Dairy farmers lose in supply chain ‘asymmetry’

Dairy farmers need better contract terms to help address uneven price movements in the dairy supply chain, says DairyCo.

A report published this week examined price movements in the dairy supply chain between 1990 and 2010.

The study identified examples of “asymmetric price transmission” – instances when price movements among related parts of the supply chain are uneven.

“Usually, a price movement in one part of a supply chain will result in a price movement in another related part of that chain, after a typical delay,” said DairyCo analyst Michael Archer.

“Asymmetric price movements occur when this lag period is unusual – for instance, a price in one part of the chain takes a very long time to react to a change in another.”

DairyCo’s report found varying evidence of asymmetric price movements in the supply chain, but found, however, that farmers never benefited.

“Farmers are price takers who are unable to influence relevant wholesale prices. Instead, the greater bargaining power of other market participants in the chains means that, at times, they can ensure they benefit from price movements by taking certain actions,” the report said.

Such price movements had greatest effect on farmers with market-orientated contracts, DairyCo said. Other contracts related to costs of production were less affected.

The report concluded that contracts would be less likely to lead to asymmetry if the mechanism for setting prices was known and agreed by both farmer and milk buyer.

Any subsequent changes to this system or the price paid would be also agreed (with the contract ending or not being renewed if that were not the case) and appropriate, agreed notice periods would exist throughout, DairyCo’s report said.

NFU chief dairy adviser Rob Newbery welcomed the findings. “It highlights the effect of lack of transparency in dairy contracts and the exploitative nature of them.”

Milk producers needed price transparency and a better balance between price determination and length of contract term, so they could invest, he said. “Certainty over price would result in commitment from farmers.”

But Dairy UK’s Jim Begg said that linking milk contracts’ duration with changes in milk price could hit farmers’ incomes if the market turned against them. “Processors pay premiums to obtain security of supply,” he said.

“By depriving processors of security of supply, linking contract duration to price changes could drive premiums from the industry and increase price instability to farmers. So, while this recommendation, on the face of it, is attractive to farmers on a rising market, it would be disastrous on a falling market, and over the long term it could drive value out of the industry.

“Interestingly, the report didn’t look explicitly at the relationship between retail prices and farm gate prices. It could have made clear that there is no necessary link, as demonstrated by the rise in farm gate prices in 2010, despite price discounting by retailers in liquid milk.”

The report concluded that some price asymmetry was apparent in cheese markets, although this was not consistent.

The impact of price asymmetry on liquid milk is less clear. There was uneveness between movements in DEFRA’s average farmgate milk prices and wholesale liquid milk prices between 1995 and 2010. However, this was not the case for the average of aligned and non-aligned farmgate prices compared with wholesale milk values from 2005 to 2010.