Dairy Farming in 2012

Dairy farmers have to adapt to survive the next five years. And to do this, they need to recognise their strategic position as suppliers in a demand-led industry, according to Professor David Oglethorpe.


“Future prospects lie not in the industry’s ability to maintain pressure on, or do battle with retailers,” he says. “Producers have five years of receiving a single farm payment and with that, have until 2012 to create an investment strategy and make it work, before the inevitable loss of support post-2013.”


So what is the perfect future for the dairy industry and how do producers become strategic suppliers? The dairy sector is not a supply-led industry, he maintains. “Dairy farmers have to realise that without responding to consumer demand, the future will remain uncertain. Producers need to recognise shifts in demand and be in a position to adapt to changes.”


To achieve this, investment will be needed, something which may not have seemed possible in recent years. And it isn’t necessarily investment in buildings or machinery, but in the processing sector, which is fundamentally important.


“Adaptability and flexibility will be key to survival. The ideal situation will be for the producer to sit with processors and retailers each month to see how consumer trends are developing continually, and be able to adapt. Retailers are not going to share information unless producers change their attitudes.”


Prices


The past 20 years have seen continually declining retail prices, but recent price increases in the liquid milk market have resulted in more uncertain trends.


“The driving forces behind these price rises, doubtless partly due to successful lobbying, are unclear in economic terms. Whether these increases have come about through supermarkets showing producers goodwill, or if they are sustainable, remain to be seen,” comments Prof Oglethorpe.


“Price increases are not indicative of a demand-led market and producers shouldn’t bank on either support or high prices. Supermarkets appear to be in competition and that favours the milk producer but, ultimately, the retailers’ commitment to offer low prices may mean increases will be shortlived.”


Structural changes


Restructuring hasn’t reached a plateau and producers will undoubtedly continue to leave the industry due to increasing price and income squeezes, leaving larger herds and fewer holdings (see graph), says Prof Oglethorpe.


“Substantial restructuring in the past 10 years has resulted in the number of farms halving and average herd size increasing by 25%. Projections show this trend will continue, with the majority of herds comprising 100 cows or more, and a quarter having more than 150 cows.”


Furthermore, dismantling the quota system, expected to commence in 2011, will allow restructuring to take place more rapidly. “Production quotas are inhibitors of natural economic growth and therefore, at worst, create a barrier to achieving economies of scale. At least, they present an obstruction through the ability to trade in quota rights.


“The demise of the quota system is only one part of reforming CAP,” he adds. “Artificial price support, direct production controls and the removal of quota will be accompanied by the removal of production-coupled direct support. EU expansion will exert further pressure on the EU budget and decoupled support will also decrease.”


EU enlargement poses both an opportunity and a threat to the UK dairy sector. “Although many of the new and proposed member states have large agricultural sectors, enlargement has the potential to strengthen the EU’s agricultural market position on the world market.


“In terms of market access, there will be a significant increase in potential dairy consumers within the EU to 450m, more than the population of USA and Japan combined.”


Demand – UK and Global


The importance of this potential EU consumption base should not be underestimated, says Prof Oglethorpe. “As countries enter the EU, wealth improves and consumer tastes move towards value added products.”


Alongside the growing EU demand for value added produce, China and India also present valuable market opportunities for the right products. “Producers able to supply value-added products efficiently will prosper, but this will come in the form of exporting processed, not liquid, milk,” he adds.


But population changes in the UK may reverse the fortunes of the liquid milk market. “The changing character of the UK population, and in particular, the growing number of single households, will serve to bolster demand.”


However, the real demand increases will emanate from diversified, value-added milk products which use milk as an ingredient (see panel).


And while recent local-provenance consumption traits may continue, Prof Oglethorpe believes that, as supply chains become more transparent and emphasis on environmental concerns grow, miles travelled will become less important and issues closer to real environmental efficiency will take over.


“Streamlining processes within the supply chain will regain its rightful prominence as a driver for environmental as well as economic efficiency.”


Dairy Herd


Meeting the Demand


To meet these demand trends, producers should aim to use what support they receive from SFP, and increased prices to invest in the supply chain, Prof Oglethorpe advises.


“Producers are in a period where prices have increased after a prolonged depression – but the future is uncertain. This increase, of which a percentage is being taken up by feed price rises, should be directed into restructuring businesses to become more efficient and demand led.


“Whether price rises are artificial or sustainable, the strategy should be to use any surplus in a positive way. In particular,






Key dairy products likely to expand


  • Health and vitality-related soft drinks and yoghurts
  • Foodservice and convenience – coffee and hot drink sector
  • Products emblematic of a region or with distinct local provenance
  • Products displaying a simple traceable environmental footprint
  • Products easily integrated with other products – eg ready meals
  • Lower-fat, nutrition-based products
investments need to be channelled into the processing industry in order to reap the benefits of changing consumer demand.”


For those producers who are unable to increase herd numbers, vertical integration and achieving economies of scale through processing and production methods will be essential, he adds.


“While not all producers will be able to target local markets, this does not mean they cannot invest higher up the chain, by either buying shares in processors or establishing cooperative groups to achieve economies of scale.


“The value lies in making sure that as suppliers, farmers capture a proportion of the value being added to their product. This does not mean increasing their power as a supplier, but means having some ownership of the demand chain through investment in flexible facilities, technologies and brands.”


A change in tactics, from a passive, income-protecting and introspective farm investment policy to a pro-active, demand-focused, product-motivated, off-farm investment strategy is required.


“The window in which producers will have this opportunity is narrowing. The SFP will not last forever, and should now be used to pave the way for a new dairy industry, one which extends well beyond the farm gate.”









DAIRY FUTURE PERFECT

Professor Oglethorpe’s ideal vision for the UK dairy industry



The “dairy future perfect” is a situation where consumer trends are transferred effortlessly through the supply chain in a transparent and flexible manner. The characteristics of how each part of the supply chain might act in such a scenario would be:Q Retailers would explain and continuously divulge milk pricing policies to processors and manufacturers



  • Market information is shared on a constant basis throughout the supply chain
  • Farmers become so well connected to processors and manufacturers that flexible supply-response is automatic and instant
  • Changes in supply costs are understood as well by retailers as they are by farmers
  • Fluctuations in consumer demand are understood as well by farmers as they are by retailers
  • Farmers act as partners in the supply chain and that partnership involves ownership of product up to point of sale
  • Any surplus gained through price or subsidy advantage is automatically used to invest in adding value
  • Every farmer has a five-year rolling supply plan, agreed and committed to by supply chain partners.








Professor David OglethorpeDavid Oglethorpe is Professor of Logistics and Supply Chain Management at the Newcastle Business School, NorthumbriaUniversity. Previously, he held the positions of Head Land Economy at the Scottish Agricultural College and Associate Director of Economics at the English Farming and Food Partnership