba members in Denmark, Sweden and Germany have. And here the politics of the industry changes radically.
From here on in there will be little point in farmers protesting outside Arla plants in a bid to get it to increase prices. Arla UK just won't be able to unilaterally raise the price for their UK farmers, even if they wanted to. This leaves Muller-Wiseman and Dairy Crest as the market makers for dairying in the UK and thus far more exposed to FFA's attention. That said, my money will be firmly on farmers not protesting outside Arla plants because I think a fast track deal will be struck with AFMP to become full members, perhaps with a few sweeteners for Arla Milk Link. Let's hope that the industry's old friends Mr Jealous and his side kick Mr Envious from Arla Milk Link don’t try to stick their oar in if one is offered.
Where does that leave the Voluntary Code? In a nutshell, so far as GB is concerned, it would see over half of producers sitting outside of the three month notice period, with over 6,000 farmers supplying milk to a co-op.
Then comes Muller Wiseman and Dairy Crest who together account for a further 23% (2,730) producers, of which 60% (1,630) are on aligned contracts which are formula driven, and therefore outside of the three month notice. The remaining 40% include those on the Muller Wiseman's non-aligned "bonus price" (who will have to forfeit the 1ppl growth and/or sign up incentive if they hand their notice in) and those at Dairy Crest who have part of their milk sold under a contract formula price. Both of these, again, effectively fall out of the three month notice.
So which of the main milk buyers fully complies with the three month notice contract within the code on ALL milk they buy direct? I reckon it is down to one firm – Lactalis and its 200 or so direct producers. So, overall, it’s not a question of 85% of UK producers being compliant with the three month notice it’s more like 85% non compliant!
Jim Paice will have to stamp his own commercial mark on First Milk when he takes over the reigns of Chairman at the end of October. Members will be looking towards how he directs the business through choppy and stormy waters. They will want him to oversee a plan and to get it implemented asap. Sir Jim will need to be a fix it man, not a maintenance man.
First Milk have previously released their annual financial results a month ahead of the previous year since 2009 - on 25th September 2009 (the final time CEO Peter Humphreys was around), 16th August 2010, 18th July 2011 and 18th June 2012.
However all is eerily silent for 2013, and I don't think it would come as a surprise if the final results showed a loss. I say that in reference to the comment from current First Milk Chairman Bill Mustoe in early April, when he stated that: “Over the last few months, we’ve supported members to the hilt in terms of milk price”. That was interpreted as First Milk having overpaying producers, and at the same time I pointed out in my bulletin that their price “has been one which has been very much at the lower end of the UK milk price scale and below average”. The big question is why the delay in publishing the accounts until what is rumoured to be September, or possibly even sneaking into October? The delay and losses will need to be explained to members, because it does not demonstrate the plc standards, management and commercial disciplines previously shown by the co-op and expected by members.
There will be keen interest and scrutiny of the numbers behind the figures, in particular the contributions to the two MMB pension schemes both current and going forward which are expected to be significant numbers. At least First Milk's annual outgoings to the pension pots will not be anything like the ones rumoured that Genus are having to make - several £million each year! Ouch.
I hope First Milk Directors and senior management have good reason for the delay and for dishing out any medicine from members until the end of September/early October. Any move along these lines is likely to result in member complaints.
Next month I hope to look at the particular appetite from some member state Governments to introduce supply management tools and regulation of the European milk market. The 31st March 2015 ending of milk quotas is just over 18 months away! There appears to be a slowly growing number of countries stating that the EU28's dairy policy cannot be left to fend for itself and must do its own supply and demand balancing. There are even calls for the quota system to be extended until 31st March 2020.
That’s for another day. In the meantime I'll leave you with this to ponder: why is Ireland and other major EU milk processors and farmers pushing hard to expand, whilst GB processing is simply selling out to foreigners just as our car industry, water and electricity suppliers have done? Answers on a postcard.
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Aug 2013 Dairy Farmer Article
Almost exactly a year ago, and in the midst of Voluntary Code mania, my view was that the Coalition and the Government were under extreme pressure to conclude a deal on the perceived (for some) magic bullet and there was a danger things were being rushed for political reasons. Militancy was a daily event and sealing a deal helped take the heat out of the Olympic summer,
Some 12 months later, though, and we have the so-called good guy processors who have signed up to the code (representing around 85% of GB milk processed) and the bad guys who have been placed on the naughty step. Meanwhile the NFU’s language has changed and they have dropped the word voluntary, now referring to “the Dairy Industry Code of Best Practice for Contractual Relations” instead.
In its pre-Livestock Event press release the NFU’s President Peter Kendall stated “Signing up to the code means that farmers have flexibility in contracts they have never had before, encourages healthy competition within the market and also sends s clear message about the future of the industry. It gives confidence to people wanting to invest in British dairy and shows that people understand how important this industry is to the nation.”
So why have some our first and second division milk processors not signed up? The NFU appear to want every processor to do so, and believe if this goal is achieved it will ensure “a fair, unified and profitable dairy industry that benefits the whole chain”. The Shadow Farming Minister is also calling for Owen Patterson to sharpen his teeth and press all processors to sign up or face legislation.
One year on, though, and I, and many others, are now questioning who benefits from the code, whether it is working to deliver “fairness and balance” to dairy farmers and who it is protecting. Was it a good or bad deal for farmers? And what are its impacts on companies too?
Let’s cut to the key issue first: is the code working against milk price increases? I believe it is, and here is my logic:
The code states “The contract must allow the producer (excluding co-op members and producers in transition to co-op status) to terminate their contract with the purchaser without penalty on a maximum three months written notice from the date of notification to the producer of any change made by the purchaser to the price adjustment(s)”.
Thus, some companies have signed up to it but still have some members unhappy. IF the price changes it would trigger resignations. An August price move would mean producers would resign from 1st November and in the trough, one of the crucial months any company doesn’t want to lose milk. The adoption of the code is therefore likely to result in carefully timed milk price movements therefore. Going forward no milk buyer is going to support high prices for spring flush milk and risk losing the milk in the late Autumn/Winter. Thus I think milk price movements in Summer will be a complete no go for code compliance milk purchasers.
All that theory applies to all of companies signed-up. But some companies have their own unique circumstances. For Arla there’s the added element of the roadmap for AFMP. Price changes could be delayed until the roadmap is complete, and when AFMP members become co-op members – thus they will be considered under the code to be members of a co-op by which time the three month’s notice period will not apply to them. And other companies have their own “code idiosyncrasies” (for want on an expression) – some buyers have secured part of their milk on one-year formula contracts or introduced bonus payments payable in a lump after a year or on the basis a producer hasn’t got their notice in.
Then there are those companies on the naughty step: Meadow Foods, Paynes Dairies, Medina and a host of cheese processors. These businesses are all growing and, to do so, have forecasts, cash flows, banking covenants and expansion plans requiring investment. Imagine the reaction to their next loan request when the bank manager asks how secure their milk field is, and the answer is “we were on 12 month notice with our farmers but last month the NFU bullied us into signing up to their code and now ALL our farmers could leave in just 12 weeks”. If one of the big guns predatory priced or the cheese price turned down compared to the liquid price the business could be strangled overnight. Signing the code does not provide a secure platform on which a processor can borrow/investment and does nothing for security.
The issue of the co-ops like First Milk, and their compliance with the three-month notice rules, is also an issue for some. In my opinion this will never happen while First Milk are a co-op – they are finding business challenging enough and the three-month rule would not help them if significant resignations were to materialise.
There is also one bit of the jigsaw I am missing: why Muller-Wiseman, which has had a three month notice for years, hasn’t pushed through a price increase in the hope that the other companies who have signed up to the code follow, thus triggering the resignation option. Now surely is the time for it to land that punch – especially on Arla – before it completes the roadmap and AFMP members join the amba co-op?
So was the code well though out? Is how it operates to the coal-face what the NFU intended? I think the answer is no, and the code is now exposed as potentially working against both farmers and processors tool. Hail the law of unintended consequences.
For me the code has merits, but the three-month rule only benefits the big sharks in the sea, Although it does keep them on their toes and influence how they behave.
The next step is the 12 month review of the code to assess its effectiveness. Let’s hope that review is truly independent and is not conducted by an industry insider with their own agenda. Let’s have a commercial non-dairy review chairman who can talk to all parties in confidence.
Finally I believe current farmer protests are partly justified, since some processors will be squirrelling away additional margins as opposed to paying the money out to farmers now. Higher cream prices alone are boosting profitability and if we don’t watch out you will be robbed of the benefits. You need extra money to pay bills, overdrafts and restore confidence. I say the demos are partly justified as I’m hoping there will be some good increases coming soon anyway, through the natural order of market related increases.
But I can also understand why processors might squirrel money away: they all know that one day a price correction on world markets will come and none of them want to be the first to move prices down. So, if they can bank some money now they can smooth out any troughs before they have to inflict a cut. An alternative theory is that the mighty retailers are seizing the cream benefits, leaving the processors on wafer-thin margins (again).
Liquid milk and cheese prices are having to be dragged-up kicking and screaming while butter and powder prices stay firm and in fact are getting firmer. With or without the code though – and aside from those on formulae prices, or on the Arla Milk Link global price, or with Tesco or Sainsburys, Waitrose and M & S – for most farmers there still doesn’t look as if there is a fair, transparent and equitable way of determining how much money ends up in your milk cheque each month.
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July 2013 Dairy Farmer Article
"What have the Romans ever done for us?" It's one of the most famous lines in cinema history, and I'm going to borrow it for this article, which concentrates entirely on DairyCo. What does it do for you? Not enough, it would seem, for many farmers. Discontent has been brewing against it for several months, not least after the publication of the Milk Bench report where a West Midlands farmer's manual work rate was costed by the organisation at a derogatory £8.90 per hour, or less than £18,000 year!
Several who attended FFA’s hugely successful Holsworthy meeting recently emailed me applauding David Handley’s professional presentation and question answering, with one stating “Handley put on a Champions League winning performance”. DairyCo and its role in milk promotion was one of the hot topics discussed, and criticised.
While DairyCo's market intelligence data has undoubtedly brought farmers closer to the market place and given more transparency, sadly the organisation does all too often let itself down. For example by making primary school comments to seriously professional farmers like “its too cold, hence grass growth is slow; there are delays to spring planting and margins are tight”. That’s not very market intelligent!
Holsworthy was an excellent meeting, therefore. But two weeks later FFA and the organisers were stunned when DairyCo contacted them declaring that Duncan Pullar, the sector director of DairyCo, had attended the meeting and asked one of his staff to get in touch with one of the organisers to “provide some clarification on a few things mentioned”. The DairyCo person charged with securing this clarification went on to request how it could get a similar number of farmers to a meeting too!
Now let’s wind the clock back to February, and Handley’s comments over DairyCo’s Milk Bench report figures. This triggered Pullar to "urgently" request a meeting with Handley, but the earliest date he said he could do was June! Handley thought the meeting couldn't have been that urgent, so he declined. Then Pullar spoke to Handley on the day of the Holsworthy meeting, wanting to meet him THAT DAY, on the M5 to find out what Handley was going to say, no doubt. It wasn't possible given Handley’s diary, but the fact Pullar was going to the meeting was never declared. Why not?
What’s also alarming is the fact that 400 plus farmers were at that meeting, and not one seems to have recognised Pullar or pointed him out when DairyCo came on the radar and in the firing line. And worse than that is the fact Pullar never stood up to address some of the questions posed, and remained on mute until more than two weeks later when one of his staff wanted to explore whether a similar meeting could be organised. Sorry, but Pullar had a golden opportunity to make his presence known in front of those levy paying farmers at the original meeting, and he bottled it.
FFA then held a meeting in Market Drayton where 250 farmers raised further criticism of DairyCo’s levy spend. On top of that a group of farmers from the South West region, and who attended the Holsworthy meeting, further escalated their dissatisfaction with what they see as DairyCo failing to provide value for money and needing to change its direction by arranging a meeting with their MP. He agreed that it was time to raise DairyCo’s activities and spending directly with the minister, Owen Paterson.
These farmers want DairyCo to use their money to promote British dairy to consumers through creative, attention-grabbing, innovative ways. In addition they want DairyCo to invest resources into exploring and identifying export opportunities, particularly to the BRIC countries (Brazil, Russia, India and China). Basically, they want DairyCo's money invested so they, as farmers, can extract maximum value from the world market. They don't want it spent on teaching "crap" farmers how to do things they should know how to do. Like growing grass or stating the bleedin' obvious.
In short they are pushing for a radical shake up of how DairyCo spends levy payer's funds. This might, ultimately, result in a surgical cut in its staff numbers including some of its extension officers. But so what? The good ones will quickly find new employment and the poor ones shouldn't be kept in the job anyway.
Levy payer's gripes include DairyCo not being fit for purpose, wasting money hand over fist, lacking innovation when it comes to promoting the image of dairy farming, and making wild, irresponsible and over-cooked production forecasts, which are of no benefit or which even are detrimental. In addition, it stands accused of being besotted with commissioning numerous reports, which have little or no value to farmers. The cost:benefit of Milk Bench, with only 700 or so farmers involved, is also cited, as is the fact that farmers can obtain a wealth of up to date technical advice from a number of consultants. Finally there's the criticism that dairy farmers can and do run their own discussion groups and don’t need DairyCo’s help.
To add to this list I question what benefit levy payers received from five - yes FIVE - DairyCo representatives going on a jolly to last year's IDF World Dairy Summit in Cape Town, South Africa. Yes, we need to be present, but how many of those delegates returned to GB and disseminated some useful information to farmers? How many levy payers read the one tiny article I fell on to by accident about the conference on DairyCo’s website? Including conference fees, flights, accommodation, salaries, food, drink etc I estimate the cost was over £20,000, which just happens to be the same figure required to ensure the film Mooman, which is about dairy farming, gets aired across 100 cinemas this year. Will they make that happen, I wonder? We shall see. Comparing several IDF delegate lists it appears one or two of the DairyCo delegates could be considered annual conference junkies, and I suspect they will soon be dusting their passports down for this year’s trip to Japan.
My suggestion is that all farmers who believe DairyCo should change direction must let the (paid) directors and staff know at the forthcoming NEC Livestock Event. DairyCo pay a shed load of levy payers’ money both in sponsorship, stand space and staffing costs to attend the event, and it’s your chance to have your say. You are their paymasters and are entitled to hold them to account. They have to listen.
Some farmers claim they are investigating whether they can legally instruct their milk buyer not to pay their DairyCo levy. Another contacted me stating “DairyCo are like your local council – they take your money, they spend a bit on things you need but waste a lot too, but there’s not much anyone can do about changing what happens.” If these are the opinions of the majority of farmers then DairyCo has to address its reputation, and, in doing so, it may have to change the composition of some of its top brass and its strategy. I will be engaging with DairyCo and at the NEC event, and hope to progress an idea for some up-skilling of some of your farmer representatives in the field of negotiations. It’s a definite gap and I am not aware of anyone who is tackling the lack of skill here. Negotiating with professional milk buyers requires training. It's no use blasting in saying we need more money just because consultants say the average COP is 34p. Properly trained negotiators will achieve better results and command more respect.I will report back!
Let me know your views on my article by emailing me at firstname.lastname@example.org. This won't be my last article on DairyCo, so your comments are valuable!
June 2013 Dairy Farmer Article
Despite higher milk volumes coming through with the better weather supply is still king, and continuity of supplies is quickly becoming more important than the price paid to farmers for it. Globally milk supplies have taken a battering and, so far as the UK & Ireland are concerned, the damage caused by the non-existent spring flush is real and significant. And now thoughts are already turning to the winter, with silage stocks exhausted and grass growth low or being used for grazing and not cut for silage.
Across the world milk supplies are also low, at the same time as demand from Asia and China is phenomenal and worldwide dairy stocks are generally low - apart from in the US where they are at record levels and thus tempering market prices there.
Closer to home, with MCVE & AMPE at record levels, there is little wonder that switched-on dairy farmers feel they are not receiving a fair share of the rewards. The reality is that liquid milk price increases appear to be moving very slowly upwards at farm level and I personally believe they are effectively capped and are not responding as they should do to events in the real market.
Talk that retailers need to pay more for milk is fine, but let’s face it they are not stupid and are very capable of crunching the numbers themselves. They know exactly what benefit processors have pocketed in 2013 from increases on the back of the cream value (circa £250/tonne), and they know that not all of this money has gone back to farmers.
The question is to what degree should milk purchasers, who are now scouring the country for extra milk incentivise new producers to join them or reward existing producers to produce more, or simply put more money on the base price to benefit both groups? Personally, I find some of the current headline-grabbing schemes to be tacky and irritating, and know that a lot of farmers share this view.
Here are the current three big processor schemes on offer:
So, for example, the 5ppl headline figure from Arla is in reality worth 0.05ppl for the average farmer who increases production by 2%. In contrast, the Muller-Wiseman deal is a very tempting bonus indeed.
Not only does the market place appear to be failing farmers we then have a situation where farmers are at war with each other. Again. Say all you like about the bad things of the Milk Marketing Board, but every farmer was pretty much an equal and there wasn’t the mistrust, jealousy, one-upmanship and, frankly, hatred at times that we have had since its demise in 1994. It’s still going on - just look at the playground punch up between Arla Foods Milk Partnership and Arla Milk Link family members. There is clear evidence that there is a group of Arla Milk Link members who appear more interested in whether their base price is ahead of AFMP’s than how far they might mutually drive the price and hopefully push the whole market up. In fact from emails I have received there appears to be real hatred from some quarters within Arla Milk Link towards AFMP.
It is almost to the point where I believe some of these farmers, given the choice between AFMP having a 35ppl base milk price with Arla Milk Link having a 34ppl milk price or alternatively AFMP having a 30ppl milk price and Arla Milk Link having 30.5ppl milk price, some of these aggrieved producers would prefer the latter pricing. It’s almost a case of if we can’t have it you certainly can’t. And we see this elsewhere, though: Davidstow producers are seemingly happy just so long as their price is higher than Arla Milk Link’s, regardless of what the price actually is. The internal Arla family dispute is one which will have to be addressed, and soon, if the AFMP Roadmap to membership of amba is going to be a success.
To be fair Arla doesn’t exactly help itself with some of its tactics, the latest being to pay early contract termination fees. This could be a PR hand grenade waiting to blow up. Arla clearly believes that securing additional milk supplies at all costs is the goal, but doesn’t seem to recognise that the move will be unpopular with many existing AFMP members and Arla Milk Link owners. Producers have pointed out that if Arla are so desperate for new milk supplies why doesn’t it simply encourage existing members to produce more milk by way of a substantial price increase, or give a higher price incentive like Muller-Wiseman?
With First Milk’s price for cheese currently off the pace it’s clear that it is exposed more than most at the moment, and needs to ratchet-up its price quickly. It doesn’t need to be told that. If there wasn’t a gap, there wouldn’t be an issue: First Milk would be on the offensive.
The risk for both Muller-Wiseman and Arla is that they are seen as employing overly aggressive tactics that deliberately target First Milk producers only in their bid to become “the largest UK dairy company”, come what may. Both Muller and Arla have set out their objective to be the biggest and the best, and they need milk to do that. Wiseman’s 1ppl bonus for a year is a much more subtle approach than Arla’s, but has the same “poaching” effect.
Cynics view such moves as being specifically targeted to inflict permanent damage to First Milk. Let’s face it, if there was to be a significant attack on First Milk producers and a lot were to leave the co-op quickly then it will become a significant problem. Again, the co-op and its members won’t need to be told that. Incidentally Muller-Wiseman says it is not recruiting in First Milk’s South West Scotland and West Wales regions and says the number of potential members from the co-op is currently “negligible”.
And quite how retail customers of the co-op will react to any overt aggression, though, is another issue: they can be hugely aggressive in their own right, as we know, but might not look kindly on a competitor who makes life overly-tough for the co-op. It is a competitive world, though.
Arla have already attracted one or two very high profile producers to leave First Milk. Some find it incredible that in a very short space of time some producers can switch from being staunch supporters of a co-op to move to the Danish way, but the fact is money talks. The price gap between AFMP / Muller-Wiseman and First Milk, multiplied over a million litres or more, is a heck of a lot of money right now.
I am not here to pass judgment on
First Milk or to defend its corner. However, I will make one observation -
First Milk are not a Mark2 DFOB with incompetent management, don’t have a
council full of suicide bombers who are brain washed into believing everything
they are told and that all is rosy in the garden. But the onus has to be on
First Milk to close that gap. Quickly. Either that or First Milk’s producers
will have to accept there will always be a sizeable gap, and that some of the
larger producers in more competitive milk field areas
will leave (which will then hinder attempts to narrow that gap and will almost certainly widen it in fact).
Finally, I have a question to all processors who have deducted seasonality or balancing charges during the past three months: Why have you deducted money rather than adding money? Is it that this balancing seasonality money is taken from existing loyal producers to be used to fund third party spot milk purchases at prices around 38p at one point? Once again some producer representatives stand accused of failing to negotiate a market related deal on behalf of the producers they represent in allowing seasonality and balancing deductions this spring.
To comment on this article email me at email@example.com
May 2013 Dairy Farmer Article
I start by focusing on the huge monster elephant in the room - namely the threat from First Milk that unless the price it receives for its cheese increases it will be forced to cut the milk price paid to members. But that’s the dangerous position we’re in. It will have no option to do so unless it can get more money out of the market, and that will almost certainly hurt its business in the short term.
It will also have no option but to divert even more milk to other more profitable outlets - for example spot milk is currently at 40ppl - as opposed to turning it into cheese in the hope that in three months time and more retailers, discounters and food service sector buyers will all pay a fair price for it. That will do little for buyer certainty in the long term either. The phrase caught between a rock and a hard place springs to mind.
It’s easy to blame Irish imports as the sole reason for the problem. This time, though, there’s more to it. Buyer intransigence is the main reason. Both South Caernarfon Creameries and Parkham Farms (Peter Willes) have both partnered up with Adams Foods who now pack and market their cheese. Neither of these companies are idiots, nor are their milk prices at the bottom of the league table either, so Adams doesn’t seem to be selling their cheese on the cheap. South Caernarfon’s February price was 3ppl more than the First Milk cheese price in fact. Irish farmers are also getting a higher price.
With explosive world commodity prices providing more profitable market outlets for milk, and Irish cheddar imports down 16.5% (and production down 12%) in the first three months of 2013, the time has come for cheese customers to realize the price they pay for the cheese is secondary to ensuring continuity of supply for the rest of 2013 and beyond. But will they?
Hopefully by the time this article is published the crisis will have been averted, and First Milk will not be dropping its price but increasing it like Arla Milk Link and Dairy Crest (with others set to follow, inevitably).
The recent and second North of England UK Dairy Expo was staged at Borderway Market, Carlisle in March, and was well supported with over 300 dairy cattle on show.
It is important that the industry has successful events like this to showcase the best of the best animals in the industry, and for a morale booster. Let’s hope the Livestock Event in July (formerly the Dairy Event) is a similarly successful show, and gets a good turnout of farmers. The offer of free buses should help, although some are viewing that provision as either a shrewd insurance policy to ensure high numbers or an early sign of panic.
Regrettably, though, the Dairy Expo triggered multiple rumours of cattle which had been “fixed”. This is where practices like sealing teats and balancing each quarter of the udder takes place. After the event the rumours gathered pace, and, without going into detail, I was concerned to receive several calls from people who attended the event (including conversations with representatives/prominent members of two breed societies) and who said that some animals had been “fixed”.
I tried to make contact with the judges, who declined to comment, as well as chasing one of the show’s organisers – twice. This set me wondering why everyone had seemingly gone to ground. Then one exhibitor evidently started to trumpet that he had “got away with it”, while another has stated he will not show his animals in GB if he can’t adjust and fix them, and will show in mainland Europe instead. That’s his call. I just hope he’s not on a retailer-aligned contract, because he won’t be soon if that’s his policy!
The gossip may be after the event this time, but what is important is that show organisers, irrespective of size, realize that farmers and rule-abiding exhibitors are the eyes and ears of the industry and it’s their duty to police not only any show rules but the integrity of the show itself and the industry. The talk of fixing will have taken a degree of shine off the Expo event, and, as far a the whole industry is concerned, all it takes is one anti with a camera and an agenda to portray the industry as cruel and the whole industry gets tainted.
I now return to the raw milk selling case, where the Food Standards Agency (I am abbreviating them to FSA1, for reasons that will become clear later) is prosecuting the 70-cow family farming operation Hook & Son for selling unpasteurized milk.
Following that article the conspiracy theorists sprung into action and several readers were quick to alert me to the fact that Tim Smith, the former CEO of the FSA, and more importantly Arla, could have a conflict if Hooks successfully defend their case, and unpasteurized milk sales were to take off. One or two even suggested some of his former colleagues from Dairy UK might even have had a role in the aggressive stance against Hooks!
Jim Begg of Dairy UK has certainly commented in regard to proposed legislation on a saturated fat tax that it was not the answer and that consumers should be allowed to decide “as long as the risks are highlighted on the packaging.” (As it is with unpasteurized milk). However, Dairy UK does not seem to follow the same logic on Hooks and unpasteurized milk. It’s a curious ambiguity.
So why do I abbreviate the Food Standards Agency to FSA1? Cue a few comments now on FSA2 - the Financial Services Authority. They have the same initials and, it seems, the same appetite to persecute the little man – in this case it has attempted to close down Burnley businessman Dave Fishwick and his “Bank of Dave” business (http://www.burnleysavingsandloans.co.uk/). Mr Fishwick has set-up his own bank and FSA2 has effectively stopped his bank taking in deposits from locals on the grounds he was operating an unregulated, collective investment scheme. However Dave is not only taking them on he has captured the attention of Channel 4, which is filming his progress.
On the face of it, it appears FSA2 are sat back watching fat cat bankers (yes, spelt with a B) who have raped this country and crippled our economy get away with robbery, yet they take the easy option to close down a community bank, the brainwave of an enterprising northerner. It’s the same with FSA1 who, in the case of the horsemeat scandal have chosen not to dig deep and hit the real culprits (Big Business!), but who have chosen to pick on the easy prey who are the likes of Hooks.
These are both real David and Goliath battles, and I wish them success and hope the FSA’s bullies will stop harassing and picking on the small guys.
In the case of Hooks I am pleased to hear the NFU legal team are supporting the Hooks QC and legal team. They believe the case will proceed to trial so we will see what happens. Meanwhile, The Mooman Film, which films a year on The Hook’s farm, has been premiered at the O2 Arena. Sorry, DairyCo, but this film does more for the image of real dairy farming than your recent YouTube and website films. But I guess you can’t promote Mooman given the fact your chairman is also the vice chairman of the FSA1, and thus taking Hooks to task!
The film will be available on DVD and in local cinemas from next month. Watch my weekly bulletin for further details.
To comment on this article email me at firstname.lastname@example.org
April 2013 Dairy Farmer Article
Tesco have, as we go to print, announced that their cost of production (COP) formula will see a 1.19ppl increase for the six months commencing 1st April, which will result in a TSDG contracted producer who submits costings to Promar receiving a standard litre price of 32.77ppl. That’s the good news. Now for the bad (as I see it): this is highly likely to be the last 2013 COP increase, due to two factors:
Firstly if milk production volumes increase by 5% nationally (as per Dairy Co.’s forecast) the production costs will be spread across more litres. In other words the 2012/13 drop in production concentrated the costs across fewer litres, hence the average COP rose. Secondly is the fact that forward feed prices are currently significantly less than the ones paid last winter, partly due to record crop forecasts in some of the world’s major grain areas. So it is a near certainty, in my opinion, that under COP models it will be cheaper to produce next winter’s milk, and while I am not a costings guru I have checked out the relationship between a 5% increase in volume and its effect on the COP, and it’s certainly worth c. 1ppl or more, and thus is very significant.
There could be another big test for COP models coming if global markets continue to strengthen as they are doing, and that’s if farmgate commodity milk prices and liquid processor milk prices leap-frog retailer COP models. If that happens COP models might have a fairly short life expectancy. Having said that, markets are very unpredictable and are likely to go full circle as volumes increase, or if milk buyers back-away from their current insatiable appetite for increased volumes of milk.
Farmers for Action are pushing for clearer front of pack labeling on cheese to CLEARLY state the origin of the milk it was made from. However, as one of my roving correspondents was quick to point out: “this should be extended to butter”. She was right and Arla should be encouraged to clearly show that Anchor butter – now produced at Westbury - comes entirely from the milk of British cows. The same person recalled comments made in 2007 by the milk purchaser for retailers Booths. The buyer stated that retailers preferred own label to that of branded as they were not in favour of provenance labeling because it gave them “greater freedom to source from further afield”. I guess that’s what the beef mince people did - and look where it got them with the horse meat scandal!
It’s a fact that the absence of country of origin labeling can be used effectively as a big beating stick to drive down cheese prices. Retailers, the Food Service/catering sectors, as well as all Government procurement departments, should embrace clearer labeling as a way of informing customers of the source of the milk in their dairy products and as a way to encourage them to support British dairy farmers.
Large retailers were, not unsurprisingly, the first obvious targets of the push on clearer cheese labeling campaign. I did a bit of fact-finding and learned that none of them are squeaky clean, but some quickly could be with a bit of a push. Sainsbury’s are partnered with Arla-Milk Link for their own-label cheese, and ASDA are partnered to First Milk. That leaves Morrison’s and Tesco out of the Premier league - both of whom do trade the market for cheddar and then have it contract packed. Tesco are the biggest and, on cheese, are partnered to Adams Foods/ The Irish Dairy Board (IDB) and their Leek packing plant.
Adams is also tied-up with South Caernarfon Creameries and Parkham Farms, which helps Tesco in its claim that 100% of its branded cheddar, as well as all of its Territorial cheeses, are packed by Adams/IDB but are all produced from British milk.
To be fair Tesco’s CEO Philip Clark and the Tesco dairy team are changing the way they work and, from May, Irish Cheese will be packaged stating “Produced in Ireland using milk from Ireland. Packed in the UK.” It’s a step in the right direction and is certainly the sort of clear transparent labeling that FFA are calling for. Others should take note - especially the so-called “second division” retailers, the discounters and catering people.
Perhaps the next step is to ensure those involved in the market improve their front of pack labeling and advertising (which is equally important). It has also been suggested that we should have a publically accessible website which states the good provenance labeling companies, and flashes-up the less transparent, ethics-bending companies for FFA’s “special attention”. It’s an idea with great potential.
My biggest concern with our cheese market relates to margins, however. I am worried that what happened to our liquid market in 2012 is now happening to our cheese market with margins cut wafer thin, or in some cases being non-existent, as cheese processors chase volume.
Our domestic cheese processors are trying hard to maintain milk volume, while their producers watch the gap between milk for cheese prices and liquid prices widen unhealthily. Consequently producers are looking at tempting offers from a myriad of liquid milk processors all eager to sign them in 12 months or less. While this courtship continues the cheese processors are operating in a fiercely competitive market where they have to compete against the competitive advantage of the Irish, and their cheaper ‘milk from grass’ Spring prices.
All we can hope is that the Irish get their Chinese visitor visas quickly approved and start to produce and sell WMP to China, as opposed to selling cheese to us. When UK milk production increased in 2011 it came at the same time as the world’s dairy markets were on fire and our friends from Ireland left us alone in the pursuit of more favourable markets elsewhere. This allowed our cheddar market to grow. Demand from China is extremely strong at the moment and the drought in New Zealand’s North Island has decimated its milk output, with farmers moving to once a day milking, early drying off as well as breaking into winter feed stocks alarmingly early. It looks grim for them… but it looks as if their loss could be our gain.
I wish I could envisage a situation where by one or more of our cheese processors would pull some cheese out of a supermarket contract, without breaching the terms of that contract, and put the milk through Westbury, which is doing a bit of milk but not a fat lot and is grossly under-utilised. As one industry wise owl commented “we only have one serious drying plant in the UK, but I can’t imagine a processor diverting milk through it to produce WMP for export”.
Finally, thank you for all the email comments in response to last month’s article and the FSA’s prosecution of Hook Farms for selling raw milk. Several readers subscribed to the conspiracy theory that the then Chief Executive of the FSA and former Arla CEO Tim Smith could have had other reasons for wanting to ensure the selling of raw milk is nipped in the bud. Another believed Dairy UK was very inconsistent in its approach to dairy industry issues. He pointed out that Dairy UK, at one time, was concerned over a possible UK saturated fat tax and stated that legislation was not the answer and that the public should simply be warned of the risks on the packaging. Surely Dairy UK should take a similar position with regards to the sale of raw milk, he said.
Finally, finally I have to thank one learned reader for pointing me in the direction as to why calving’s in Southern Ireland – currently 20% up on last year - may not be as it first appears. The increase is partly as a result of BVD tagging changes imposed on farmers which means they have to tag their calves earlier. The situation is perhaps not as bad as we first thought, but it’s still one to watch.
To comment email me at email@example.com
March 2013 Dairy Farmer Article
Amid the horsemeat scandal comes a dairy David V Goliath Case
Now I don’t claim to be an aficionado, but those who drink milk straight from the bulk tank reckon it tastes much better than normal homogenised, pasteurised milk.
The customers of Philip and Steven Hook certainly do. The Hooks farm 180 acres and 70 organic dairy cows and, and in April 2007 Phil Hook mentioned he had started retailing their own unpasteurised milk at 75p per pint.
Today, the Hooks still milk 70 cows, but their raw milk business has about 3000 customers, both local and via online sales. All are given a health warning that it is unpasteurised milk, but some buy Hook’s milk under doctors’ orders. One 82-year old customer says he has 16 pints of raw milk every week following removal of part of his colon. Others claim it clears up eczema, while others are lactose intolerant but can drink it.
Then the Hooks had the opportunity to rent a small space in the prestigious Selfridges store in Oxford Street, London. In 2011 they installed a self-service unpasteurised milk vending machine.
Westminster City Council’s Environmental Health sanctioned the Selfridges machine and an identical machine had been approved and installed in Canterbury only three years earlier.
It has been an exciting time for this small family farm, who were the centre piece of a 90-minute feature film called “The Moo Man”, which looked at a year on the family’s farm and was selected as a film in the USA’s Sundance Film Festival - see www.the-mooman.co.uk.
But step forward the muscle-men at the Food Standards Agency (FSA). First it tried to stop the family selling their unpasteurised milk online, but failed. Undaunted, though, the FSA has recently sent both Selfridges and the Hooks a summons banning further sales. The FSA states that Hooks have “breached food hygiene regulations”.
This opens up a whole heap of questions. Is the FSA prosecuting a small family farm and Selfridges for publicity, and because they are easy targets? Would they have been so keen to prosecute if the vending machine had been located in a Tesco store? And where does the FSA’s Vice Chairman, Tim Bennett, sit in all of this when the prosecution is discussed at FSA board meetings?
Now, not only is Tim Bennett vice-chairman of that organization, he is Chairman of DairyCo, and thus represents dairy farmers. The Hooks pay levy to DairyCo so, in effect, he is authorising the FSA to prosecute one of his levy paying members. Was he involved in the decision to prosecute, for example? Answers please.
And while this issue affects just one dairy farmer, where would Mr Bennett sit if, say, 10, 20, 100 or 1000 farmers were involved in something the FSA didn’t like, or (heaven forbid) a food scare or scandal like the horsemeat one were to hit the dairy industry? He’d have a couple of pretty uncomfortable feet in each camp I would imagine.
The proverbial fans at the FSA now need a decade of servicing to recover from the volume of excrement that has hit them from the horse meat scandal. And yet, incredibly, one of its priorities appears to be prosecuting one small dairy farmer.
The reason I bring this up is the parallel between this and the Gangmasters Licensing Authority’s court case against “prominent” dairy farmers (its word not mine). Here a six-figure sum was spent on attempting to prosecute a handful of dairy farmers in a three-year battle, before the Judge gave the farmers an absolute discharge last week. The NFU’s headline was that the GLA were “heavy-handed” and I think the FSA could well see history repeat itself with the Hook case. Fingers crossed that a bit of common sense prevails.
Last month, I was invited to chair the question time at the dairy breakout session at the AHDB’s Annual Outlook Conference in Westminster.
Independent international dairy consultant Mark Voorbergen was bullish for global dairy demand during the next decade, which will outpace production. That’s with the exception of the EU. In the two years post 2014 and the ending of milk quotas he believed we may, for that short period, have too much milk on our hands.
He posed the question as to why would UK farmers invest in growth if their milk is sold into a crowded domestic market with limited growth opportunities? This was pointing to the fact we are obsessed with our fresh liquid domestic market and have very limited opportunities to access this exciting global market. He then stated that “being late is never a reason to do nothing” – in reference to the UK getting in on the export act.
The DairyCo Milkbench results for the year ended 31st March 2012 were launched at that same meeting. The report itself, I am afraid, is extremely complex and probably only of best value to the 315 farmers who contributed, and thus who understand Milkbench.
The average costs of production at 28.8ppl at March 2012 excludes any cost for a farmer’s management time and hence its value is questionable. Farmer wages are a sensitive topic, with a West Midlands farmer costed in at only £8.90/hour, or less than £18,000 a year. This is for his manual work only with nothing for management, which comes “out of the profit”.
A week later I sat with a Welsh CARA dairy bench consultant who presented his annual costings. He said his best farmers could command a salary (including management time) of £62,500 a year. And he stated that his costs were actual, while some of DairyCo’s are imputed costs and contain assumptions.
For example, he claimed one of his top 25% performing farmers also participated in Milkbench and the results were “poles apart” and he believed Milkbench had too many “lets pretend” figures included.
The question then is are the results useable and is the data accurate? More questions for DairyCo, I’m afraid. But hey, you pay them to be accountable!
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February 2013 Dairy Farmer Article
This month’s article concentrates on what I gleaned from this year’s excellent Semex Conference.
The opening tag team of NFU President Peter Kendall, and Ronald Kers, the boss of Muller-Wiseman, will certainly be a hard act to follow next year. Both speakers spoke with passion, enthusiasm and with a determination to make a difference.
Kendall’s presentation title was “A future of our dairy industry and future leadership”. Ironically, his organisation has only a year to consider its future leadership, as Peter’s eight-year reign will come to an end. That’s unless there is a need for him to serve a fifth term, of course.
There can be no arguing that during 2012 Peter Kendall was the heartbeat, oxygen and blood supply at the centre of all key dairy matters involving the NFU. Cometh the hour, cometh the man - he took charge. While dairy farming is vitally important other membership areas will require Kendall’s attention in 2013 - not least of which will be CAP reform.
Kendall trumpeted the leadership shown by former Minister Jim Paice in getting the Voluntary Code of Practice (VCOP) signed off. He stated that the VCOP does not exclude co-ops. That’s a point up for discussion, however: what is clearly frustrating Kendall is the fact that AFMP members negotiated an exemption from the Code on the basis they were a business “in transition” to becoming a co-op. Five months later AFMP have failed to produce a road map or timetable. They are clearly directs, and Kendall wants its members to bang the drum to demand their organisation(s) sign up to the Code.
In my opinion the uptake of the Code has, to date, been painfully slow. I reckon that if Jim Paice were still around he would be kicking some backsides very hard now that five months have elapsed since it was signed-off. From my research around 1773 British dairy farmers are able to change milk buyer within three months notice, and they supply Dairy Crest, Muller-Wiseman Dairies or Lactalis. Note an additional 843 producers supplying Dairy Crest and Muller-Wiseman on aligned retailer formula prices are excluded because they have signed-up to an independently verified formula.
Paice’s successor, David Heath, will be judged according to how successful the Code will be, but as I write only these three processors have implemented or will implement the Code’s three month’s notice.
Kendall was all guns blazing at Semex, declaring that the coalition will push Government to regulate if the Code is “not adopted and functioning as designed”. If processors and co-ops delay they “will face the consequences.” There is little doubt that from April the 80 approved purchasers who do not adopt the Code will be publically named and shamed.
So what do I think of it? Well I would argue that a milk supply team dealing with ex-farm gate milk price changes has a dramatically different attitude when it knows it could lose producers within three months, as opposed to a team who bathes in the comfort of a 12-24 month notice period, and who believe that if they get it wrong affected farmers will forget about and that the dissent can be smoothed over during that oh-so long notice period. At least one co-op effectively operates a once a year exit point, which means the notice period varies from one year, to one year and 364 days. Are milk purchasers with long notice periods missing a trick? There is surely hardly a better way to convince their customers that unless they pay a competitive market price for their products the milk supply will be down markedly in as little as three months!
But, in contrast, I can also understand why a company that has invested £250m or so in UK dairying, hasn’t had a culture of three months notice periods, is still grappling with a merger, two supply groups, etc etc isn’t going to gleefully shout “How high?” as soon as the NFU (which hasn’t invested a penny, remember) says “jump”. I can also understand why a buyer at or near the bottom of the milk price league table might be nervous too.
The Code has the potential to add power and value, and needs courageous producers and processors who want to make it work. The success will be dependant on dairy farmers, so, if you want the Code applied to you it’s down to you and your representatives to make sure your milk buyer – no matter how large or small - adopts it and makes it work. Two purchasers have rather smugly suggested to me that they will not adopt it either because, as a co-op they are exempt, or simply because it states it is “voluntary”. I detect some naïve protectionism creeping in, but in my opinion such a policy will work in the short term, but not in the long term. It is perhaps no surprise that the bulk of the producers who have been in contact with me, claiming they want to leave their current milk buyer, do not supply either Muller, Dairy Crest or Lactalis.
Ronald Kers was bullish and positive as he took to the podium at a national UK industry conference for the first time since the takeover last year. Theo Muller wants the most successful, competitive and biggest dairy company in the UK. He outlined the devastating numbers behind the 2012 collapse in cream values - with 450,000 tonnes of UK cream valued at £710 million in 2011, and one year later its value was £520 million - representing a loss to the industry of £190 million. (And the processors knocked it off the farm gate milk price, remember – the last domino in the pack rule again!)
Muller intends to take charge of its own destiny to be in a better position if cream prices collapse again, hence the building of the UK’s largest butter plant at Market Drayton costing £17 million. This will have the capacity to process all Muller Wiseman’s bulk cream (90,000 tonnes) into 45,000 tonnes of butter, and puts the company in a much stronger position. Kers pointed out that the UK imports £2.245 billion of dairy product and exports only £1.11 billion leaving a net trade deficit of a staggering £1 billion.
He also asked a similar question to that which I have previously asked in this column: “What is the strategy to capitalise on the opportunities these figures present?” In reality with quotas ending in two years do we have a plan to restore the UK dairy trade balance?
On recruitment, it is set to be the Battle of the Giants with Arla recruiting to fill its new plant at Aylesbury and Muller keen to have a larger percentage of their milk coming from direct suppliers. I wonder how this will play out for First Milk, who currently broker close to 60% of their milk.
Finally, I will comment on the Irish Farmers Association’s plan for the ending of quotas in 2015, as presented at the conference by Catherine Lascurettes. Its 18,000 farmers currently produce 5.2 billion litres of milk, of which 85% is exported with a staggering peak to trough production ratio of 1 to 7.
Their target is to increase production by 50% to 7.8 billion litres and to export 7 billion litres (90%) of their production to an expanding global market selling Irish butter, cheese and powders – particularly in Brazil, Russia, India, China and Asia to which “Irish dairy farmers want a slice of”. It appears Irish dairy farmers have the enthusiasm, technical expertise and potential to aim so high, and the figures confirm they are world competitive when it comes to Cost of Production. Ms Lascurettes confirmed rapidly rising heifer numbers of all ages are now on the ground in preparation for expansion, with numbers expected to be 50% up by 2016 compared to those in 2010. The only question is whether Ireland will be able to find circa £2.0 billion to achieve its ambitions.
So, can GB compete with the Irish? If not, why are they more efficient and cost competitive than we are? Is it a mind-set, or are some of our leaders lacking the ambition and vision shown by the Irish, possibly because they are comfortable and ready to collect their winter fuel allowance and bus passes?
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January 2013 Dairy Farmer Article
Last year was certainly an eventful one, wasn't it! One of the key moves involved industry consolidation, with Muller and Arla commencing the battle for GB dominance.
It will also be remembered for the awful weather, catastrophic price drops, huge farmer protests, which generated incredible media coverage and the support of top TV chefs and the wider public, and the lowest milk supply in history. Finally Jim Paice succeeded in banging heads together and announcing an agreed Voluntary Code of Practice, having threatened to legislate only hours before he was axed.
On legislation, I really struggle to understand how the Government could possibly legislate over the relationship between farmer, processor and retailer so as to guard against inequalities in the supply chain. However, the threat did play a part. The Voluntary Code is primarily about processors behaving more responsibly than some did earlier in 2012 - for example Dairy Crest when they gave producers only four days notice of a brutal 2ppl price cut in May.
It now needs breathing space to bed-in, and hopefully it will lead to greater transparency in milk pricing. It will be up to the NFU’s, FFA and others in the coalition to police it and persuade all milk purchasers to adopt it. It’s unique and I can’t think of another industry which has anything similar. So let’s all hope something positive emerged from all the protests and farmer frustration. Only time will tell whether both sides have the commitment and determination to face the challenges of 2013 and beyond together.
It is a fact that “No one is going to help us but ourselves.” The adoption of the Code is a major test for all. If it is abused, or not used, processors should not expect farmers to sit back and be demoralized by a dysfunctional and de-stabilised industry. Dairy farmers know they have influence and power and understand that if they are used wisely they can be effective.
As we enter 2013 it will be a challenge to significantly increase ex-farm gate liquid milk prices until the gap between them and the milk for cheese price closes. Having said that, there is clear evidence that significant quantities of milk for cheese are now going to the liquid market which will hopefully tighten-up the availability of cheese. But remember, cheese can be imported from anywhere in the world to plug any shortfall. There is evidence cheese processors are trying to get more money out of the market place but it’s far from easy. My concern is that the merry-go-round of liquid processors dropping their trousers and offering customers milk at totally unsustainable prices may well migrate to cheese processors. We shall see!
I am aware of cheese processors who have either defended their existing contracts by taking a price cut, or have lost business to very aggressive competitors who have under-cut them in pursuit of volume. All of these moves simply take value out of the industry, and once margin is surrendered it’s very difficult to recoup it as liquid processors will testify to.
The problem is that cheese is a globally traded commodity and you would be hard pushed to believe there is significant head room to push prices up too much. That's especially the case if we get out of line with our European neighbours, who will quickly seize the opportunity to send more product through our front door. It used to be the weather that was the one factor a farmer had no control over which influenced a farm's profitability, but now its world wide dairy product competition, which I think has leap frogged the weather.
Whilst average UK milk prices were in many cases below the cost of production during 2012, they moved from near the bottom of the European 27 member states milk price league table to almost the top.
Against that is the catastrophic drop in milk production which, if it were to continue in 2013, will result in factories closing and imports increasing.
Recently I was invited to visit the UK’s largest cheese packing site at Adams of Leek, owned by the Irish Dairy Board, where I met two of its directors and its Chief Executive. There they pack at least a third of all the hard cheese sold in UK and half of all private label cheese, Which has a total value of £220m. The business has a £315 million annual turnover.
The No. 2 UK cheese brand Pilgrim’s Choice (the No. 1 is Dairy Crest’s Cathedral City) is owned by the IDB. It is sourced from the IDB predominantly from five Southern Irish Creameries. However it was formerly a West Country Farmhouse brand, which the IDB now pump millions of pounds of promotion money into it.
I challenged the Organisation's bosses over the fact the packaging for Pilgrim’s states that it is "Packed in Britain". They were adamant that the own label cheddar-buying public have provenance as a low priority, and they are probably right - Cathedral City is not promoted by Dairy Crest on provenance, and that's a brand. First Milk's Lake District, is, however.
“The public are patriotic on cheese until it costs them money”, they said. Note, all exported Pilgrim’s Choice cheese does come from GB cow’s milk, and Adams did confirm that they will be changing their Pilgrim’s Choice mature and extra mature packaging in the New Year, highlighting the cheese is made from Irish milk as opposed to sourced from around the world.
The IDB have recently won a contract which starts in early 2013 for somewhere in the region of 8,000 to 9,000 tonnes to supply Iceland stores, with Arla/Milk Link having lost out. When I heard the news I thought that’s a blow to GB cheese production, but on further investigation it came to light that Arla Milk Link have, for a long time, used Irish cheese which they pack at Oswestry and put into Iceland stores. In fact, it is conceivable, even if it’s bizarre, that Iceland’s move to source its cheese from IDB could see more British milk go into Iceland’s cheese.
When questioned over the effect on Irish cheese production post March 2015, when milk quotas end they/IDB research suggests most of the extra milk will go into butter/powder for global markets.
The factory was very impressive and extremely efficient and well invested, with 24 lines running. Adams don’t make any cheese they just cut it, grate it, pack it and sell it. They don’t get hung up about Red Tractor. Logos or Farm Assurance and that’s the way one or two appear to be heading. Are these dairy businesses, which are turning their back on Red Tractor Farm Assurance, becoming the Ryanair of the dairy world: "We will deliver you competitive quality cheese, no frills, no red tape, no Farm Assurance, if you want any of those extra bells and whistles you pay. If you don’t then that’s fine”
I questioned their view on cheese investment in the UK versus the huge investment seen and still ongoing by our liquid processors. They agreed it’s almost non-existent, and one day someone will have to bite the bullet and build a state of the art cheese plant aka Ronald Akkerman's vision.
The Adams are and will continue to be Britain’s biggest buyer of hard cheese and from what I saw they are certainly in Britain for the long haul. The latest trade figures to September 2012 confirm that Irish cheddar imports are up 11% on the previous year to 58,616 tonnes.
The very sudden and sad departure of the Vice Chairman of FFA, Andrew Hemming, has left a huge void in the organisation, which will need to be filled quickly.
There are a number of potential candidates who aspire to become General David Handley’s lieutenant. For my mind, for the organisation to retain its credibility the Vice Chairman must be a professional, active grass-roots dairy farmer who’s sole motivation is to work with David and FFA to the benefit of all farmers. He or she must be a leader and good communicator and someone who can share the workload with David. That certainly narrows down the field and demonstrates what a good man Andrew was, and how hard his boots will be to fill.
Finally, discounters like Poundland and others have decided they can no longer do 4 pints for £1 (2.272 litres). The word on the street is that at least one of our big three liquid processors is close to down sizing their standard 4 pint container to enable discounters to continue to offer £1 cartons of milk. Thank goodness for that - we need some New Year cheer, and that will do for starters!
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December 2012 Dairy Farmer Article
Recently I succeeded in taking-up a long-standing invitation from Dairy Crest to visit its HQ and have a go at its Competition Law compliance programme, and exam. It’s an area the company takes extremely seriously, following its £9.4 million fine for allegedly colluding with retailers and other companies in the Retail Price Initiative a few years ago. Penalties totalling £120 million were paid by a number of supermarkets and dairy processors after the OFT’s investigation. These fines hurt and all involved are more cautious and careful, as the legacy remains to this day. If they get it wrong the penalties are high.
Today all of DC’s customer-facing employees have to achieve at least 80% in the exam as a condition of employment. DC’s CEO Mark Allen describes it as “acting responsibly with a passion to do the right thing”.
In the UK the OFT are policeman, prosecutor, judge, jury and executioner, and if anyone falls foul of the rules the fine can be up to 10% of a company’s worldwide turnover. Individuals can also receive a maximum five-year prison sentence and unlimited fines. And it won’t get easier with suggestions that the fines could increase to 30% of turnover! It’s all about consumers enjoying cheaper products.
So there I was sat alone in a room having completed the online tutorial followed by the test involving negotiations with two leading hybrid retailers – inexplicably called Testburys and Masda stores, and up comes my score: 100%! Full marks! What a star! And was it easy? No. But did it make me think? Yes! Will I be applying for a position at the company? No, but if I did one statement would stick in my mind in relation to Competition law, and it would be this: “asking a question will not get you in trouble: breaking the law will!”
Prices are increasing slowly and steadily, but there still needs to be more to come. Cheese prices have still not moved up, but so far there hasn’t been a major driver in the market on which the processors can push. That will change next year, I feel, because the low milk volumes and high spot prices MUST mean that the amount of cheese made is much lower in the second half of the year compared to the first, and stocks must be being whittled down. That said, there are rumours of forward deals having been done at prices that won’t deliver the sort of returns farmers need, but I have seen no evidence of that.
Irish imports have been as much as £400/tonne lower than GB prices this year, but that was when milk volumes were high. As volumes fall the price differential between Irish and GB closes, which is what has happened recently. Nevertheless the Irish Dairy Board are winning cheese business from our processors and are successfully migrating the Pilgrims Choice brand from a British farmhouse cheese to a 100% Southern Irish Cheddar without consumers noticing. (And not without a bit of naughty marketing too. See http://pilgrimschoiceusa.com for an example – Pilgrims Choice cheese [origin, Ireland] in packs with huge Union Jacks [origin, er, not Ireland] slapped all over them.)
Some of the imports are cheap, inconsistent quality cheese, but some is undoubtedly good stuff too, and winning business with retailers. If our processors push too hard for price increases and the Irish don’t then it’s obvious what will happen. At present I am attempting to find out who is importing cheese and some pricing information but it’s proving a challenge to establish who is telling the truth. It is a fact that the farmers’ much loved retailer Iceland is only interested in the cheapest cheese, and provenance is irrelevant. Iceland are not particularly interested in Red Tractor or Farm Assured cheese or carbon footprint: they just want it cheap. I am due to go and see the Irish Dairy Board soon, so I will report back next month on Irish, and imports.
Sainsbury’s move to take the Red Tractor mark off its produce sticks two fingers up to the Farm Assurance brand and its red tape. In terms of Sainsburys own label cheese it tells me they can now source cheese from anywhere in the world, and when you sell around 10,000 tonnes a year of cheddar that’s a powerful negotiating position. It’s equivalent to almost 100 million litres of domestic milk production.
On the liquid front prices are moving-up as the liquid premium re-establishes itself at the top of the league. Escalating costs of production, particularly feed costs, along with a below cost of production milk price, make for a long hard Winter of discontent.
My question is whether liquid milk prices will be allowed to leap frog the Sainsburys and/or Tesco cost of production price. To my mind there should be no lid on farm gate milk prices, but I suspect behind the scenes there is, and non-aligned liquid suppliers will never receive a higher price than Sainsburys or Tesco dedicated producers. Undoubtedly 2013 will be a batten down the hatches time for a lot of farmers. The SFP money will start in December but for many it will already be spoken for and that includes the taxman at the end of January. Buckle up everyone, you are in for a storm!
The New Year will herald the start of the conference season and I will be attending the annual Glasgow Semex Conference, so I look forward to a natter with regulars and newcomers there. Come on, and bend my ear!
I will not be at the Oxford Farming Conference (OFC) in January, however, although it will be interesting to see the RSPCA’s Freedom Foods sponsored "rolling logo" there. Perhaps it will follow similar RSPCA rhetoric: "You're soaked in badger blood, you bastards" or, alternatively, “We will expose all those who participate in a badger cull. Watch your backs!” I wonder whether the OFC has thought their “partners” through carefully?
So here’s wishing you and your families a great festive season and a prosperous and weather-friendly New Year and 2013. In case you get bored (and randy over Christmas) here are a few facts I brought back from a recent trip to Norway, which I will write about later, that I thought you may like to ponder:
1) A pig’s orgasm lasts 30 minutes (apparently). 2) Some lions mate over 50 times a day. (Mmm… I wonder if there is anything in the theory of coming back after death as another life form, after all) And 3) Starfish have no brains. (Mmm… clearly it’s not a theory it’s a fact! Some of them work in the dairy industry!)
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IP NOVEMBER 2012
Now that Milk Link is part of a larger European co-op I have heard numerous comments suggesting GB milk processing is predominantly owned by successful foreign businesses. But is that a problem? I don’t think so. Let’s face it, our foreign colleagues are investing in the GB dairy industry, and we need that investment.
I also attended First Milk’s positive AGM/conference in South Wales recently, where CEO Kate Allum stated: “If we all pull in the same direction we will become unstoppable.” She was referring to the co-op’s 2,000 farmers and 750 employees.
However, like all others involved in GB cheese processing they face challenges – not least cheese imports at prices considerably below UK prices at times. Will GB retailers pay significantly more for home produced Farm Assured cheese than imports? Or will those cheaper cheese imports win the day?
Or perhaps the third alternative will come to the fore. Some cheese producers such as Lactalis have cut cheese production and are diverting supplier’s milk into the booming liquid market and are utilising existing cheese stocks to meet demand. To me this shorts the market, and has the potential to deliver a better ex-farm gate milk price to a cheese processor’s struggling farmers. Is this an example of pulling in the same direction?
There were numerous excellent comments and questions about the future raised at a 500 strong FFA/NFU farmer meeting I attended at Market Drayton livestock market in early October.
FFA have a target for an average January 1 GB milk price of at least 30ppl (ie excluding Arla-Milk Link members, who’s milk price is based on what happens in Europe and not here).
The meeting agreed we have now moved into phase two, where a few week’s breathing space is needed to allow processors, their commercial teams, the NFUs and FFA to negotiate. If that fails, then by early December those who do not play their part will be exposed and held to account - mainly by FFA and its army of protesting farmers. The name of one Midlands middle ground supplier and three food service suppliers were singled out as already being on FFA’s and the NFU’s radar - Johal Dairies, Brakes, 3663 and Compass.
Although milk supplies in the UK, EU and the US are crashing, dairy commodity prices have levelled, with butter prices having peaked, so it won’t be easy pushing up the price. However, most retailers and processors recognise ex-farm gate milk prices have to increase to even cover cost of production, but the reality is processors will not be able to go back for more money from those retailers who have paid before December, for January 1. And some price rises paid by some processors have still yet to be fully recovered from their customers – so there’s a lot of work still to do.
Southern Ireland has clear post-quota expansion plans under its Harvest 2020 project where the influential Irish Farmers Association (IFA) has targets for the processing industry to invest £400 million in capital projects which would require an additional £500m of annual working capital. On top of this it predicts farmers will need to invest £1.5 billion in their own farms. In an attempt to make this happen soon the IFA has devised a tax efficient loan scheme which is attractive to farmers and non-farmer investors – now that’s what I call pulling in the same direction!
The funds and investments will see dairy production in Southern Ireland increase by an estimated 50%, creating almost 10,000 additional jobs. In its own words the IFA stated “we believe this is a very good deal for the Irish economy.”
Some European countries clearly see a green light to turn the taps on full bore after 2015 when quotas disappear – that is less than 30 months away, and it’s time British dairy farmers had a clear picture of how they fit into the equation. Are there any export opportunities we can bag, or should we brace ourselves for even more raids on our industry from Johnny Foreigner. DairyCo are planning to do some research in this area and the results cannot come too soon for me.
I am worried about the outcome, and even more worried we don’t appear to have a plan of action. If we don’t look out we will continue to be fixated on our liquid market obsession while others work on maximising any potential which will arise from the removal of milk quotas - including some of our non-liquid markets.
Over in mainland Europe, the European Milk Board is organising a huge farmer demonstration in Brussels in mid-November ahead of the European Parliament’s vote on agricultural markets.
Poland, Portugal and Spain are calling for continued regulation in milk and given the current European milk price, large demonstrations by farmers calling for milk quotas to continue will be influential. As one industry insider recently commented to me: “British dairying has a perfect storm brewing, with quotas ending, Single Payments reducing, the need to spend more money to meet environmental targets and a general recession.”
Consequently we need a very loud call from all farmer organisations, from the dairy coalition and farmers’ representatives for clean, transparent, honest milk pricing. Today we have conditional and unconditional price increases (some dependent upon increased volumes) and I would like any of you who have milk contracts with these terms to email me.
I also call upon milkprices.com and DairyCo, as two respected independent analysts, to strip out the spin and conditional bits so league tables compare apples with apples and not apples with pears.
Call it the Potter campaign for clean milk pricing and transparency, if you like. Whatever you call it, it needs to happen, and it needs to happen now.
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IP OCTOBER 2012
The world truly is a global village and we now know what is meant by the saying “When the US sneezes we all catch a cold.” A record US drought with numerous fields of corn and soya completely written off, and others cut for silage, will cost our dairy farmers a fortune in higher feed costs. Add to this the forecast that Russia’s wheat harvest will be 31% down on 2011 and lower than its 2010 “disaster crop” and everything is set for a very bleak, expensive winter.
Global feed costs have exploded and some US dairy units who were already finding life tough have reached the tipping point. Entire herds have been culled.
Back here there is no disputing that the second brutal liquid milk price drop did long-term, irreversible damage. An alarming number of dairy farmers looked at the two drops in two months and could not see even the smallest glimmer of light at the end of the tunnel. I understand why they decided to quit and wish them well. I suspect they will miss the monthly milk payment, but in time will not miss the bills, the cows and the work.
This year’s annual Dairy UK Conference and dinner is likely to be the last now that the Dairy Event has moved its dates to July and somewhat diluted its emphasis on dairying through its controversial re-badge to Livestock.
One of the highlights of this year’s conference was the unveiling of Nicola Adams as one of three 2012 Olympic gold medalists who will front the last Make Mine Milk (MMF) promotional campaign. Nicola, the first woman boxer to win an Olympic gold medal joins double Olympic cycling gold medalist Laura Trott and Taekwondo gold medalist Jade Jones in an “m powered make mine milk” strap line. Regrettably they could be the last celebrities, as funding is running out. MMF Chairman, Müller/Wiseman’s Sandie Wilkie, said that independent research has shown the campaign had increased awareness amongst teenagers by 73%, and in mothers by 62%. An additional 110 million litres of liquid milk were also sold in 2011.
There have always been unanswered questions as to who benefits from increased sales of milk from such campaigns, and whether any of the additional income filters down to farm level. I can’t answer those, but they certainly make me proud of dairy to see Olympic stars fronting milk promotion campaigns convincingly extoling the benefits they believe they obtain from drinking milk, and how it helps them succeed in their sport. It’s a fantastic message and I do hope when the EU funding dries up at the end of this year a solution can be agreed which allows the campaign to continue.
The conference also held a lively debate involving key people from The Grocer, Farmers Guardian (FG) and Farmers Weekly (FW). On the question of recent farmer demonstrations Alistair Driver (FG) believed recent farmer blockades were justified and effective. However, to the surprise of some in the audience FW’s editor Jane King did not agree with blockades believing they disrupted other businesses and did not show dairy farming in its best light. One delegate challenged Jane to differentiate between types of direct action (blockades and protesting) and that FW had at the time championed direct action producing posters. It looked like a U-turn.
Milk Link members will (all being well) shortly receive their 57p in the £1 payment for the cancellation of their qualifying loans post the 1st October merger with Arla. All members should be immediately exploring any tax saving opportunities, with a view to reducing or in many cases eliminating any tax bill. According to advice received from HMRC by Milk Link the entire payment will be treated as a gain and will not be available for roll-over relief. The windfall payment from Milk Link is treated as a capital receipt and therefore subject to Capital Gains Tax. Essentially we are talking about crystalizing and utilizing any capital losses, therefore.
That leads me onto the option available to farmers who over the years have purchased milk quota for their business, especially now quota is only worth around £1,000 for 1 million litres. There is still an opportunity to sell your existing milk quota to create that capital loss and legitimately mitigate how much money you hand over to HMRC. In many cases the amount your business will be handing over will be a five figure sum, so it’s better retaining the money in your pocket than putting it in HMRC’s! The average Milk Link member payout will be around £17,000 and a 1 million litre member should receive around £28,500.
For several years now a large number of dairy farmers have traded their milk quota and, after a suitable waiting period, have acquired replacement. It’s really quota re-cycling and sounds simple but it’s not as straightforward as it sounds. We have already heard of Milk Link farmers who believe they can simply swap their milk quota with a friend or neighbour and create a capital loss. Such farmers will not be the first to come to us asking for help with an HMRC investigation on the grounds that the transfers were connected, or invalid or breached anti-avoidance rules. For those who have proceeded down this route it will be six years before you can sleep easy. So please take advice before taking action.
Now to some porky pies in the middle ground. Reports suggest at least one middle ground milk processor is claiming Force Majeure on his contracts with several customers. Force Majeure is defined as “a chance occurrence, unavoidable accident or Act of God” and it is claimed this is the reason why they cannot supply customers the milk they have contracted to. Me thinks God is innocent in this instance. The real culprit is the processor who sold ridiculously cheap milk in a bid to chase volume, and who surrendered both its farmers and its own margins and who agreed totally unsustainable prices. They have been caught in the sea with no trunks on, and the tide is going out fast. This processor needs to be an Olympic swimmer to avoid being exposed! With spot milk at close to 40p and short term one to three month contracts on offer to farmers at 34p to 35p these processors had better pay up or they’ll reap just rewards from their suicidal volume chasing campaigns.
The Voluntary Code of Practice has been ably covered since it was signed-off by the industry ahead of the Livestock Event and just in the nick of time before Jim Paice was hung out to dry. The only time I winced was when I heard one industry leader suggest any dairy processors who did not buy into the Code would need to be given “special attention”, implying they would be challenged. So, a word of warning: it’s a Voluntary Code, it’s not mandatory. I agree the industry needs to make it work but any suggestion that any rebellious processors who fail to adopt the Code will be dragged in kicking and screaming is likely to be met with the strong arm of snappy lawyers. At least one lawyer has looked at this and my advice is let’s not go down that route and potentially wreck the good work those involved in the Code have achieved. Keep moving forward together for the good of all.
Turning to the NEC Livestock Event I sense from the two days that attendance was well down, no doubt affected by the pressing need of many farmers to cash in on the two dry harvesting days. There was certainly lots to talk about – not least the motorised opening and closing cow legs on the JCM Shackles stand! A lot of farmer’s wives, partners, girlfriends and mistresses are clearly reading or have read Fifty Shades of Grey and view the shackles as a useful accessory! Apparently, according to Mrs P, a red room of pain is the thing to have these days! I’m not so sure… so I’ll be keeping-up my spare tins of red Massey 1250 paint for my tractor for the time being!
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IP September 2012
Demonstrations. What demonstrations! Wow. They were all a huge team effort involving farmers, their suppliers and supporters. Agricultural engineers, consultants, vets, sales people and friends completed their day’s work and joined the protests. Some brought much needed refreshments, catering and even music too. Politically, all parties and organisations worked well together under the banner of the Dairy Coalition including FFA, NFU, NFUS, NFU Cymru, RABDF, TFA & WFU. NFU chief Peter Kendall put his arm around Handley and FFA (metaphorically speaking), and worked cleverly with a good cop, bad cop routine. It was a huge test for the NFU, which Kendall took charge of. He dragged the old school NFU dinosaurs by the neck and did it his way. Credit to him it worked. Those within the NFU who argued that the NFU is big enough to negotiate this problem alone were old school, and wrong. Time to man up and remember leaders lead, they don’t sit around the table and chair committees.
For me it was great news that the dairy industry got its act together and also maintained public support and that we didn’t end-up dumping milk, disrupting supplies to the Olympics, or culling lots of cows. The coalition aimed at specific targets, fired and moved onto the next one rather than machine-gunning all and sundry who got in the line of fire.
Others behind the scenes also require some recognition. The press and media coverage was by and large first class and very supportive. DairyCo provided credible, independent, market intelligence to the media, FFA, NFU’s and commentating dairy farmers who wanted accurate facts. This information was invaluable and almost all of the farmers and representatives I heard on the TV and radio used it and portrayed a very professional on-the-ball, no nonsense commentary with snappy, punchy answers. It’s the first time I can recall when all involved knew where to go for the facts, as well as some tips and coaching for those who wanted to get involved and do interviews, but needed some guidance. Levy money well spent, DairyCo. I have, in my time, been a critic of DairyCo and have frequently questioned how it invests, spends (and sometimes, in my opinion, wastes) levy payer’s money. But there’s no doubt it should be the automatic one-stop shop for information in these situations.
If I had one slight criticism of the campaign it was of the much-publicised RABDF milk bottle showing incorrect retailer profits, which was unfortunately used. DairyCo should have a new bottle ready at a moments notice, with up to date margins and profits. I guess for the short term its back to the day job for Dairy Co of promoting of all that is good and positive about our great industry (supply chain / fair pricing aside) and raising the profile of it until the next big crisis. If DairyCo hasn’t read the tea leaves I’ll spell it out: market information and promoting milk and dairying are what the majority of farmers want their levy money spent on!
For all the effort put in by everyone we have to be realistic and recognize that the achievement to reverse the 1st August liquid price cuts is only like sticking a plaster on a bad wound. It has changed nothing, long-term. Farmers were angrier than anyone has ever seen them before, and the protests, whilst yielding short-term results, have done damage to confidence which will take time to restore. We know the same wound will open up again when someone picks at the scab unless some major surgery is carried out to rid the disease underneath. The only language the (non-aligned) market place seems to understand is “we will pay what we have to when we have to and rarely any more”. But then who can blame them, really. Processors and retailers are price driven, and the sooner they are short of that precious liquid milk they desperately need every day the better. Today’s pricing mechanism is broken, almost beyond economical repair. We need to sell milk and negotiate differently.
Many milk processors and retailers listened to the cry for help, and either recognized the pain or did what it took to get the mutinous farmers off their backs and stepped forward with increases. There is still some “tidying up” to do as I write, including tackling the harder nuts like Iceland and Farmfoods, who have not even blinked at the protests and should be pressurized or shamed to pay a price for their milk which reflects the cost of production. ASDA are still on the radar, as are Freshways for importing milk from Belgium during the protests, which is scandalous and for which there is NO excuse. Not only does Jamie Oliver buy his milk from Freshways, but Vice Chairman of FFA Andrew Hemmings sells his milk to them! This prompted a headline in The Daily Telegraph of “Oliver, the fair deal champion pays farmers less than their costs for milk.” Bally (Nijjar, Freshway’s owner) is this imported milk Farm Assured, branded as Red Tractor, or is it just cheaper at 31p than paying your existing farmers more? What’s your answer?
Finally, its fine for Jim Paice to pressurize retailers to do the right thing when purchasing liquid milk but he should first get the Government’s own house in order for dairy product procurement. The farmers supplying the House of Commons and Lords catering suppliers are also paid below COP and the various Government departments still source on price.
August will be a month to get on with farming, to give the retailers and processors more time for longer term thinking, and to reflect how negotiations on the finer details of the Voluntary Code shape up. Let’s hope European milk production also continues to drop.
By 1st October the Tesco price will, baring a miracle on falling costs, certainly increase and if Wiseman/Muller dares to implement a 1st September price cut I think I can safely predict more than a small riot on their doorstep.
Returning to my last article concerning the fact that the abolition of milk quotas in 2015 would affect us and could hit us hard, I’ll share with you now the Irish Farmers Association’s (the equivalent of our NFU’s) view.
Its plan is called “Food Harvest 2020 Dairy Expansion” and its analysis is telling dairy farmers that “National production growth of 52% by 2020 is realistic, from 390,000 more cows and better yields.” This, it claims, would result in a 54% increase in annual export earnings, creating an additional 9,400 new jobs. And - guess what? - not only does it have a plan the IFA is now working hard to persuade their Government to provide additional tax relief for farmers who invest in dairying. And that’s on top of the Dairy Equipment Grant Scheme in operation!
The IFA is travelling the country with meetings entitled “Focus on confident Growth “ asking how will the dairy expansion be funded? Where will your extra milk be sold, and into what products? Clearly the Irish are pretty confident and intent on seizing opportunities while we are in total turmoil.
Come on GB industry - do we want to continue to (for want of an expression) scratch around the yard with the hens or soar with the eagles? One reader suggested we need a Fonterra plan. I’m not sure what we need, but I can’t see anyone who is taking the threat and opportunities serious enough. We are looking through our rear view mirror, let alone looking forward.
Who is going to step forward to drive the GB dairy industry forward? Who will analyse the direction of travel, fuel, speed and engine performance? We need an experienced driver. If we haven’t we could be heading towards the brink of a disaster. The next few weeks and months will be critical, I feel.
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IP August 2012
The solidarity shown by a very, very large number of dairy farmers in July has been fantastic. Well done to all and sundry – you know who you are. I have never seen so many angry farmers all wanting to have their say - many with good ideas, some tame, some radical. The August 1st price cuts by our three big dairies were described to me as a milk tornado which quickly sucked-in every liquid milk purchaser/processor which got in its way. Hence the reason why most believe if we can sort out the big three, and their big liquid customers, the rest will automatically fall into line. Not that you’ll need reminding, but here are the big three liquid non aligned prices from August 1st - Arla 24.27ppl (and this does not allow for the 0.5ppl levy), Wisemans 24.48ppl, Dairy Crest 24.58ppl. Yes, the Danes and the Germans are paying the lowest prices. Both have invaded Britain and it’s not just The Danes who, with an awful lot of help from the retailers, are doing the pillaging.
I still hear stories of prominent aligned farmers who are sitting back smugly thinking / commenting that they’re OK and are not joining their colleagues at any meeting or protest. Surely they realise that the bigger their price differential to “normal” farmers the less sustainable their price becomes?
Some so-called farmer representatives are leaving all negotiations with retailers and liquid customers to their processors. But others are actively working with their processor to extract more cash from customers. Look at the facts: Arla dropped their 1st August milk price by way more than DC and Wiseman. Does this indicate that the other two had more success in obtaining extra money from their customers, particularly those in the middle ground? Maybe, maybe not. But its high time some so called negotiators and representatives got off their backsides and started to deliver results and soon. There are still an embarrassing number of representatives who simply relay messages instead of battling for their farmers.
There is an awful lot wrong and immoral with this supply chain. There’s the obvious to start with – the obscenely unfair share of the margins. But there are other unseen, shady activities too. How many “back door” payments do retailers “force” processors to make, for example, which muddy the waters? The ones I am told about make my eyes water, let alone theirs. The bottom line is dairy farmers and processors are paying for cheap milk, for this immoral activity and wanton greed. And if recent drops are not quickly reversed the cows themselves will pay the price: more, inevitably, will be culled.
Meanwhile the formation of British Producer Organisations (PO’s) toddles along. Farm Minister Jim Paice recently announced £5m funding to help the industry on this. But who will run them? Well I believe one outfit that could do so is First Milk, who could potentially do so alongside its other activities - assuming its members buy into the idea and do not resent their co-op representing some retailer aligned farmers whose milk is not processed by First Milk. Remember that Co-ops, in themselves, cannot be PO’s.
A PO is not a silver bullet, however if one is set-up correctly with the right people running it it will certainly help put dairy farmers on a more equal footing with processors and retailers when it comes to negotiating. I also envisage a PO which is involved in hedging mechanisms and futures contracts to smooth out the peaks and troughs of prices. I believe dairy futures will, during the next five years, become a useful and frequently used tool to add certainty to prices. Let’s face it fixed rate mortgages and loans are common-place, as are forward buying contracts of winter fed and fertilizer, and they are similar to futures contracts.
Let’s face it, this volatility isn’t going to go away. It could get worse. I am stunned at the number of farmers, experts and so called leaders who still trot out the utter rubbish that the end of milk quotas in March 2015 will not affect GB farmers and the market here because we are, and will remain, well under quota. They clearly are taking an island mentality and have failed to understand the likely effects of quota removal on EU milk supply - the signs of which are already evident.
Just look across the water to Southern Ireland where, if their dairy Industry only half succeeds in their eye-watering target to increase milk production by 50% post the end milk quotas in 2015, then we have a BIG problem. Any increase in milk production will not be consumed domestically and will increase their exported powder and cheese output. They will certainly be involved in futures markets and if we want to move away from our beloved liquid market we should be looking 100 yards down the road to see what is coming our way in 2015 and not looking at the dashboard as to what is happening now. We need to plan now and explore fair and transparent formulaes between markets, commodities and the ex-farm gate price and have contracts to match them. First Milk have almost got there with their Eilers and Wheelers milk contract - hence why I am legging them in for the PO job without prior warning. Yes such contracts will be more volatile – but you’ll get more of the ups as well as the downs.
The current uproar in the liquid market is partly because we are fanatically obsessed with what some still call the “premium liquid market”. Post 2015 we need to be ambitious and think beyond it. If we don’t then we may as well shrink our milk production and processing to the size of that ever-shrinking liquid market. Any extra production will have to be exported, so let’s not sit back while others explore the opportunities.
Most, if not all, member states are already producing significantly more milk each year as their quota increases - with the exception of the UK, which, given the current turmoil, is now in decline. The suggestion that the abolition of milk quotas will not affect the UK could not be further from the truth. It’s going to be a hard landing, and is likely to hit us hard.
Back in April the Polish Minister of Agriculture, Marek Sawicki, advocated keeping milk quotas until 2020 to give time for the Commission to come up with new solutions. At the same time the Latvian official and milk producer Dace Pastare stated “When quotas are abolished in 2015, the dairy market will collapse with a big bang.” She drove more than 1,000 kilometers with the Chairman of a Latvian Dairy Co-Operative to deliver her one line message to officials.
The very active European Milk Board have recently stated that the EC’s “soft landing” by 2015 will be a crash landing and have stated there is an urgent need for action.
I am not suggesting the EU will do a U-turn on quota abolition, however, there is clearly pressure and all, apart from most of the GB dairy industry, are gearing-up for the end of it. I admit it will be a slow burn but someone has to take the lead and we have to do things differently. As I have stated in this article before the British dairy industry needs a Mr or Mrs Fix-It - not another maintenance and bodge it man. And it needs them fast.
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IP July 2012
I start this month’s article by referring to another one - an article by Dragon’s Den guru Deborah Meaden in a recent Farmer’s Weekly. I won’t waste valuable column inches analysing her comments, but can’t ignore the article. John Allen of Kite Consulting summed-up Meaden’s surprise appetite for dairy farming matters in his well-crafted letter with “Let’s be clear – WSPA’s agenda is not to save the dairy industry by showing farmers how pasture-based systems are better economically, it is a campaign entirely focused on trying to prevent a certain type of production system. As an industry, we should ensure that we do not allow such an organisation to turn farmers against farmers.” Meaden openly admits she supports The World Society for the Protection of Animals Campaign “Not in My Cuppa”, and is anti large dairy farms.
I was particularly disappointed that (according to my records) there was no cohesive “one hit” industry response to the article politely acknowledging her points but telling her dairying matters are in no way shape or form her area of expertise. In other words she should stick to the multitude of business opportunities she does know about. She is undoubtedly out of her depth commenting in trade journals on the best dairy farming model farmers should adopt. If I meet her in person, for example, I can’t wait to ask her about the efficiency of processing in relation to spring calving operations. I can image her answer: “Er, wot…?” Focusing exclusively on small family farms is admirable, but it must be in conjunction with the acceptance that globally competitive commercial units in the UK need to be developed and supported. Come on NFU, Dairy UK, DairyCo and RABDF you are once again letting the industry’s communications down.
The European dairy package has seen the adoption of EU wide Producer Organisations (PO’s) which for the UK means any PO will be subject to European competition law and not our infernal National competition law and bodies.
It’s disappointing to learn that the UK is at least a year away from having the legislation in place to enable PO’s to be formed. Germany, for example, already has 190. It was clear from the recent NFU dairy farmer representative meeting that farmers need one point of contact to which all groups of farmers investigating the PO facility should be directed to learn how they function and the benefits and pitfalls. For me that job falls to EFFP, who are best equipped to establish and constitute PO’s.
There are calls from within the NFU Dairy Board for the union to set up a national dairy farmer database to help co-ordinate PO’s. Well I know a man who already has such a database, which is always up to date and could potentially be put to good use: me. For the record I’m happy to help, but state now I won’t run one. I am also not convinced the ability to form a PO (which has a legal right to negotiate up to 33% of the entire UK milk production, remember) will be a silver bullet. In fact at the moment I can only really see one PO, on the radar.
That’s a PO for the 3,000 (1 in 4) GB producers on retailer-aligned contracts, which I would like to see kick-started by Tesco (TSDG) farmers. A PO will not be a panacea, but it will facilitate producer collaboration, help balance farmers’ negotiating power, put them on a more even, competitive footing and could prove to be a benefit to the likes of the retailers themselves. But let’s be clear: PO’s must be driven by farmers and that brings me back once again to your current producer representatives. Self-interest must not dominate decisions. What is right for the producers they represent HAS to be the objective. I hope I am wrong in my belief that one or two farmers who sit on the TSDG farmer representative committee are likely to block the formation of a PO, perhaps fearing their position, salaries and bonuses. Time for our so-called leaders to be brave to demonstrate they want to make a difference and ensure retailer-aligned farmers are early adopters. They should take the lead and be a voice for those who feel they have no voice. Fingers crossed Tesco and other retailers will support the PO idea. It can be argued that a PO will be a threat and an opportunity, and if one or more are formed my plea is that they are professionally run with qualified negotiators doing the negotiations.
Recent news highlights where a PO could have had influence. DC, Arla and Wiseman have been knocking seven bells out of each other to secure extra volume from the retailers, and recently DC lost 50 million litres of Tesco business. For DC it certainly was not a case of a dedicated supply, as Tesco, in the end, were in no way dedicated to its suppliers.
First Tesco informed me they intended to retain the farmers by transferring them to Arla. Er, whoops - that was not contractually possible as they are DC’s farmers not Tesco’s. Second Tesco told me they would give six months contract termination notice to the DC Tesco farmers, and pay them compensation for any shortfall. Then someone at Tesco had a look at the contract and figured out option 3 - that if the DC’s Tesco volume allocation was reduced to zero from 16th July the farmers were still TSDG members but, because no milk was going to Tesco, there was no requirement to pay any compensation.
The bottom line is Tesco took the decision to dump DC’s liquid contract without any consideration for the 25 farmers. It is my belief if a proper PO had been operating Tesco could have negotiated to switch the producers to Arla or Wiseman, and would not have had to resort to worming their way out of paying compensation.
At the Dairy UK dinner Jim Paice did not hold back in expressing how disappointed he was not to be in a position to announce more progress on the voluntary code of practice. As it was all he could do was to inform the audience that it needed a final push with a long-stop target for an announcement of the final compromise deal at the NEC Dairy Event in September.
Paice clearly wants the code agreed and has minimal appetite to intervene with legislation. I have previously criticised DC for what I term a series of gaffs. Well I am pleased to say when it comes to the voluntary code DC have been on the front-line agreeing significant concessions and trying very hard to make a deal.
One of the hurdles appears to be that for the code to work all Dairy UK processor members need to adopt it, hopefully followed by other non member processors. Arla are currently unwilling to concede on anything less than a 12-month notice period, and there lies a major blockage to progress. Time for a good negotiator to step in and persuade Arla to join the party, I say!
Finally (and please don’t shoot the messenger) - by the time you read this article I fear a number of 1st August milk price cuts will be on the cards. Given the fact all intelligence points towards commodity prices having bottomed and starting to turn up it’s likely the price drops will be the last of the year, and hopefully soon will be followed by at least one price increase. That’s where I am nervous because knowing August or September could be the last chance for processors to try to justify price cuts, the word is one or two will seize the opportunity and cut deeper than necessary. I do not subscribe to the view when it comes to farmgate milk pricing the market operates normally but I do live in hope that one day at least one purchaser will take the lead and be more open, honest and transparent. Roll on the voluntary code and a new way of doing business.
Comment to firstname.lastname@example.org
IP June 2012 DF
This year’s Annual Dairy Industry Newsletter conference posed the question “Is dairy recession proof?”. A more apt title, said one acidic farmer on hearing how quickly his cheese buyer had followed DC with a nice round 2ppl price drop, would be: “Is dairy collusion proof?”
The volume of milk now being sold through the big supermarkets enables them to squeeze the processors hard, because with that volume it becomes an imperative part of those processors’ business to ensure that they do not lose those major customers – at all costs it would seem (which is paid for by the farmers). The only thing the processors can do is squeeze the dairy farmer, and the only thing the farmers have left to squeeze is the cow’s tits.
How long will the low prices continue for? Well quite a while, said David Dobbin, the boss of United Dairy Farmers, at the conference. Until next year, probably. Chinese demand has been a key factor in the rising world dairy commodity prices in recent years, and while oversupply has crashed prices it is a fact that in the long-term China’s potential is the largest cog for what looks to be an existing future in world dairying. We need them to start buying even more than it does now! Just look at the numbers - the population of China is 1.35 billion people, which is almost double that of the EU 27 population and more than four times the population of the mighty USA.
Worldwide the increased global production is resulting in stocks mounting. Domestically the result is all our UK processing being at 100% capacity, and we have ended-up with distressed milk delivered across the water for less than 20ppl. For the future I do worry where the phenomenal amount of milk from low cost producers in Southern Ireland, and who are already gearing-up for life post quotas, will be sold. This was another point from the conference, and it will have a significant impact on our ex-farm gate milk prices, without a doubt.
Between now and 2015 the industry will have to respond, and positively. At the DIN conference Kate Allum said this year would be one of major change in the industry. Well there’s only six months left so if she’s right something has to happen soon! Let’s hope the strong businesses will get stronger (for the farmers) and the weak won’t try and pass-on the pain to the farmers through the milk price.
Currently Arla Foods UK is seemingly on the up, but Dairy Crest isn’t. Arla has reported sales for 2011 up 7% to £1,587.2m, just 1.1% less than Dairy Crest. However operating profit was down 14% to £31.4m, and operating margin was down from 2.5% to 2.0%. However the company paid a record dividend to its Danish parent of £97.4m during the year. It’s a shame Arla’s UK farmers don’t get a share of the profits like Milk Link’s farmers did, but hopefully they will do one day. Next year Arla is likely to become the biggest dairy company in the UK after DC completes its current divestment programme.
Last month I said that DC was definitely the worry - especially its liquids division – and those comments were timely and appropriate. The company gave farmers a brutally short notice period for the 2ppl price cut, and instantly there were strong rumours that it was the first cut of at least two - with another planned soon. Was it coincidence that DC announced the 2p drop so close to the end of the month, making it nearly impossible for farmers to arrange another buyer, and to give notice (which they have to do before the end of each month)? This meant DC had its producers “cornered” for another 13 months. Despite that observation from a furious farmer the short timescale didn't present a hurdle to dozens of farmers who did actually submit their notice to DC, however. Their reaction to the price drop was huge.
No doubt DC, or whoever has its liquid business within the next 12 months, will be planning to charm and cuddle up to the resigning producers with a view to sweet-talking them into rescinding their resignation.
Some farmers, though, are wondering if DC’s kamikaze price moves might be a bit more strategic than it would appear. For example, they question whether it is deliberately trying to lose producers to make its liquids business easier to sell, and also speculate if it is working with a potential purchaser who will pick-up producers who leave the company. Clearly DC is currently in knots, but equally obvious is that it has a plan to untangle itself for the future. Whatever we might think we shouldn’t underestimate it. The two main questions, to me, are whether DC shrinks, or shrinks, smartens-up and sells-up. For what it’s worth my money is on the latter. It is being restructured into a fundamentally different business, especially if it concludes the side of its very profitable St Hubert business. Certainly there’s lots of speculation around at the moment concerning the major companies, some or all of whom could be involved in major moves in 2012.
One thing is for certain, with DC having given producers only four days notice of the price cut and Lanchester Dairies trumping it with a backdated 2ppl price cut these two companies have done more to ensure either a voluntary code and contract change will be agreed and implemented than the NFU has done in years of banging their drum. The message to Jim Paice and the devolved Governments is simple: push through change and a meaningful code, or sharpen your teeth in other ways. Such short or negative notice periods have set relations with producers back at last five years, farmer confidence has been shattered and investment and growth plans wrecked over-night. Some producers have thrown in the towel already. I hope those in this camp do not feel they have failed and enjoy, and thrive, on their change of direction.
I’ll finish, though, with some good news. Contrast the above with the situation of Sainsbury’s producers. At the same time as the price cuts were announced the retailer declared it would be paying a cost of production price of 30.3p to its 324 farmers supplied through DC and Wiseman. This cost of production model, prepared by Kite, is a genuine effort by Sainsburys to assist their farmers through these very volatile periods. The model is fair, uses transparent, publically available data, and is great news for those farmers. Some years they will be the winners on the scheme, other years Sainsbury will, but overall it will balance out. It is a shining example of best pricing practice in the industry, and long-may it carry on and succeed. Hopefully the model can be mirrored by others going forward. Quickly.
You can email any comments to me at email@example.com
IP May 2012 DF
Some farmers never cease to amaze me about the business acumen (or lack of it) they have when deciding where to sell their milk. One particular example which caught my eye recently was the case of one of the 84 dairy farmers who were caught in the collapse of Farmright.
Having worked hard and to wake-up and find you have delivered up to eight weeks of milk for absolutely no return is sobering. It should make everyone scrutinize their milk purchaser/processor for “longevity” and to assess them for being a financially sound business, and the degree to which they are re-investing in their facilities on a regular basis, as opposed to sticking plasters on problems.
But low and behold in the case of our highlighted farmer he informed a potential new secure well-invested milk purchaser he would not be signing with them because he could get the grand sum of an extra 0.1ppl elsewhere.
So on 1 million litres that’s £1,000 gain per annum, and the difference between a safe haven or a risky home. If a ppl gain is your only reason for selecting a buyer then you have a problem, given it will take any farmer years if not decades to make up the tens of thousands of pounds of losses from a buyer’s collapse. However, perhaps I should give this farmer the benefit of the doubt on the basis he was under the impression he could negotiate a “special deal” with the ‘secure’ milk buyer who would cuddle-up, massage his ego and throw money at him to secure his milk supplies. It has worked for some with one or two buyers, but not for this farmer, and all we can hope is the new buyer is