IP Dairy Farmer - May 2020

Posted on: 01/05/20

I have been writing this article alongside my free dairy newsletter for the past 29 years, and I have never experienced the volatility together with unforeseen, abrupt, and frightening changes that we have witnessed so far in April. It made me tentative about what to write, knowing it could all change before it was published!

The problem was simple: dairy processors could not convert or divert cancelled foodservice orders into the retail sector. Yes, there was a spike in retailer demand for liquid milk but that’s what it was. Just a spike. Christmas demand is a spike but processors can plan for it. This one came from nowhere.

Spot milk very briefly fell to 5ppl, which meant if a processor was willing to collect milk from another processor it was free. The surplus milk was compared to taking finished lambs to market knowing there were no buyers with the farmer unable to take them back to the farm. Consequently, some farmers were told to dump milk with less than 24 hours’ notice because there was no plan B outlet.

Immediately after Easter there were signs of light at the end of the tunnel, and they came on as quick as the lights were switched off 10 days earlier. As I write, I cannot find any on farm milk dumping.

No one predicted the unforeseen consequences of COVID19 on the fresh milk business and less than a handful of struggling liquid buyers appeared to have only one solution - to solve the problem by instantly passing all the pain down to supplying farmers. That, though, is no surprise given some fresh milk processors lost so much money in 2018/19 that they were treading water with no financial reserves.

Freshways have retrospectively (by 13 days) dropped its suppliers April milk price to the lowest in GB, has extended payment terms, and told farmers to dump milk and are unwilling or unable to pay anything towards that dumped milk. The delaying of payments to farmers is brutal and is the one element farmers are struggling to cope with the most. Farmers have bills to pay and cash flow challenges and for sure the fact they are outstanding for more money understandably makes them extremely nervous. Many Freshways farmers are completely hacked off, but they only really have two options - quit or pray.

I have previously stated in this column that the biggest problem farmers fear is not how low the milk price drops to, but for how long it remains low. The milk price dropping to 20p for some liquid suppliers (which it likely will be for some by the time you read this article) for one or two months is by and large survivable, but 22p for 12 months is unsustainable. My crystal ball indicates any farmgate milk price drops will bottom out by June/July and I believe the industry passed its low point during the first 7 to 10 days of April as the panic distressed milk vanished as quickly as it arrived. Let’s hope I am right. 

As I write there are calls from the NFU and TFA for a Government backed and funded milk reduction scheme, allegedly against the backdrop of a threat of adverse PR in the form of cows having to be slaughtered if it doesn’t step forward with financial help. For me, though, dairy is not at the centre of the Covid storm, unlike leisure, travel, food service, NHS, care homes etc.

I fail to understand why, once again, the GB dairy industry believes it’s the Government’s job to provide a financial safety net. I don’t buy the NFU’s numbers that “2000 dairy farmers are suffering severe financial pressure and that number is growing by the day”. That’s a poor back of a cigarette packet calculation, and let’s face it, horticulture and the ornamental growers have been hit much harder than dairy. All of agriculture will be financially hit by COVID19, so why do our organisations always claim dairy is a special case?

Recently, the idea that government should prop up any struggling dairy business has been  suggested. It’s ludicrous, and for me any business which was unstable prior to COVID19 should not be saved. The consequences of propping up unviable businesses is huge. The reality is that (for want of an analogy) when you have a dog which is terminally ill, it is best to be brave and take it to the vets and put it out of its misery. If the business model has failed, or the business has no available reserves of cash, or goodwill or whatever, and the tide then goes out for whatever reason, then it’s probably game over.

Smart processors quickly adjusted to the crisis and found ways to mitigate the problem. Muller instructed all its farmers, aligned and non-aligned, to scale back and deliver 97% on a rolling 7-day average, which may, for some, mean the necessity to temporarily dump some milk. The only question is whether Muller will penalise all producers if the 97% target is missed/ignored by some, or whether it will take targeted action directly at the non-conformers. I hope it’s the latter. For me, the Muller approach was instant, limited in its pain, fair and a good solution to what was and is a relatively short-term challenge. It is a great example of the industry sorting its own challenges rather than bleating to Government. In contrast, I think the actions of Freshways and their own directors’ foolish behaviour, which was seized on by The Daily Mail in an excoriating article, will leave them with a long-lasting hangover which will haunt them for years.

Several responsible processors appear to be concerned that drastic moves by farmers now will result in a serious milk shortage in the Autumn. They are taking a long view and appear to be behaving responsibly and whilst they want production pulled back a bit, they know milk will be needed in the second half of this year.

Longer term life will never be the same as we adjust to a new norm, hopefully in the second half of the year. It is inevitable there will be more failed businesses at both processor and farm level and most will have more debt. Sadly, some who were the future of this industry are in danger of having their legs chopped from under them as they are caught in the wrong place at the wrong time simply because they were supplying the wrong processor.

Honesty, transparency and trust are qualities necessary between farmers and their processor. Frequency of reliable information from your processor should reduce the element of surprise, for example Paynes Dairies commitment to provide its farmers with weekly market condition updates. Put simply, tell them the truth with no spin.

Remember not all processors are bandits, and they should be viewed as long-term partners with mutual trust. Alas, there is still a long way to go on that front with some and the experiences with Covid 19 has made the journey longer.