The future of dairy co-ops

The UK farming industry has long lagged behind our European and global counterparts when it comes to co-operation, with the dairy sector often cited as an example, especially with such strong co-ops as Fonterra and Arla.

This has often been put down to a greater reluctance among UK farmers to work together. While there is an element of truth in that, we were also later to start the development of competitively sized co-ops, with Milk Marketing Boards doing their jobs for 61 years up until 1994.

There is also opposition from competition authorities to growing co-ops in the UK beyond a 25% liquid milk market share. There is definitely as much myth as truth about that now. The view from the Office of Fair Trading hasn’t been tested recently, although the mood suggests competition authorities’ concern about this issue has receded.

Lacking behind this development curve has cost us, although current low milk prices across mainland Europe confirms even the relative strength of larger co-ops is not enough to protect them from varying global markets.

Following the recent collapse of Dairy Farmers of Britain, the two remaining co-ops are First Milk and Milk Link, which handle about quarter of the milk in the UK. However, the value of their sales is less than their competitors with Dairy Crest and Robert Wiseman Dairies both enjoying substantially higher sales than First Milk in 2007/08, even though they handle a smaller amount of milk.

First Milk and Milk Link have been striving to develop their business in the direction of value added products; First Milk in high value branded cheese and Milk Link (now the biggest cheese company in the UK) diversifying further into products such as flavoured UHT milk and branded butter.

Previous merger talks between the two broke down last year, but if the two co-ops were to join up, they would control more than 3bn litres of milk and a substantial proportion of the high-value cheese market in the UK. To grow and become more competitive in a sector increasingly dominated by huge global players would seem a constructive move for both co-ops.

The co-op ethos to pool product returns and to accommodate producers of varying scale and location would be best served by a strong, diversified and forward-thinking co-op, developing and innovating to increase the value of its raw material.

Producers who remain with their co-ops have shown loyalty and deserve their leadership to evolve businesses strong enough to deliver a higher return on their investment. But likewise, farmers who aren’t co-op members and yet feel powerless in the marketplace need also to look carefully at how best that position can be improved through their producer groups.

Undoubtedly, producers need more power to negotiate their own terms of production and price and deserve to be operating with fairly negotiated contracts that strike an appropriate balance between the producer and milk purchaser.

Lessons should be learned from the demise of DFoB. In response to this, DairyCo have put out a tender for research to determine the strength of dairy processors. If dairy farmers are granted this flexibility, they will be able to maximise their collective strength and reorganise themselves in a way that is more conducive to obtaining a fair return for their milk. A strong co-op sector would have a major role in facilitating this reorganisation.

The prospect of the majority of the milk produced in mainland GB, being centrally hauled and marketed by a world class farmer-owned business is an exciting one indeed.