Risks in liquid milk sector continue to grow

Farmers are under increasing pressure from problems in the liquid milk processing sector, accounting for about half of the UK’s milk.

Low processor margins, falling cream prices and regional milk surpluses are the main issues.  

Observers are clear about the remedy – retail prices need to rise and some of the benefit must be passed back to processors and farmers.

See also: Dairy performance advice

Industry views

What needs to change in the liquid milk sector to ensure each link in the chain makes a viable margin?

Chris Walkland, dairy analyst
We need retailers to get off the “£1 for four pints” price point and get it back to at least £1.39, where it was before the price war started several years ago.

Then the returns from that need to be passed through the chain to processors, and so on, to direct farmers, so it isn’t just the lucky ones on cost-of-production contracts who benefit.

Nick Holt-Martyn, principal consultant, The Dairy Group
Ten years ago, the AHDB average four-pint price for milk was £1.50 or 66p/litre, and today it’s £1.13, or 50p/litre.

The majority of liquid milk retails for less than 50p/litre and the price gap between two pints and four pints is 31%. Retail prices need to be a minimum of 60p/litre for six pints and 66p/litre for four pints.

If the price is unsustainable then ultimately supply will be unsustained.

Ian Potter, dairy commentator
The retail battle to have the cheapest milk comes at a significant cost to the industry. The UK liquid premium was surrendered without a fight years ago.

The devaluation and commoditisation of milk at retail level, from four pints for £1.40 down to the current norm of £1, is the root problem.

At processor level, it has stifled innovation and new product development.

UK farmgate milk prices have been slowly reducing over the year, averaging 28.8p/litre in August (the most recent Defra average available and down 2.9% on a year earlier).

However, many buyers have recently announced price holds for December. Liquid milk returns are a combination of the price received for the milk and for any products made with the excess cream.

“For processors to have maintained overall revenues as cream prices fell, they would need to have increased their sales prices for milk,” said Patty Clayton, lead analyst at  AHDB Dairy.

“Since December 2018, however, they have fallen back despite cream prices continuing to fall. As a result, processors’ overall income will have been reduced since the beginning of the year.”

The administration of Tomlinson’s Dairies in mid-October, along with Muller’s recent Scottish supply review, provide stark evidence of problems in the sector.

Criticism of Muller moves

There has been a strong reaction to Muller’s Scottish supply review, which saw 14 Aberdeenshire farmers given a year’s notice and transport charges imposed on the remaining suppliers.

The review was kicked off by over-expansion of supply, said Muller, which claimed a 25% rise in its Scottish milk supply since 2014. The company takes milk from 230 of Scotland’s 891 producers.

However, many argue that Muller encouraged expansion with its recruitment drive of 2013 and a 1p/litre bonus for producers who managed to raise production by 2% from 1 April 2013.

Who is right – Muller or AHDB?

The Muller 25% supply expansion figure has been widely questioned, given that AHDB Dairy’s figure for Scottish milk expansion since 2014-15 is just 4%.

A Muller spokesman said: “The data we work with reflects actual volumes supplied to us by Muller producers.

“We would not comment on information presented by other organisations. 

“With respect to decisions to incentivise milk production in 2013, this reflected the need to secure milk supply to meet customer requirements during a period where this was required and also a move, aligned with our farmer board, to source directly from our own suppliers to a greater extent, reducing reliance on third-party brokers. 

“Milk supply from farms has followed a cyclical pattern for many years and, more recently, the extremes have been more pronounced.

“We are in a period now where milk supply in Scotland has surged to a level that requires us to ship 180m litres to markets in England.”

Farmers and processors will need to have a much closer relationship in future to avoid putting pressure on milk prices, said NFU dairy board chairman Michael Oakes.

Both processors and farmers had expanded to find economies of scale, he said, but demand was, at best, static.

Milk producer Graeme Kilpatrick, who farms near Glasgow, said: “If we had had the contract legislation that the farming unions were pushing for, some of this nonsense would not be happening.”