Leading milk buyers say they have no plans to cut farmgate prices for organic milk, despite Dairy Crest’s announcement that it would be forced to cut its organic suppliers’ milk price by nearly 4p/litre.
In a letter to producers, Dairy Crest blamed falling demand for organic milk as the worsening economic situation struck consumers’ pockets. The firm told farmers it had “no option” but to effectively cut the price it pays for organic milk by 3.7p/litre from 1 December.
Dairy Crest’s milk purchasing director Arthur Reeves said the firm was negotiating with organic certification bodies and DEFRA to allow producers an organic “holiday” to feed cows conventionally until the oversupply situation was corrected. The processor had boosted its conventional price and would look to accommodate producers on Davidstow cheese contracts where possible. “If we can get some of these measures to work, we won’t need the full 4p/litre cut.”
But NFU dairy board chairman Gwyn Jones quickly branded the decision a “huge mistake” and accused Dairy Crest of an “embarrassing lack of strategy”. “This highlights once more the need for proper contracts. The NFU template contract advocates a window for negotiation which would prevent buyers imposing unilateral changes at their discretion. I implore [Dairy Crest] to look again and see how they can improve the dire situation for their organic producers.”
Mr Reeves defended Dairy Crest’s record and insisted that the firm, which handles around a quarter of the UK’s organic milk, remained committed to the sector. “We have worked with our farmers throughout to meet organic demand, but that demand has now fallen away due to the credit crunch, which no one could have predicted. Meanwhile organic milk supply remains pretty buoyant, so we have an oversupply situation somewhere in the order of 30m litres.”
But other milk buyers, including the Organic Milk Suppliers Cooperative, Milk Link, First Milk and Arla, told Farmers Weekly they had no plans to cut organic milk prices, although some acknowledged the sector faced significant challenges as consumer spending tightened.
“Business is a lot tougher than it was, but people aren’t walking away from organic milk,” Omsco’s Richard Hampton said. “We still see some growth, which has been backed up by TNS figures for September and October, which showed the [liquid organic milk] market grew by 4% and 5% respectively. Some cheese customers have reduced their purchasing, but that’s likely to be temporary. We’re cautiously optimistic about the future.”
Dairy Crest’s shares slipped below £2/share last week, reaching 186.5p/share on Wednesday (36 November), less than a third of their 52-week high of more than 600p/share in January. One City analyst said the fall was largely on the back of difficult trading news (a profits warning was issued earlier this month). “Markets don’t like highly geared businesses at the moment. But, while trading news hasn’t been great, it is a reasonably solid business with some strong brands.”