Dairy supply chain must adopt culture change over milk prices

NFU Scotland is seeking to meet with retailers and milk processors on the urgent need for the dramatic upturn in dairy markets to speedily feedback to farmers.

After two years in which milk prices fell to their lowest levels for a generation, plunging production and rising markets have sparked a turnaround in wholesale prices for products like cheese, cream and milk powders. It has also seen spot prices for milk rise to more than 30p per litre. However, the average price received by a Scottish dairy farmer will be close3 to 20p per litre, with many well below that.

The response to the market changes from milk buyers and processors has been hugely variable, causing frustration amongst dairy farmers. That has seen a return to protests outside a Muller UK site in Shropshire in recent days after the company announced it would not be increasing its milk price in September – a decision questioned by NFU Scotland.

The Union has had a positive response to requests to meet with Muller UK and farmer co-operative Arla and meetings with Asda and Morrisons are in the process of being arranged, where dairy will be on the agenda. It intends to set up meetings with all other processors and retailers in due course.

NFU Scotland wants all involved in the dairy supply chain to use this current upturn as an opportunity to embrace culture change and move away from the damaging approach of the past where dairy farmers are left to bear the brunt of extreme volatility in dairy markets.

The Union believes that it is in the interests of processors to use this upturn to quickly drive long term confidence back to those milking cows rather than returning to previous practices of delaying price rises and basing pricing decisions on what a competitor is doing rather than focussing on their own business model.

The Union also makes the point that, by the autumn, the expectation is that the EU dairy package currently being finalised will offer farmers the option not to produce to their maximum, with an estimated 12p per litre paid on the production cut over a three-month period when compared to the year before.

Modelling by the levy body AHDB Dairy suggests that, with UK cow numbers falling, milk production towards the end of 2016 will only just cover consumer demand.

According to NFU Scotland, processors should immediately offer a price that starts to return producers towards profitability and, going forward, work with producers and retailers to put in place fairer and more resilient supply chain models.

NFU Scotland Milk Committee Chairman, Graeme Kilpatrick said: “The dramatic and welcome change in dairy markets means we have an urgent need to engage with milk buyers and retailers and ensure that there is no further time lag in the upturn being reflected in farmgate prices.

“That has not been the case in the past and analysis has shown that farmgate prices are quick to fall but slow to recover, even when commodity prices have surged ahead. Sadly, some processors are already repeating the mistakes of years gone by.

“They need to realise that the EU package means producers are likely to have options this autumn if their price remains uncompetitive. It is in the gift of processors and end users to lift prices as fast and as high as they can they can – rather than by as much as they think they can get away with if they want to secure supplies.

“We are in the process of setting up meetings with supermarkets and processors to assess how they intend to respond to the dramatic changes in the milk market and the drop in supply. There is also a need for individual farmers and those representing milk producer groups to lead and drive the discussion on prices with their buyer. I urge them to put aside any obsession about what another milk buyer may or may not be paying and focus attention firmly on how their buyer is responding.

“As markets strengthen, farmers must also consider their options. The grass isn’t always greener elsewhere and not all in Scotland have an option on who to sell their milk to. However, there is much to be gained from working with a milk buyer who has a history of responsible engagement with their suppliers.

“The bottom line is that many producers have never faced more challenging financial times. The vast majority of Scottish dairy farmers are still a long way short of the point where they will see a return to profit; rebuild balance sheets and contemplate investments which have been put off for almost two years.

“It is in the interests of consumers, retailers, processors and farmers that we use this huge improvement in the market to drive change and confidence. In the short term, producers need to see a commitment to immediate price moves that reflect the market. Longer term, the entire supply chain must act collaboratively to ensure a sustainable and more stable future for the UK dairy sector.”

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