NFU Chairman Bursts Blood Vessel On Milk Price Cut News

Three cheers for NFU dairy board chairman Gwyn Jones, who has thrown his toys well clear of the pram on the news that over keen Arla & First Milk are to cut the price they pay their farm suppliers for milk. Indeed, if toy throwing was an Olympic event, then I think that Mr Jones has gold medal winning potential with this outburst. And I for one think he makes some very valid points. Take it away Gwyn:

“No sooner has Dairy UK started talking about the ‘green shoots’ of recovery in the dairy industry than its members come along and trample them underfoot.

“Not a day has gone by this month without there being news of another milk price cut – farmers would be forgiven for thinking that First Milk’s announcement of a 1.25ppl cut on liquid and cheese on April 1 was a bad April Fool’s joke, had it not been preceded only days before by Dairy Crest announcing a 1.25ppl cut for its Davidstow suppliers.

“Yet it’s Arla that has the biggest boots in being the first big liquid player to announce a milk price cut of 1ppl from May. My big concern is that Wiseman’s and Dairy Crest will see this as an opportunity to follow Arla’s lead.

“Milk Link must be applauded for holding its April price, but why are they one of a minority of processors able to achieve this? Serious questions need to be asked about how effectively other companies are managing the pressure and how effective their strategies are for getting the best returns from a volatile market.

“I do understand that the British cheddar market is under substantial pressure. Cheap cheddar imports are dragging the market downwards and wholesale cheddar prices are predicted to fall further. Also, in the liquid market we are seeing a growing divergence between milk destined for retail shelves and the volumes swilling around in the middle ground.

“Any processor that is brokering milk or manufacturing commodity cheddar will be massively exposed to poor returns in a weak market where contracts are being renegotiated frequently. However, the ingredients market appears to have bottomed out in recent weeks, assisted by the opening of intervention and Private Storage Aid, which have seen EU and UK commodity prices stabilise. Cream prices actually increased between February and March and further weakening of sterling recently only improves our position. All this means that any cuts linked to further pressure in ingredients and falling cream prices have to be challenged.

“However, Arla is neither a broker nor a cheese manufacturer. Quite the opposite in fact. Arla is one of the most well invested, efficient leaders in the British liquid milk market with over 85 per cent of its liquid milk being sold into the major retailers. This share has grown in recent weeks with Arla being awarded an additional ten per cent of Tesco’s business – equivalent to around 90 million litres. It begs the question – what is going on here?

“I’ve no doubt that Arla, like other processors, is feeling the brunt of retail pressure on promotions and margin squeezing. Yet DairyCo’s latest report reveals that there is more than enough margin to go around on liquid milk to allow everyone to get a fair slice of the cake. Margins for liquid processors have increased by 2.91ppl over the last year. Having undoubtedly absorbed the volatility in cream prices during 07/08, it would seem that processors are more than making up for it now, by increasing their gross margins through farmgate cuts. With the latest figures putting the cost of milk production at nearly 27ppl, retailers and processors would be wise not to gamble with security of supply.

“The common denominator in all these price cuts is the weak contract that allows any buyer to recoup their costs at the farmers’ expense. Once again, the NFU urges all farmers to print off a copy of the NFU template milk contract, sign it and give it to your milk buyer or representative. The NFU is here to support any of its dairy farming members in getting a better, fairer milk contract.”