31 October 1997

More change lies ahead

Pressure in the market place

will force further

restructuring in the dairy

industry, possibly to the

advantage of dairy farmers.

Roger Metcalf reports

UK DAIRYING has been through enormous change since market deregulation in 1994.

But anyone who believes things are now settling down is in for a shock. If anything, the next few years could be even more turbulent.

In trying to forecast the changes that lie ahead, it is necessary to understand the forces at work. These include market pressures and political pressures.

The market pressures are manifold.

The liquid sector

Within the liquid milk market, demand is reducing at a steady 3% a year. The decline in doorstep sales is even faster at 7 to 10% a year and could wither to nothing before too long.

As the profitable doorstep sales decline, processors have to keep their volumes going by selling more to the retail sector. But the four major supermarkets are concentrating on fewer and fewer suppliers, which in turn means many of the medium sized dairy companies are having to deal with the even more aggressive "second division" retailers.

The upshot is that liquid milk has changed from a product with a high service value into a low added value bulk commodity. Margins are becoming tighter, which in turn puts pressure on raw milk prices.

The cheese sector

UK cheese production since 1994 has been highly volatile. Consequently, cheese-makers have been reluctant to invest for market development.

At the same time, imports of speciality, added value cheese has increased steadily in response to consumer demand. UK manufacturers have been left behind, producing mainly hard pressed, commodity cheese. Demand for this is still growing in the prepared foodstuffs and catering sectors, but slower than in the speciality and branded sectors.

The butter/powder sector

Despite the allegations that the UK is short of milk, large quantities of butter, skimmed milk powder, cream, cheese curd and other bulk commodities are exported to other EU countries.

Returns from some of these markets have been improving. But they are still essentially commodity markets, vulnerable to currency change and lacking in added value.

With the liquid market declining by over 100m litres a year, more and more bulk commodities will have to be made to mop up the surplus.

These are the market pressures. The political pressures are just as important.

There is no doubt that there is a global determination to free up trade. Already there is an over supply of milk within the EU which tends to keep commodity prices down to support levels.

This will become increasingly apparent as the World Trade Organisation arrangements take effect, limiting the volume that can be exported to Third countries with subsidies, and allowing more world-priced product into the EU.

Political moves to integrate east European countries will also add to the over supply. And at some stage the politicians will decide that milk quotas are unsustainable, which will also lead to increased EU milk production and lower prices.

Given this scenario, it is inevitable that the structure of UK dairying will change.

Most of the major dairy companies will find their profits squeezed. They will be less interested in investing in raw milk processing and will gradually divest themselves of their less profitable businesses. Shareholders will demand a shift into the branded added value sectors.

This will leave the door open for more UK producer-owned co-operatives or companies, such as Milk Marque and Dairy Crest (with its large farmer/shareholder base) to take on more raw milk processing capacity. (Milk Marque has already made a start with the acquisition of Aeron Valley Cheese in Wales.)

It is in the interests of all milk producers to have a secure home for their supplies. But they will have to provide for the investment, as is the case in most other EU countries.

Meanwhile, the private companies will only stay in milk processing for as long as it is necessary for them to develop their branded products from raw milk. Increasingly, products such as yogurt, fromage frais and dairy desserts are being made from milk ingredients.

This secondary stage processing will leave the production and profits from commodities in the hands of milk producers.

It is likely that, over the next 10 years, dairy farmers will have to set up their own co-operatives to efficiently process these raw materials.

Profits from these enterprises, which would otherwise go to private investors dividends, will be added to their income, lifting the overall viability of their milk production.

&#8226 Roger Metcalf runs Agri Food Consultants from his home in Surrey.

Despite the efforts of some companies to glamorise the product, drinking milk has become, in the main, a low added value bulk commodity.