7 May 1999

AD DELAY DIVIDES PRODUCERS OVER CAMPAIGN MONEY

By Vicky Houchin

IT was a bitter blow. Against all expectations, farm minister Nick Brown has refused to force dairy producers to fund a national milk advertising campaign.

In a letter to the NFU, Mr Brown encouraged the union to consider a voluntary collection system to raise money to fund an advertising campaign instead.

Terrig Morgan, deputy chairman of the NFUs milk committee, describes Mr Browns letter last month as a complete shock. The NFU had expected to be given the go-ahead to press for a statutory levy. Now everything is hanging in the balance.

If a milk advertising campaign is to have any impact at all, he believes one single concerted effort is needed.

Meanwhile, milk consumption continues to fall and further price cuts are being enforced. And with potential advertising indefinitely delayed, some producers are making alternative plans of their own.

Round in circles

West Sussex dairy farmer Anthony Adorian decided to do something after attending endless farmer meetings and seeing the debate go round in circles. He has set up his own fund and is asking farmers to contribute at least £100 each to his Sell Milk campaign.

Mr Adorian sees his scheme as a way for sceptical farmers to see that advertising milk could work. He hopes to raise £1.5m by June. If he fails, he has pledged to return all the money to his contributors and donate any interest to the Royal Agricultural Benevolent Institution.

But if successful, Mr Adorian intends to approach the dairy industry which he hopes will match his sum. "Theyll have to because if the farmers raise the money theyll be shamed into matching it," he says.

Other producers claim a different approach would be more appropriate. Glos dairy producer Ben Pullen believes the MDC concentrates on research at the expense of effective milk promotion. He wants the MDC restructured and turned into an advertising agency so it can better promote milk.

"They have £5m-£6m a year and nothing they do is beneficial to us," claims Mr Pullen, who has watched milk prices fall over the past five years.

Mr Pullen admits the MDC wont be turned into an advertising agency overnight. But he claims a lot of support from farmers and is already planning to take up the idea directly with Mr Brown.

There is, however, a slight problem. The plan would involve redrafting the legislation which Mr Brown has already refused to change.

Such a dilemma has led Taunton farmer Marshall Taylor to conclude that turning the MDC into an advertising agency is the wrong approach.

Panic thinking

"This idea is panic thinking by producers. If this is the way they go about it, then their businesses are lost already," he says.

The idea of redirecting funds from research and development into advertising is idiotic, he adds. The dairy industry must move ahead of continental suppliers by developing new branded products and improved technologies.

Despite what seems to be a total lack of progress, money appears to be available in case an advertising campaign is given the go-ahead.

Any forthcoming campaign would build on an existing advertising campaign currently being co-ordinated by the National Dairy Council (NDC).

The NDC won over £1m last year from the European Commission for the purpose of advertising milk. It is now running a six-month campaign in womens and childrens magazines aimed at reaching 80% of housewives more than five times.

The NDC hopes to secure a further £1.5m next year which could be pooled into one campaign with the rest of the dairy industry.

But while the farmers fight it out, financial support among retailers appears to be dwindling. Having benefited from its own advertising campaign recently, Marks & Spencer was until recently keen to work with the industry on a generic campaign.

Since last autumn though, M&S has lost any increase in milk sales because other retailers have reduced their prices.

"Were not making our margins and I struggle to understand how they cover their costs," says M&S merchandiser Yves Fourcade about the big supermarkets.

Despite his current concerns, Mr Fourcade is still keen to push milk. But unlike last year when M&S paid for its own campaign, the money must now come from farmers. &#42

GENERICADPROGRESS

&#8226 No government support.

&#8226 Producers must pay.

&#8226 EU money possible.

The story so far

An MDC-funded project last year estimated a £29m return based on an annual generic advertising spend of £10m funded by producers and processors. The estimated levy for producers is 0.4p a litre. NFUs milk committee voted in favour of a national campaign last September. But government has not supported collection of a statutory levy from producers and processors. Before generic advertising goes ahead producers will need to vote in favour of it.

INVESTMENT NEEDS PLAN, TOO

PAY as much attention to future investment plans as to getting feed costs down because depreciation charges run in roughly the same range as feed costs a litre.

Top 25% performers in the Axient/MDC accounts had a depreciation charge of 1.8p/litre, while bottom performers carried a 2.2p/litre charge, says Tony Evans of Andersons.

This compares with feed costs in a range from 1.5 to 3p/litre and represents up to 10% of milk price forecasts for the current milk year.

Depreciation, the historic writing down value of wasting assets, is often not given the attention it deserves, because until the asset needs replacing, it is simply a paper figure.

Future investment in parlours, bulk tanks, machinery and tractors, slurry systems, scrapers and farm vehicles are the main areas where producers will be concentrating.

Limited reinvestment over the past 12 to 18 months may have assisted cashflow management in the short term, but unless producers are going to stop using the asset or sell it, then reinvestment will be necessary at some point in time.

When reinvestment is carried out, examine the system carefully. Investing to change in order to improve or simplify it can reduce depreciation and running costs, says Mr Evans.

Ask whether each item considered is really needed. "Could good second-hand machinery become an adequate replacement, reducing initial capital requirements and so leading to a lower depreciation charge and less cash demanded for the purchase?"

Among the main investments there are meaningful savings to be made by a change of attitude. Producers who need to replace silage kit could contract out silage operations and save up to 0.5p/litre by doing so.

Contract hire is another good way of hitting depreciation charges for some businesses, as is machinery sharing. "Umbilical cord systems for slurry disposal are fantastic, they do the work in half the time, and, therefore, sharing slurry tankers may be cost-effective with lower capital needs."

The really big issue on any dairy farm is replacing the parlour and it is a more complicated decision. "It gets to the point where you cant afford not to replace it, but you could be looking at a depreciation charge in the region of £200 a cow before inflation and how do you raise the cash?

"You could be spending £40,000 or £200,000 to milk the same number of cows. The parlour is the heart of the dairy operation."

Also consider whether simplifying the feeding system could reduce costs. For example, are in-parlour feeders really necessary?

"Are electronics, digital readouts, computerisation and other such sophistications all really necessary, and how much extra profit can be made from having them? The more complicated systems can demand more capital, higher depreciation and higher running costs."

Many businesses under-utilise capital, which increases unit costs of production through high overheads and especially depreciation, adds Mr Evans. For example, on some dairy farms the cost of a complete diet feeder is carried by 80 cows, while on another the same capital costs are shared between 1200 cows.

"Scale and output must be correctly matched – you must get the output right to equal the system you are running – or change the system."

One extreme example of this is an agreement by two dairy producers to merge their herds of 150 and 70 cows, then milk through one parlour. It offers significant cost savings in labour and depreciation.

"Future capital structure should be planned, because reinvestment cannot be put off forever," warns Mr Evans. &#42

FARMREINVESTMENT

&#8226 Will become necessary.

&#8226 Consider simplifying.

&#8226 Match scale with investment.

Plan investment ahead, says Tony Evans. That way, you may avoid having it forced on you.