Memorandum submitted by NFU Scotland (L18)
SUMMARY
1. NFU Scotland believes that, on the whole,
milk producers are weak sellers of their product into a highly
concentrated processing and retail market for milk and dairy products.
We believe this dominance allows processors and retailers to capitalise
from producers' weakness in the market place.
2. This has been most evident in the past
12 to 24 months when significant weakening in the value of sterling
against the Euro, and improvements in both world commodity markets
and UK wholesale prices for milk and dairy products have not been
fully reflected in the basic farmgate price paid to producers
for their milk.
3. Farmgate milk prices received by farmers
have been at or below the average cost of production for almost
four years. This has led to a significant number of farmer demonstrations
at both retail distribution and milk processing sites in the last
two years. NFU Scotland, in its representations to both the retail
and processing sector, has indicated its willingness to work with
all parties on a long-term solution that will lead to all in the
dairy supply chain receiving a fair share of the returns from
milk and dairy products. This is necessary to ensure that production
of the raw material, milk, can be returned to profitability at
a farm level. Without commitment to such a process, farmer frustration
over low milk prices will continue to lead to disruption and demonstration
at key points in the chain.
IN DETAIL
4. NFU Scotland welcomes the opportunity
to submit written evidence to the Environment, Food and Rural
Affairs Committee Inquiry into milk pricing where the terms of
reference are: "The Committee will examine the market price
and farmgate price of milk, and will investigate why recent rises
in the former have not led to increases in the latter."
5. Dairy farmers in the UK, and Scotland
in particular, are amongst the most efficient in Europe. Scotland,
at 107 cows, already has the largest average herd size in Europe
and significant improvements in efficiency have achieved in recent
years. Despite the benefits of scale and efficiency, in an EU
context, farmgate prices paid in the UK have been below the EU
average for more than a decade and UK farmgate prices have been
the lowest in Europe for the last three years.
6. The farmgate price received by UK farmers
has been in decline since 1996 and has, since 1997, been at or
below the estimated cost to a dairy farmer of producing milk.
This ranges between 19p per litre (Scottish Agricultural College)
and 21p per litre (Royal Association of British Dairy Farmers)
according to cost analysis carried out by these organisations.
Declining farmgate prices have resulted in unsustainably low returns
to all dairy farmers over this period and restricted necessary
investment and improvement on even the most efficient premises.
7. Recent improvements in a number of key
factors should have significantly reduced this downward trend
in farmgate prices. Since April 2000, the Euro has strengthened
considerably against the value of sterling from £0.60 to
£0.70. This has led to an improvement in the intervention
support prices paid for the commodity products of butter, skimmed
milk powder (SMP) and whole milk powder (WMP). These intervention
support prices traditionally set the base price for milk and dairy
products. Since September 2000, the intervention prices for butter
and skimmed milk powder have increased by around 2.9p per litre
to 19.2p per litre.
8. The recent weakening of sterling also
makes the UK more competitive on export markets for dairy products
and less vulnerable to imports. This comes at a time when world
prices for all the main dairy commodities have been rising.
9. Despite the improvement in these market
fundamentals, farmer expectations that average farmgate prices
would react more positively this year have not been realised.
This created feelings of frustration and anger amongst grassroots
dairy farmers and resulted in a significant number of farmer demonstrations
at milk processing plants and retail distribution centres during
September to December 2003. A similar situation occurred in 2000-01
when a combination of political pressure from producer organisations
including NFU Scotland and farmer demonstrations resulted in a
"retail price initiative" from major retailers which
increased the price of liquid drinking milk and dairy products
in supermarkets with the instruction given by retailers to processors
to pass the price increase back to farmgate level. Although this
resulted in higher farmgate prices, NFU Scotland believed that
with retailers making margins of 30% on liquid milk and between
20 and 70% on cheese, there was sufficient money available within
those margins to improve the farmgate price rather than ask the
consumer to pay more.
10. Since the summer of 2003, NFU Scotland
along with other producer organisations has been involved in a
series of protracted negotiations with major retailers and key
milk processors to secure a justified significant increase in
the farmgate price of milk based on the improvements in the markets.
This resulted in a small increase in the price paid for milk going
into the liquid market in July. However, it took increased political
pressure and further farmer demonstrations to secure further increases
in the price paid for milk used in cheese manufacture, finally
agreed in December. As we enter 2004, it remains unclear whether
these price commitments achieved from certain retailers and processors
are sustainable and will actually deliver a justifiable increase
of at least 2p per litre in the average farmgate price.
11. The following table, compiled by the
Milk Development Council shows that even the gains already made
across all commodities in the past 12 months have not been passed
back in full to farmers and that retailers and/or processors have
retained significant amounts from the price improvements. The
table compares October 2003 with October last year and suggests
that if all liquid milk retail price increases and other wholesale
price rises had been passed back, then average farmgate prices
could have risen by around 2.3ppl. However, prices have risen
by only around 1.5ppl, suggesting that not all the possible extra
revenue was passed back to farmers. Further increases were secured
in November and December and it remains to be seen what proportion
of these increases are returned to dairy farmers through the farmgate
price.
£/t or p per litre
| October 2002 | October 2003
| Equivalent Change |
Retail Milk PricE | 46.3p
| 48.5p | +2.2p |
| Doorstep Milk Price | 75.1p
| 76.8p | +1.7p |
| Cream (from Liquid Milk) | £900
| £1,030 | +0.6p |
| Mild Cheddar | £1,800 |
£2,100 | +3.0p |
| Mature Cheddar | £2,100
| £2,100 | 0 |
| Butter/Powder (IMPE) | 17.0p
| 19.2p | +2.2ppl |
| Weighted average | |
| +2.3ppl |
| DEFRA average Farmgate Price | 18.13p
| 19.59p | +1.46ppl |
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12. The influence of the major supermarkets (Tesco, Asda,
Safeway, Sainsbury, Somerfield, Morrisons) and the key dairy processors
(Dairy Crest, Wisemans, Arla/Express, Glanbia) on farmgate prices
is significant. Supermarkets account for 65% of all retail sales
of liquid milk and 72% of all cheese sales (including 80% of all
retail cheddar sales). In reaction to the increased retail share
being commanded by supermarkets, competition for retailer contracts
between relatively small numbers of key dairy processors has been
significant.
13. In the KPMG report into Prices and Profitability
in the British Dairy Chain, completed in February 2003, it found
that "Supermarket power has been reinforced by the net increase
in liquid milk capacity by processors, as they have competed for
this growing distribution channel. The result is that while prices
to the consumer have remained fairly static, the spread between
the retail and the farmgate milk price has increased significantly.
Retailers have taken a higher share of the total liquid milk chain
value and farmers have received less in the form of lower prices.
The situation on cheese is less extreme, because there has not
been the same change in the distribution pattern. However, because
market prices have trended down over the period and both retailers
and processors appear to have maintained their cash margins, the
farmers' share of the chain value has fallen." NFU Scotland
believes that the findings of this independent report accurately
reflect the weak selling position of farmers and that this must
be addressed.
14. To further highlight the importance of the supermarket
sector, the following table supplied by the Dairy Industry Newsletter
illustrates how the farmer's share of the price paid by the consumer
for fresh liquid milk has been eroded by 10% over a three-year
period. Liquid milk accounts for 50% of all milk produced in the
UK (with 35% of all the milk produced in the UK sold through major
supermarkets as liquid milk).
LIQUID MILK
PRICE ANALYSIS—OCTOBER
2000 TO JULY
2003
| Retail Price
| Farm-gate | |
| Period | p per litre
| p per litre | % of retail price
|
October 2000-March 2001 | 37.0
| 18.2 | 49% |
| April 2001-September 2001 | 40.9
| 19.7 | 48% |
| October 2001-March 2002 | 40.9
| 19.1 | 47% |
| April 2002-September 2002 | 40.9
| 16.4 | 40% |
| October 2002-March 2003 | 43.1
| 17.7 | 41% |
| April 2003-September 2003 | 45.3
| 17.8 | 39% |
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Almost a quarter of all milk produced in the UK is processed
into cheese. The following work carried out by Taylor Nelson Sofres
shows that, since April 1996, the overall consumer price for mature
cheese has risen by the equivalent of 4ppl, while the price paid
to dairy farmers has fallen by almost 8ppl. For mild cheddar,
the price currently being paid by the consumer is very similar
to its April 1996 level but the price paid to the farmer has fallen
by more than 8p per litre in the same period. There has therefore
been an increase in the margin of around 9ppl for mild cheddar
and 12ppl for mature cheddar over the period of this analysis.
While significant margins are available in the cheese market,
it would appear that the bulk of the margin available has been
and is still being retained by retailers and processors and not
passed back down to farmers.
IN CONCLUSION
15. The weak selling position of many farmers makes them
price-takers in a dairy chain dominated by a small number of major
retailers and processors. Even when market fundamentals indicate
that a significant price increase is justified, the recent price
negotiations have shown that farmers have limited ability to influence
the price they receive. Public demonstrations leading to significant
disruption of the dairy chain has proven to have a partial effect
in increasing prices. However, NFU Scotland feels that this is
not a long-term option and would look for others in the dairy
chain to work with them to establishing a pricing structure that
ensures that all in the chain receive a fair return. Such an approach
should be in the interests of the retailing and processing sector
as it would assist in returning dairy farming to profitability,
allow those farmers committed to milking cows to invest in their
businesses and help guarantee future supplies of the necessary
raw product, milk.
16. In line with the recommendations of the KPMG report
into Prices and Profitability in the British Dairy Chain, NFU
Scotland would support more effective monitoring by the Office
of Fair Trading of the Supermarket Code of Conduct. This could
be extended to include independent and confidential auditing of
all price negotiations on milk and milk products between members
of the chain to ensure that the market situation is properly reflected
in prices paid.
January 2004
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