Arla Foods is offering its suppliers increased milk price stability and a reduction in tit-for-tat price cuts in return for a nasty dose of short-term pain.

On the same day (31 Jan) that the milk processor announced it would be paying farmers 0.9p/litre less in February and March because of falling fat values, it also revealed a new pricing strategy that it claimed would be more transparent and better reflect the value of the milk sold to its customers.

Under the new deal, agreed between Arla and the Arla Foods Milk Partnership, which supplies 80% of its milk, farm-gate prices will be linked directly to Arla’s sales and returns in three product areas – branded added-value milks; fresh milk and cream sales and butter, export cream and skimmed milk powder.

The impact of balancing seasonal variations in milk production to match Arla’s needs would also be taken into account.

Significant Lead

In a letter to his members, AFMP chairman Jonathan Ovens said: “We hope this new approach to pricing, which takes into account many of the suggestions from the NFU’s Vision for the Industry, will be a significant lead to the rest of the industry.”

Mr Ovens said he was hopeful that the system would be in place from the beginning of April when a price going as far forward as six months could be announced.

Although Mr Ovens said the price reductions were unwelcome, he did not think Arla’s management would have agreed to introduce the new pricing system unless he had conceded ground on prices.

“We’ve cleared the slate and will start on 1 April with neither side owing the other anything.”

However, farmers have reacted angrily to the price cuts and their representatives questioned whether the board of AFMP had paid too heavy a price to secure the new pricing deal.

NFU chief dairy adviser Tom Hind said: “Our phones have gone ballistic.

Nowhere in our Vision document did it mandate that prices had to be cut to get a better pricing system.

The intent is absolutely right but to get there through a price cut is disgraceful.

This totally undermines what could have been a good news story for Arla.”

Mr Ovens admitted his members were unhappy.

“I’ve had about a 100 calls today and yesterday.”

But he still believed he had done the right thing.

“I think we will start to see the benefits by the end of the summer.”

The negative impact of falling commodity values would be indexed to ensure they did not have a disproportionate impact on prices,” he added.

This month’s Milk Price Review reflects a one-off decrease of 0.18p/litre by Paynes Dairies due to difficult trading and lack of Christmas demand and a 0.3p/litre cut in constituent values by Blackmore Vale Farm.

andrew.shirley@rbi.co.uk