Cost of production should not be used to negotiate milk price

Dairy farmers should be wary of using costs of production as the main tool to negotiate higher milk prices, says HSBC bank’s new head of agriculture.

Milk prices rises seen in the past 12 months had been driven more by emotive reasons than economic ones, HSBC’s Pat Tomlinson told FW at last week’s Dairy Event and Livestock Show.

“People who began to worry about supply wanted to be seen as paying the best price.”

Most of the noise about where milk prices should be is about increases in the costs of production up to March 31 2008. “This is a very defensive mechanism to negotiate prices and also potentially very dangerous to dairy farmers; it’s a last resort from producers.”

Instead, dairy farmers should be using plain economics to inform their discussions with milk buyers, Mr Tomlinson said. “Knowing costs of production is critical for a business, but as a management tool, not a marketing one. Costs of production alone have little negotiating power. Arguing that their situation has changed is unlikely to be a more consistent or equitable basis for milk price negotiations.

“The flip-side is that if you want to influence prices, rely on the free market. Dairy farmers need to be in a position to negotiate milk prices based on supply and demand. World demand for dairy products is growing and the dairy industry needs to get itself in a position to take advantage of that.”