Better times ahead for UK dairy sector, says Milklink chief

Dairy farmers should be optimistic about prospects, says the chief executive of Milk Link, Neil Kennedy. Continuing our series profiling agribusiness leaders, Paul Spackman discovers why

Starting up a farmer-owned co-op from scratch is notoriously difficult and history is littered with examples of those that never quite made it. But a few have, and one of those, in just eight years, has become the largest cheese manufacturer and long-life milk producer in the UK.

Since its formation after the breakup of Milk Marque in 2000, Milk Link has expanded from its heartland in south-west England and now has nine production facilities across the UK, with enough capacity to process about 1.4bn litres of milk a year. In 2007/08, the company turned over £523m, up nearly 3% from the year before.

That should come as welcome news for the 1600 UK dairy farmers who own the company, says Neil Kennedy, who took over from Barry Nicholls as chief executive at the end of 2007. “Our farmer members signed up to a strategy of taking control of their destiny and our business model is designed to pass profit back down the supply chain to farmers.”

It may sound like a slick sales pitch from a man who has held several high profile sales and marketing roles, but the reality is, it seems to be working. Mr Nicholls must take a lot of credit for transforming the business from a fledgling milk broker to a progressive dairy products business. But since joining in 2004, Mr Kennedy has developed the consumer dairy products division significantly.

Many experts talk about “adding value”, but it is refreshing to hear first-hand from someone actually doing it. And if Mr Kennedy is to be believed, it is a route the whole UK dairy industry should be looking at more, rather than trying to compete in highly competitive and volatile dairy commodity markets, such as butter and milk powder.

“Historically, the UK has made far too much milk into commodities. Ultimately, the return to the farmer will be better if you add more value to the final product.”

Take a 200g block of high-quality cheddar, for example. It may retail at £10/kg, compared with standard cheddar at £4-4.50/kg, yet the farmer’s production costs per litre of milk are relatively similar for both. “The more of a premium you can generate, the more money there is in the pool for members.”

Supermarkets increasingly want local produce and Mr Kennedy – who is a grocer’s son and no stranger to the retail world (see CV panel) – is optimistic that will continue. Indeed, Sainsbury’s, M&S and Waitrose now feature the names of Milk Link’s creameries on their packs, including own-label brands. “We charge a premium for it, but if consumers like it, they’re not going to go anywhere else.”

So the demand for dairy products is there, but is the supply?

Despite his “glass half full” attitude, this is where things are a little less certain, Mr Kennedy admits. “If domestic supply continues to contract, there is a risk some more demand will have to be met by imports, because retailers can’t afford to have empty shelves. Their number-one priority is security of supply. Our biggest challenge as an industry is to get sufficient confidence back, to encourage farmers to invest for the long-term and allow UK supply to recover.”

That may be easier said than done, especially considering rising costs of feed, fertiliser and fuel, ongoing disease threats from TB and Bluetongue, and the legacy of several years of under-investment. “We have been through a difficult period, having had years of prices below subsistence and latterly rising costs. But the price situation has only really been better for eight or nine months, so it’s little wonder it’s taking time for confidence to come back.”

But he is sure it will. Even though input costs have typically increased by 5-6p/litre since last year, milk price increases of 8p/litre have more than compensated, and prices are likely to at least remain stable for the foreseeable future, he says.

“The UK is still out of step with most of Europe, where dairy markets have responded to increased quota. We hope, and expect some [supply] recovery next year, but it will be slow and modest.”

Balancing will still be needed

As milk supply has contracted, so the cost of balancing has increased and the three main co-ops have absorbed a disproportionate amount of the cost, Mr Kennedy believes. “There is still a need to balance, albeit a smaller volume of milk. When cheese plants are full, for example, that milk needs to go somewhere. We have to find ways of making plants such as Westbury [in which Milk Link entered into a joint venture with First Milk] work.”

He sees two main ways of doing this, namely through better cost efficiency, particularly heat and power use, and improved capability, or product innovation. “For the latter, we’re the only co-op, and one of the few major dairy companies, to be opening a bespoke innovation centre this year.” The site, at the Taw Valley creamery in Devon, will help develop new products for a range of markets and should go some way to keeping up with constantly shifting consumer demands.

Cloud on the horizon?

One of the more worrying consumer trends, no doubt spurred-on by recent concerns about childhood and adult obesity, is the negative attitude towards saturated fats in dairy products, especially cheese, Mr Kennedy says. Having been involved with the cheese-making industry for 20 years, he is understandably frustrated by the Food Standards Agency attitude towards this. “The FSA has clearly got saturated fats in its sights, and I’m worried about some of its intentions. From an initially positive intent, it seems to have, executionally, lost the plot.

“The natural fat content of milk products is an important part of any balanced diet and we’re fighting hard to make sure they’re seen as such. Frustratingly, the advertising ban on cheese for kids remains, though.”

So the months and years ahead are unlikely to be a bed of roses, but at least there are signs of better times for the dairy sector. Coming from the chief executive of a big milk co-op, that is encouraging to hear. Only time will tell whether this optimism is well founded and is enough to encourage existing farmers to reinvest, and perhaps more crucially, attract new entrants and innovative ideas into the sector. Let’s hope so.