Memorandum submitted by Milk Link Ltd
(L12)
1. SUMMARY
1.1 The Curry Commission referred to a vision
for a sustainable farming and food industry, but it stressed that
unless farming could be returned to profit none of that vision
was deliverable.
1.2 The dairy industry is in crisis because
the milk price paid to primary producers is not sustainable. The
current cost of production means farmers are struggling to break
even. In the last seven years, most dairy farmers' income has
only exceeded the national minimum wage twice and through this
period the effective rate of pay has averaged just £2.90
per hour.[1]
1.3 Further downward pressure on farm gate
milk prices will see an exit of producers leading to pressure
on raw material supplies and questions over continuity of supply.
1.4 For dairy farming to survive and therefore
to ensure the supply of fresh liquid milk in this country is maintained,
the industry must be profitable. This means securing a sensible
and sustainable price for the producer.
1.5 This is the challenge facing the industry
as a whole and, accordingly, it makes sense for producers, processors
and retailers to work together building partnerships and trust
which result in long-term stable relationships and collaboration.
1.6 Dairy co-operative Milk Link
has forged more efficient links between producers and processors
and retailers as a result of its strategy of vertical integration.
1.7 With a 10% UK market share, Milk Link
can't buck UK and worldwide market trends but it can influence
the prosperity of the 2,400 dairy farmers it represents by returning
a greater and fairer proportion of the margins in the supply chain
to its members—primary producers.
1.8 In an era of change with the probable
removal of milk quotas and the continued erosion of milk subsidies,
there is a significant opportunity for growth in a global marketplace
for dairy businesses with their own processing and marketing resources.
1.9 The dairy industry of the future must
be one in which multiple activities and diversity create the potential
for the best, sustainable returns to farmers by allowing them
to participate in more of the value-adding process as milk is
turned into products.
2. THE UK MILK
MARKET
2.1 The UK is the 7th largest milk producer
in the world and the 3rd largest in Europe. The current UK milk
quota is 14.2 billion litres.
2.2 The raw milk sold in the UK is manufactured
into a number of different products[2],
summarised below:
| Liquid Milk | 49%
|
| Cheese | 26% |
| Milk powders | 11% |
| Other | 14% (includes cream, butter, yogurt, condensed milk, other products and disposals)
|
| |
2.3 The marketplaces in which these products are sold
are complex.
2.4 Products such as cheese, butter and skim milk powders
are effectively sold in a world marketplace and are therefore
subject to a range of factors influencing price such as currency
movements and worldwide supply and demand balances — factors
the UK market can do little to control.
2.5 Sales of liquid milk to our domestic market are subject
to a different range of pricing factors that the UK market has
a greater amount of control over. Around half of all the liquid
milk sales in the UK are to the major retailers. The remainder
is to middle ground outlets like convenience stores, hospitals
and catering outlets as well as being sold via the "doorstep".
3. MILK PRICING
AND ITS
EFFECT ON
THE INDUSTRY
3. The dairy industry is in crisis because the milk price
paid to primary producers is not sustainable.
3.2 In 2002 the average farm gate price of milk was 17.1
pence per litre compared to 24.9 pence per litre in 1995. Provisional
Defra statistics for 2003 show an average farm gate price ranging
from 16.0 pence per litre in May 2003 to 19.6 pence per litre
in November 2003.
3.3 The raw milk price paid to the primary producer is
affected by a number of market related factors, for example:
— A demand profile for milk during the year that
doesn't match the production profile, which has lead to a negative
effect on returns.
— Currency has an impact on the price of both imported
and exported dairy products—cheese, butter and powders and
affects the value of Intervention prices for both skimmed milk
powder and butter.
— Retailers have supported farmers by the introduction
of "price initiatives" where consumers are asked to
pay a higher price so the increase can be passed directly back
to the farmer. However, this can be negated in practice by profit
improvement teams and aggressive purchasing policies.
— Processors, quite naturally, under pressure from
retailers wanting to maintain their own margins.
3.4 But little or no account is taken of how much it
really costs to produce a litre of milk.
3.5 Independent reports from analysts KPMG and ADAS/HSBC
concluded that it costs the UK dairy farmer between 19 and 21
pence to produce a litre of milk.
3.6 The recent (July 2003) independent guidelines produced
by the Royal Association of British Dairy Farmers (RABDF)[3]
concluded that the breakeven point is just over 20 pence per litre
and as much as 23 pence per litre if full account is taken of
the cost of unpaid family labour.
3.7 Primary producers endeavor to improve their profitability
by cost control and performance efficiency improvement in terms
of herd size and yield. But although herd sizes and yields have
increased (Appendix 1, graph 1), profits remain stubbornly low
(Appendix 1, graph 2).
3.8 Primary producers have no effective mechanism to
pass genuine cost increases back up the supply chain, for example,
feed, fuel or additional costs resulting from consumer driven
measures such as farm assurance schemes.
3.9 The existing milk price is already driving producers
out of milk and without some upward, sustained price movement,
decoupling is likely to compound this trend. Then the producer
can take the money and realise the capital tied up in his/her
herd without producing a single litre of milk.
3.10 The real challenge is how to re-address the balance
and reduce conflict within the supply chain.
4. THE UK DAIRY
SUPPLY CHAIN
4. The UK dairy supply chain is fragmented with a number
of different players—producers, processors and retailers,
in direct competition with each other. This has tended to lead
to protracted price negotiations with all parties endeavoring
to protect or improve their margin.
4.2 Whilst Milk Link has a strategy of vertical integration
the majority of processors in the UK are not producer co-ops unlike
many other European and worldwide countries.
4.3 Milk Link's strategy also aims to reduce conflict
in the supply chain. Combining producer and processor elements
of the supply chain has helped forge better relationships with
retailers.
4.4 Operating in the spirit of Sir Don Curry's recommendations
Milk Link is proving it is possible to work together to build
partnerships and trust which result in long-term stable relationships,
better understanding and collaboration.
4.5 By operating in both milk marketing and milk processing,
Milk Link has enhanced the commercial interests of its dairy farming
members. Importantly, it has meant an increase in return to Milk
Link members of over 16% (April 2000 milk price: 15.94 pence per
litre, September 2003 milk price: 18.53 pence per litre).
5. A SUSTAINABLE UK DAIRY
INDUSTRY
5.1 For dairy farming to survive the industry must be
profitable and this means securing a sensible and sustainable
price for the producer.
All players need to understand and appreciate how much it
costs to produce a litre of milk and in accordance with Article
33 of the Treaty of Rome "for the producer to receive
a fair price for his produce, for the interests of the supply
chain be that processor or retailer to operate effectively and
equitably and lastly that the consumer should expect to pay a
reasonable price for that produce."
5.2 Significantly, the increases achieved in the milk
price in 2002 (only a matter of 2ppl) had a dramatic impact on
farm profitability, which shows that to begin to restore confidence
it is not necessary to achieve an enormous increase in the milk
price. (Appendix 1, graph 2)
5.3 The concept of sustainability has three pillars,
economic, environmental and social.
5.4 The independent evidence suggests that the dairy
industry is not economically sustainable given the existing pricing
structure. The average age of most dairy units reinforces the
fact that there is a lack of investment in milking. There are
not the economic returns to support new plant and this is badly
needed to cope with aspects of environmental sustainability especially
where the handling and treatment of animal waste and silage effluent
are concerned.
5.5 To tackle the consequences of increased herd size
towards which producers are being driven requires investment and
without appropriate returns this is simply not going to be forthcoming.
5.6 Equally important is what dairy farmers do "for"
the environment. Farming maintains over 18 million hectares of
diverse landscapes, habitats and food sources for farmland wildlife.
The use of inputs, soil, water, waste, nutrient and land management,
all affect the quality of our rural environment.
5.7 CAP reform intends to sever the link between subsidy
and production, moving towards payments based on the delivery
of agri-environmental targets. Whilst this reform is welcome,
change should be implemented in a proportionate and incremental
manner. As it stands, dairy farmers simply cannot afford to deliver
increased environmental standards unless the industry returns
to profitability.
5.8 Farming is the mortar that binds the social and economic
fabric of rural communities with the rural economy. There has
been a steady decline in the number of men and women working in
the farming industry. In England alone, dairy farm holdings accounted
for over 65,000 jobs in 1992, which ten years later stands at
less than 45,000[4]. This
threatens to undermine the strength of rural communities across
Britain.
5.9 Foot and Mouth Disease (FMD) demonstrated the integrated
nature of the rural economy—it is not simply about farming
alone but also many related activities. Farming accounts for circa
10% of GDP when food, related leisure and tourism and agriculture
service sectors are included. In some regions eg the South West,
this figure is greater.
6. ABOUT MILK
LINK
6.1 Between them, the 2,400 dairy farmer members of Milk
Link produce around 1.4 billion litres of milk every year, accounting
for about 10% of the entire UK's milk production. On behalf of
its members, Milk Link collects, markets and distributes this
milk to more than 70 customers, including its own processing sites.
Milk Link processes more than 700 million litres of milk
per year and produces more long life milk than anyone else in
the UK.
The processing business directly supplies customers ranging
from the major multiple retailers right through to specialist
retail outlets with products such as long life milk, long life
and fresh cream, long life and fresh custard, soft cheese, yoghurt,
flavoured milk drinks and a range of milk powders.
6.2 However, with only a 10% UK market share, Milk Link
can't buck UK and worldwide market trends. What it can do is influence
the prosperity of the 2,400 dairy farmers it represents by returning
a greater and fairer proportion of the margins in the supply chain
to its members—primary producers.
6.3 Working with a co-operative provides Milk Link's
customers with a direct link to the farming community, as farmers
are both suppliers to, and owners of, the business. Its integrated
business structure provides a secure market for members' milk
and generates an additional revenue stream over and above milk
production, as raw milk is turned into added-value products. As
a co-operative, Milk Link is run on an equitable basis and therefore
takes all decisions in the interests of the majority of its members.
6.4 Milk Link intends to continue to develop its processing
operations to develop the business interests of these members.
Evidence of the success of the restructuring is strong, not least
because the two other major UK dairy co-operatives have followed
Milk Link's lead by introducing new constitutions along similar
lines.
6.5 For dairy businesses with their own processing and
marketing resources there is a great opportunity for growth. The
dairy industry of the future must be one in which multiple activities
and diversity create the potential for the best, sustainable returns
to farmers by allowing them to participate in more of the value-adding
process as milk is turned into products.
12 January 2004
1
Promar National Finance Consultant. Back
2
Source: Defra, SEERAD, DARD. Back
3
RADBF Independent Guidelines for Costing Schemes. Back
4
Source, Defra. Back
| 
