Q&A: Milk prices row and how the system works

  • 23 July 2012
  • From the section Business
Dairy farmers say the cost of producing milk is now more than the price they are receiving for it
Dairy farmers say the cost of producing milk is now more than the price they are receiving for it

Dairy farmers are warning that they risk going out of business because milk processors, which buy the milk from them to sell onto customers such as supermarkets and food production companies, have cut the price that they pay for milk.

What's all the fuss about?

Milk processing firms, which buy milk from farmers and sell it onto customers including supermarkets and food production companies, have cut the price that they pay farmers for milk.

The biggest firms such as Robert Wiseman Dairies, Arla Foods and Dairy Crest, as well as some of their smaller counterparts, are now offering farmers up to 4p less for a litre of milk.

Isn't cheaper milk good news?

Not for dairy farmers. They say that the average 25p a litre price that they are receiving for their milk is now less than the 30p per litre cost of producing it, potentially putting them out of business altogether.

Why are the milk processing firms cutting the price then?

Processors say that the price of cream on global markets has fallen over the past year, and therefore the price it pays to UK farmers must reflect this reality.

In wholesale terms, cream prices have plummeted from £1,800 per tonne in June 2011 to around £1,020 a tonne in June 2012.

But what's the price of cream got to do with the price of milk?

The number of people buying and drinking whole milk is much lower than it used to be with most opting for skimmed or semi-skimmed milk. This means that just half of liquid milk is now sold as whole milk.

The skimmed-off cream component part of milk has therefore become a vital part of milk processors' business model. It is sold to make cheese, butter and yoghurt, and processors say that they use the higher profit that they can make from sales of cream to offset the lower price that they can get for milk.

But now the value of cream has fallen so dramatically, processors say they are being forced to pass this price collapse onto farmers.

Couldn't dairy farmers just sell their milk directly, cutting out the middlemen role of milk processing firms?

Farmers say that this isn't possible. They are typically locked into one-year fixed-term contracts with processing firms, making it impossible for them to exit even if the processors, as they have just done, lower the price that they offer farmers.

Milk processing firm Dairy Crest, however, last week agreed to release farmers from milk supply contracts after just three months' notice if the processor cuts its offered prices. This change, Dairy Crest says, frees farmers up to seek better deals elsewhere.

However, farmers, say with the milk processors all cutting prices, there isn't really anywhere else to go. And farmers rarely have the bargaining power or relationships to sell milk directly.

What about supermarkets? They buy a lot of milk can't they help?

The National Farmers Union thinks that they should. It believes all supermarkets should offer a price for milk which covers the cost of production, enabling processors to pay farmers a fairer price.

Although sometimes supermarkets offer price promotions on milk, using it to attract customers to shop in its store rather than rival ones, they say this does not affect the price that they pay farmers.

The British Retail Consortium (BRC) says supermarkets are the "wrong target", and claims that currently, 11 of the top 12 best-paying milk contracts are contracts paid by supermarkets.

However, milk trade body DairyCo estimates that in 2010-2011 retailers' average gross margin - the difference between the price they sell milk to customers for and the price they pay farmers or milk processors for it - was 34%.

Critics say this wide margin indicates that supermarkets could, and should, pay more for the milk that they buy.

However, due to commercial confidentiality, we don't know how much profit - if any - supermarkets make on their milk sales. Crucially, gross margin does not translate into profit margin. The costs of transport, storage, staff costs, for example, are not incorporated into the gross margin - meaning once these costs are taken into account, supermarkets could actually make a loss on their milk sales.

Since the protests began Asda, the Co-operative and Morrisons have agreed to raise payments to milk suppliers.

Supermarkets are responsible for buying around half of the milk currently sold. Other organisations which buy milk in large quantities such as caterers, schools, prisons and convenience stores would also need to pay a higher price in order to boost the farmers' incomes, the big retailers say.

Don't dairy farmers just have to accept reality and produce milk for less?

They say this is simply not possible because the cost of sustaining their herds has skyrocketed.

The biggest contributing factor to the increase in milk production costs by far is the increase in feed prices. Feed costs in 2010-11 are forecast to be 16.6% higher than in 2009-10, according to the National Farmers Union. While bedding costs for cows have risen by 13.8% over the past year.

UK farmers also say that have very high welfare standards, even in comparison to the EU, which adds to their costs.

Should the government set prices for milk to guarantee a fair price?

This is what happened in the past when the Milk Marketing Board set prices for farmers. Since the 1990s, when this was scrapped, milk prices have fallen.

But farmers say they would rather have an industry code of practice - agreed between themselves, processors and retailers - which would give them more bargaining power to ensure that they receive a fair price for their milk.

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