The move to dedicated milk supply chain agreements between farmers and the major retailers will add further pressure to an already struggling dairy sector, according to Sainsbury’s chief executive Justin King and David Curry, chairman of Dairy UK.

Speaking at the launch of the National Association of Women’s Institutes’ Great Milk Debate on Tuesday, 24 April, Mr King and Mr Curry agreed that the creation of dedicated supplier groups, such as those promoted by Waitrose, M&S and Tesco that paid a premium above the market average to a select group of producers, would increase the downward pressure on the price received by remainder of the industry.

The market would, asserted Mr King, become less efficient and the price received by others would come under greater pressure as the market sought to establish new price equilibrium.

“It’s very likely that dedicated supply chains are an unstoppable train,” Mr King said.

“A very large part of the market would be outside the dedicated supply chain, making the whole chain less efficient. I believe there is an imbalance between supply and demand in this market place. The imbalance would then reside in the rump of the supply chain, not the dedicated supply chains, and therefore the pressures in the rump would be greater not less.”

Added costs

Such contracts also add extra costs, he said. It would cost Sainsbury’s about one penny per litre to establish a dedicated supplier group, he estimated.

But such concerns were dismissed by NFU president Peter Kendall, who said it was in the interests of the dairy sector that Britain’s biggest retailer acknowledged the need to pay a greater price for milk.

Conservative MP and chair of the All Party Parliamentary Group on Dairy Farming, Daniel Kawcynski, suggested government should appoint a regulator to ensure retailers paid a fair price to producers. This call was supported by Farmers For Action chairman David Handley, but dismissed as “nonsense” by Mr Curry, who said if Mr Handley “didn’t like it he could stuff it”.

But he said he understood and agreed with farmer frustrations that they receive insufficient returns for the product. This is why the dairy sector needs to work harder to capture more of the value added sector, he said.