1 October 1999

Success – but

change vital

By Emma Penny

THE dairy industry is efficient and faces a prosperous future, but to be effective it must be part of a competitive supply chain, requiring a new mindset for both producers and processors.

Speaking at the NMR/RABDF Gold Cup presentation on the eve of the Dairy Event, Cranfield economist Sean Rickard warned that being efficient was not enough; the industry also had to be effective.

He said that many people believed the industrys current malaise was down to the strength of sterling, but challenged that view. "We had a depreciating currency in the 1980s which bailed us out and fooled us into thinking we were competitive. Then, when currency took off, it crucified everyone."

However, he believes the current year will be the worst for producers, and predicts that prices will improve by up to 2p/litre in the next year.

"We are also highly productive, with year-on-year growth and further potential to exploit."

But he warned that those most able to exploit that potential – and the most efficient and effective – were producers with 100 cows or more, who currently produced two thirds of the UKs milk output. These herds are the industrys future, he said.

"Currently, 44% of herds have less than 40 cows. None of these are economically viable, and if theres any argument for supporting them, its on a social basis."

He also believes that small family farms with 40-100 cows will find it increasingly difficult to survive unless they find a niche market for their milk.

"There is a link between size and efficiency. The revenue difference between farms with 40 cows and those with 100 cows is 20% alone from a higher milk price. Large farms also make better use of inputs, giving a 20% difference in gross margin.

"But the killer is that fixed costs on large farms are 47% less. Multiply all those figures by higher cow numbers, and the difference is crippling."

He said the industry must move to fewer, larger producers to ensure return on capital and boost competitiveness. "We cannot be competitive if the industry is over-manned, and producers must push for removal of quotas – they are only stopping our ability to compete."

But increasing our competitiveness also depends on integrating the food chain, said Dr Rickard.

"Other industries are discovering that as elements in the supply chain become closer, information flow improves, sectors become more responsive, transaction costs fall, and a trusting relationship builds.

"No-one can spend their lives trying to compete on cost; we should compete by anticipating needs and meeting those needs first. We need to be more responsive, and so a tighter supply chain is essential.

"Free trade means we must think as a global industry; the UK has a dairy industry which is potentially world class, and we should go all-out to realise that potential," he said.

INDUSTRY FUTURE

* Larger farms.

* Supply chain links.

* Global industry.

INDUSTRY FUTURE

&#8226 Larger farms.

&#8226 Supply chain links.

&#8226 Global industry.