15 May 1998

Why farmers need to be processors

What does the future hold for milk marketing and processing

in the UK? Andrew Dare, chaiman of Milk Marque

Development, gives some answers to Catherine Hughes

AS FARMING incomes come under increasing pressure, there has never been a greater need for farmers to co-operate. Milk Marque Develop-ment chairman Andrew Dare has been bashing out the same line to the milk industry for years – that farmers need to stand together to have equal negotiating power with their buyers. In fact Mr Dare is renowned in the industry for two particular quotes: "It does not make good business sense to be beholden to one company," and "Remember shareholders are not at all interested in the welfare of farmers."

But a lot of bloodshed has followed in the industry since 1994s vesting day – the day that gave farmers the choice of where to sell their milk. Since then 5% of producers have dropped out of the industry each year and 40 or so milk groups now exist throughout the country – all competing in the same market place.

&#42 40 milk groups

Its difficult to say whether the decline in dairy farmers and the 30% drop in milk price over the past year might not have happened if farmers had stuck together. But with 40 milk groups – which do not talk to each other – doing business with one powerful trade body – the Dairy Industry Federation – it doesnt sound like the best way to market the £4b of milk produced by UK dairy farms each year.

MM has been enormously successful in its mission to get more than 50% of milk producers on board on vesting day and is the biggest farmers co-operative in Europe. Mr Dare believes that over the next couple of years two or three forceful co-operatives will come to dominate sales and that a lot of the existing milk groups will disappear.

Now that MM is well-established, Mr Dare will be focusing on getting members to invest in their own plants. Which is why Milk Marque Developments was incorporated into MM last autumn to create a demand for milk – something Mr Dare has been working on for the past two years.

MMs relationship with the DIF has been a constant battlefield. But Mr Dare is hoping that the referral of the whole milk supply issue to the Monopolies and Mergers Commission (MMC) will end the bitter dispute and allow a more constructive dialogue between them to begin.

One of the areas of disagreement is MMs belief that the trade is not investing in efficient processing plants in the UK, claiming instead that it is cheaper to get milk processed in Europe. The trade disagrees.

&#42 Rural economy

"Thats the reason why we are getting involved in processing ourselves," says Mr Dare. "Also, processing here means providing employment in the UK rather than exporting it abroad, which is also good news for the rural economy."

But MMD (which bought Aeron Valley Cheese in west Wales last year) is not the only co-operative to be looking at getting farmers involved into processing. Other farm co-operatives have already made similar moves in this direction, with Scottish Milks purchase of Scottish Prides Island Cheese and the Milk Groups purchase of Nene Valley Dairy.

Mr Dare claims that co-operatives can be just as efficient as privately-owned businesses but warns that they need top-class management. And as dairy factories cost a lot of money to buy and run, only sizeable co-operatives will be able to raise sufficient funds to do the job properly.

With a 7% decline in the liquid market since deregulation, he adds, more milk will have to be processed into butter, milk powder and cheese. However, dairy companies have been steadily closing processing facilities. Dairy Crest mothballed Whitland, Avonmore/ Waterford closed Appleby and Unigate closed St Erth.

He questions where the extra processing is going to come from if farmers dont buy into it. For as farmers look to expand production to exploit quota relaxation under the CAP reform, they will only be able to do so if dairy companies can sell more dairy products. Other-wise, he warns, milk prices will fall as the UK milk market becomes over-supplied.

What of the future for individual producers? "Fundamentally, survival will depend on the overall structure of the individual farm with unit cost being the crucial factor," he says. "Large farms and small farms alike will be among the survivors, depending on how farms are geared. The key issue will be the cost of production per farm and many small farms have a better structure for surviving than many large ones."

Milk Marques first step into processing will certainly not be its last. Green-field sites are now being looked at in the south-west, as well as in Cheshire and Lancashire. MMD needs to raise cash from its members to go further down this route, but first of all it will wait for the outcome of the MMC inquiry in October.

By the end of 2000, £100m will be needed by MMD and the organisation aims to process 1bn litres of milk a year by the same date. But farmers will be asked their views later this year on investment plans that will amount to £1000 a member.

&#42 30% price-drop

Not surprisingly, Mr Dare is confident that MM will survive and be one of the two or three remaining co-operatives over the next few years. But he (along with many in the industry) will be anxious to know, during the current MMC inquiry, why consumers still pay the same for a pint of milk as they did at the time of deregulation, while farmers have seen their price drop by 30% over the past year.

Maybe MM was ahead of its time in the UK, but the success of co-operatives throughout other EU countries should be a lesson that if farmers dont look after themselves and each other nobody else will.

And for farmers wondering which of the three co-operatives will have their milk, they had better be prepared to dig into their pockets because its going to cost them this time.

Reform and modernisation may be the key words of the government, but perhaps the reorganisation of the milk groups may well see the renaissance of the old Milk Marketing Board. &#42

Above: Andrew Dare, Chairman of Milk Marque Development. Right: Aeron Valley Cheese in Wales, which MMD bought last year.