IP Dairy Farmer - October 2020

Posted on: 01/10/20

As I pen this article the Government’s milk contract consultation has just closed. The Farming Unions, as the main promotor for contract reform for over a decade, detailed five “asks to Government”, which, for me, seemed more based on emotion rather than hard fact (unless the facts are within their submission).

But the processor’s organisation Dairy UK’s response has clearly been a factually orientated submission, being supported by an independent overview report into the UK Dairy Market by the globally recognised consulting firm Ernst & Young (EY). It does beg the question as to why the Unions didn’t commission AHDB to do a similar analysis to beef up some of their arguments. And no, a study into France, Hungary, Italy, Poland, Romania and Spain doesn’t cut it: France is full of small farms and co-ops; we know Italy’s track record from quotas; Spain producers half as much milk as we do, and Romania’s average herd size is 2.4 cows! 

Apparently, the report confirms that UK milk price volatility has declined during the past decade and “is significantly lower than export-orientated markets elsewhere in Europe”. The report and Dairy UK’s press statement on the back of it implies that legislated formula-based pricing mechanisms (as suggested by The Unions) could increase UK farmgate milk price volatility. I believe the word ‘could’ should be replaced with ‘would’. The report confirms the average UK farmgate milk price over the past five years was 26.3ppl, and ranged from 22.02p to 28.62ppl.

The report and release emphasises the facts that the UK processing industry is low margin and highly capital intensive; with the average processor profit during the last five years after tax being a net margin of only 0.7ppl. For me these low margins and profitability begs the question as to where the hard evidence is to back the theory that buyer’s discretion pricing (which the Union’s want scrapping) is an issue, or that all “contracts are weighted heavily in favour of the milk buyer”, as claimed by the Unions.

As part of the report EY also carried out a nine-year analysis of AHDB’s MCVE figures, which confirmed that the UK cheddar price closely tracks the global market, as it compares closely with the price of five other EU cheese exporting countries. A nineteen-year analysis of AHDB’s AMPE also confirmed UK farmgate milk prices have been protected from the extremes of dairy commodity markets.

On top of this fellow hack and analyst Chris Walkland presented at the Semex conference some 18 months ago a five-year analysis of UK farmgate milk prices against a basket of ten or eleven different prices, indices and formulas from across the globe, and this again showed that UK prices were pretty much in line with that global basket. I.e farmers had, over time, been paid the going rate.

The notion that the UK Dairy Industry lacks investment when compared to other countries is also rubbish, in my eyes, and means the Union’s claim that “farmers take all the risk” is cobblers. I wonder what Theo Muller has to say about that comment!

Nevertheless, an EY survey of Dairy UK members as part of the report showed a clear consensus that better terms and conditions between processor and farmer, fair treatment of farmers and better best practice are all required, and that regulation to enforce this would be helpful to level the playing field.

I have always accepted that a very small percentage of processors set poor minimum standards at farm level and have below minimum acceptable operating standards. In my opinion there are only around half a dozen “rogue” processors, who duck and dive and fail to treat supplying farmers fairly. They know their farmers don’t trust them! The processors - most of whom are either brokers and/or liquid processors - are hard-wired to find loopholes in any regulation, and run roughshod over everyone when it suits. One or two couldn’t even spell “good practice”. These “offenders” were, in my opinion, letting their farmers down long before the pandemic.

Regrettably, DEFRA has recent experience of the NFU’s emotional rather than factual arguments, when the Union made a complete and utter Horlicks of its Covid emergency fund figures and Dairy Hardship Aid lobbying. I hope the submissions this time contain hard evidence to back up the claims being made because when DEFRA studies the factual nature of Dairy UK’s submission will make it think hard about exactly who benefits from contract legislation (if anyone), and who will lose out.

I really hope lots of factual evidence has been submitted to support arguments for and against regulation. Then it will be DEFRA’s job to sort the spin from the fact, and above all to make the right decision for the industry (which I have reservations over!). It’s not a case of whether you are pro or anti the Unions on this issue, or about supporting what have become personal crusades. It’s about what is right for the industry, and I remain convinced that wholesale contract legislation will make most dairy farmers poorer NOT richer!

I do agree with the NFU that “the contract consultation is the most important conversation in a quarter of a century”. It shouldn’t be, but it is. I just hope DEFRA get it right. How it will all be enforced also remains to be seen. I just hope change is gradual and measured, so there are no unintended detrimental financial consequences to dairy farmers.

Finally, there’s one thing regulation of contracts won’t do, and that’s to save farmers from themselves! To that end I turn to what can only be described as exceptionally strong market prices for store lambs, sheep and dairy cows… all fuelled by farmers applying for and securing £50,000 bounce back loans from The Government (which some farmers even believe will not actually need to be repaid, and will be written off by Government!) Some auctions reported a seismic jump in prices at the time the banks paid out the loan money, with heifers regularly selling for +£2,000.

Many farmers also seem to have repaid bank overdrafts with their bounce back loans, and have assumed that the bank will automatically reinstate their original overdraft when required. I am, however, reliably informed that banks are likely to have a different view when that day comes!

Comments to ianpotter@ipmsltd.co.uk