IP Dairy Farmer - November 2020

Posted on: 28/10/20

Although some readers will no doubt be convinced that the gospel according to the NFU’s on DEFRA’s milk contract reform is one of the biggest challenges/issues facing the industry, you won’t be surprised to learn I continue to disagree. In fact, my position is that a maximum of five GB processors/milk brokers operate unfairly / dubiously, and they should be dealt with individually. I would put the US presidential election outcome, this second wave of Covid 19,  the Brexit transition countdown and the impact of currency fluctuations all ahead of the contracts consultation in terms of importance for the industry. 
And, like the weather, none of us have control over any of them. 

The industry has to hope our politicians will successfully conclude the Brexit trade negotiations between the UK and EU by the 31st December deadline. More should be known by the time this article is in print, however the track record indicates those critical negotiations will go to the wire. 
If we end up with a hard Brexit it could be a catastrophe for all of you, especially if Arla’s Three Musketeer pricing (aka “all for one, one for all”) ultimately falls victim. Let’s face it, a combination of Arla’s member milk price, together with cheese processors, has been the corner stone of 2019 and 2020 farmgate milk prices from which all GB dairy farmers have benefitted whether they care to admit or not. 

Arla’s biggest market is the UK, and a Free Trade Agreement with the ability for Arla products to cross borders free of excessive tariffs is imperative, particularly for Lurpak. A hard Brexit with no EU trade deal resulting in the UK trading under WTO rules could quickly result in the Danes and Swedes involved in the Arla Board challenging the price schedule. Having said that, the farmers and their organisations in those countries are already talking about this possibility, mainly because they know Arla GB farmers are expanding at 28/29ppl, whilst their own COP is higher. My information clearly confirms Arla’s 6,700 or so non-UK members will not accept a drag on their milk price as a result of a failed or messy Brexit. If that happens they will demand the UK price is adjusted, which will mean the 2300 farmers here might catch a cold. When the day of reckoning comes the Arla Board will have a tough call to make, which won’t be popular with all members but I’m sure will be what’s best for the majority of the farmers and the Arla business.

Now at this point some of the anti-Arla-ites will view all that with glee, thinking they are all immune. But they may not think so by the end of this article, mind. Before that, though, a few words on standards.

There have been pages written by various farming organisations and celebrities on the need to avoid a freefall in food standards when it comes to imported produce. There is a need for equivalent standards for imports compared to that produced here under Red Tractor standards. The popular examples used are dairy products produced with BST, plus chlorinated chicken. Both are regularly flagged up as a potential import risks, and are, of course, illegal to produce in the UK. But let’s get real - if any retailer were to approach a group of US farmers with a set of Red Tractor’s relatively straight forward standards it wouldn’t be too difficult for them to up their game and comply! Result: problem solved! This would then enable farmers abroad to supply part of the 40% of our food we currently import to UK Red Tractor standards. Oh, and don’t forget: the so-called level playing field is another rural myth. We have long imported pork from mainland Europe, where sow stalls are still commonplace several decades after they were banned here! Let’s hope the outcome of the trade agreement talks is positive, therefore, even if they run to the 31st December. 

Possibly an issue even bigger than those mentioned, though, are the changes to the supply chain we could all face early next year. That’s the supply chain we have taken for granted for decades, even if we haven’t always liked or trusted it. Whilst most of you reading this might feel you are currently more chilled than Arla members over possible free movement of dairy products across borders, it might be time to wake up and smell the souring milk. That’s because there is the potential to be a financial disaster if we have another big spring flush, because the cost to comply with the new export rules and the costs of shipping surplus milk across borders could be prohibitive. The result could quickly be lots of distressed milk with no home at all. Add to that the fact that liquid milk consumption remains in long-term decline, plus the fact that the UK liquid model is bust (as any processor whose milk is sold at 4 pints for £1 will testify to) and it’s not hard to see there is a “Houston, we have a problem” brewing. If we don’t secure the ability to export surplus milk on something like current EU trading terms, and it’s a plentiful spring flush, and we continue to experience Covid 19 issues, some of you could be in for a very rough ride indeed. And rougher than Arla members!

Remember, too, that the UK has taken out 1 billion litres of liquid processing in recent years (Watsons/Medina 200M, Foston 350M, Tomlinson’s 100M, Chadwell Heath 350M). And yes, the Woodcocks have nobly upped their capacity at Yew Tree, but a big spring flush and a messy Brexit could result in a DISASTER! Consequently, my short to medium term price prediction (and I do have some success in this area) is that liquid processors will struggle to increase prices beyond November until well into 2021. 

Finally, the success achieved by 16 Medina farmers in defending a High Court injunction to force them to continue to supply Watsons Dairies/Medina for a further nine months to 30th June 2021 has been well documented in my www.ipmsltd.co.uk news bulletin, and the farmers were immediately released to supply new processors. Ironically, the two members of Meadow Milk who broke away and signed new contracts with Watsons/Medina on better terms assisted the 16 farmers involved in the litigation. It’s another example of the law of unintended consequences.
Where the hearing failed everyone was that it dealt only with the injunction, and the judge decided such a tool was not appropriate for determining whether Medina should be awarded damages. Medina’s efforts continue here.

Alas, there was no airing of the perceived contractual failures, including extended payment terms and breach of contract. A lawyer representing the farmers commented that “our clients are no longer tied to unfavourable contracts and are free to sell their milk elsewhere under better terms and conditions”. For sure this was a Round One, with more rounds to come before the war is over.

Comments to ianpotter@ipaquotas.co.uk