If milk processors are worried about the security of supply thenthey've got a funny way of showing it

Milk, a photo by @Doug88888 on Flickr.

If milk processors are worried about the security of supply then they've got a funny way of showing it.

This week's massive price cuts, initiated by Dairy Crest and followed by Robert Wiseman Dairies and others, are a hammer blow to an industry that until recently appeared to be gaining an air of confidence, with fewer farmers leaving the sector and more planning to expand.

At 2p/litre, the scale of the cuts was bad enough, but Dairy Crest's decision to give its non-aligned suppliers just four days notice stoked up more anger and highlighted the weakness of farmers in a somewhat dysfunctional supply chain.

Both Dairy Crest and Wiseman blamed the cuts on tough retail conditions and falling commodity prices, but why is it that such price corrections always seem to come much quicker when markets are falling than when they're on the way up?

The essence of milk processors' arguments may be true, but they hold little weight with farmers who face production costs outstripping milk price by about 3p on every litre. It is a cruel irony that farmers aligned with the supermarkets on cost-tracking-type contracts are now the ones receiving the highest prices.

Only half of dairy products consumed are in liquid form, but milk is a key product for retailers. When times get tough, it is one of the first to be discounted to draw shoppers into stores. The retail price for a four-pint polybottle, for example, has actually fallen by about 35p over the past four years, when we've seen food inflation soar for most other products. Cheese has also been subject to some ridiculously cheap deals. If a little more was available from the retail end, surely it would ease the pressure for all further along the chain?

Processors, too, should look at their operations and decide whether volatile commodity markets are really the best home for UK milk. It's no use using farmers to protect wafer-thin margins, because eventually those farmers will snap.

Notice periods of up to 12 months for many contracts make it difficult for farmers to switch buyers quickly though. This needs to change if producers are going to gain more faith in their supply chain and the confidence to reinvest.

If we're looking for a silver lining to these dark clouds, ironically, the drastic cuts announced this week may actually improve the scope for changes to contracts. Unusually, DEFRA has commented on milk prices, so the issue is making it onto the wider political radar.

Processors and retailers need to learn from the reaction to these price cuts and remember that farmers do have other options for using their land, whereas a dairy facility is of no use without raw milk. Let's hope that other processors can show strength by resisting making similar cuts and in turn protect those promising shoots of recovery.

Paul Spackman Deputy business editor

Q News p6

Q Business p22

Source Citation
"If milk processors are worried about the security of supply then they've got a funny way of showing it." Farmers Weekly 4 May 2012. Environmental Studies and Policy. Web. 14 May 2012.
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