8 March 2010

3 minute read

Europe

“They may have detailed production cost data, but no processor would accept the imbalance on the income side of the equation that dairy farmers have to tolerate. Specialist dairy producers have an income stream that would scare milk processors to death.

"Having only one customer, taking 90 per cent of your product at a single price makes a stark contrast to the broad aspirations set out in DairyCo’s Company Strategy and Performance Report. Most companies talk about developing their brands, differentiating their offer, working with their customers and suppliers to achieve supply chain efficiencies. No where do any of those companies recognise the weakness of their core suppliers who are totally dependent on the processor to determine their share of market returns.”

He went on to say that the distribution of supply chain margins is heavily weighted in favour of the retailer with processors coming a close second. The weakness of the primary producer margins is in stark contrast to the rest of the supply chain. The recovery in share prices over the last 12 months (+55 per cent Robert Wiseman Dairies and +43 per cent Dairy Crest) on the back of reported rises in profitability and reduced debt indicate the strength of major processors.

Smaller milk processors are often in the same boat as milk producers albeit at the whim of retail customers, even so they rarely operate with a single product, supplied to a single customer at a single price. Producers supplying these companies should look at their accounts in the same way as the DairyCo report tackles the large companies. A key difference will be the volatility in performance from year to year and the level of director’s remuneration which can be eye wateringly high when profits are on the rise.

The rationalisation of the industry and the uphill battle for the two remaining Co-ops means for most dairy farmers there is little choice in milk buyer, it is either one of the Co-ops or a PLC. As most PLC suppliers left the Co-op to supply them it isn’t really a choice at all. It also ignores the fact that in terms of share of the wholesale market returns UK dairy farmers do far worse than our EU competitors.

With the UK market built around liquid milk and quality cheddar how can UK prices fall below those in more commodity led countries? The only answer that makes sense is the structure of the UK industry; a combination of sectorial PLCs and fledgling Co-ops, compared to the powerful Co-op giants of the European dairy industry.

With the next round of CAP reform on the horizon it is important for Defra, the retailers and processors to recognise that without livestock sales and Single Farm Payment there is no profit for most dairy farmers.

"We purposefully exclude Single Farm Payment and include family labour in our production cost analysis to get a “true” picture of the realities of making a dairy profit. Livestock values are currently good and the weak exchange rate in 2009 masked the transition in Single Farm Payment to a lower area based payment. Without these the returns from milk alone is poor."

Whilst it is true that milk price isn’t everything it is 90 per cent and when costs are stable it is a proxy for profit. A change of one per cent on the top line equates to around 10 per cent change in profit, a significant gearing when milk prices changes can be 0.25 ppl at a time.

"With the gap between market returns and milk price widening it is important for dairy companies to recognise the inherent weakness in their supplier’s position and look to ensure margins are sustainable. Don’t patronise by saying producers should look beyond milk price, make sure UK milk prices reflect the market returns and are comparable with our northern EU neighbours, it is really not much to ask,” said Mr Holt-Martyn.

Further Reading

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