The recent increase in milk prices has led to renewed interest in milk brokerages. The pros and cons were due to be discussed at a Dairy Event Farmers Weekly forum this week. Two of the panellists offer their opinions
Misunderstood and much needed in an industry that hasn’t been working for farmers – Chris White of newly formed milk brokerage Capital Milk
In the past, farmers have signed long-term contracts, with notice periods of six to 18 months, to provide milk with certain quality standards. But there was no guarantee of price or fixed pricing mechanisms in place.
This has meant that prices have sometimes been reduced retrospectively, leaving farmers only one option of giving notice to terminate their contracts. However, with the majority of milk contracts being very similar, what real option have dairy farmers had over the last 13 years?
Anyone who has viewed the UK milk industry knows the evidence that the milk market has not worked well for the UK farmer.
The existing milk marketing systems that are in place have delayed the recent increase in world prices feeding through to the UK. As a result of this widespread dissatisfaction, large numbers of farmers have given notice to terminate their contracts at a time when prices are actually rising and are at their highest since 1994.
Capital Milk seeks to create a more competitive market where the processing companies that require more milk can buy it at the market price. In the past milk prices to farmers have been restricted through the existing trading, contracts and pricing mechanisms. As you might expect some professionals and companies are still trying to preserve the old system.
There seems to be some misunderstanding about what exactly a milk brokerage like ours will do.
HSBC’s head of farming, Steve Ellwood, writing in Farmers Weekly on 14 September, said the recent move to establish milk brokerages to trade milk on the spot market ‘is an exceptionally short term strategy and bad news for the sector’.
Capital Milk will not trade milk on the spot market. If Mr Ellwood is referring to our company his information and comments are therefore totally inaccurate and he is not only misleading dairy farmers but possibly reducing their long-term profitability.
Capital Milk will ensure that farmers who sell their milk through the company, will receive a fairer share of the revenue generated from milk sales to consumers.
We will offer long term contracts with a pricing mechanism that will track the fluctuations in the milk market. Dairy farmers selling to us will benefit from improved returns, and much fairer, balanced contracts.
It is the directors’ intention that if milk supply outstrips demand again in the future, Capital Milk will help dairy farmers avoid the desperately low returns they have suffered in the past ten years.
Capital Milk (01794 367611) has been formed by consultants Chris White, who is a member of the Farm Consultancy Group, and David Lunniss who trades as SKS Dairy.
More hindrance than help in an industry that is already changing – Duncan Rawson of English Farming and Food Partnerships.
I do not believe that milk brokering will serve the long-term interests of the farmer for three reasons:
1) The milk industry is consolidating – relationships have formed between suppliers, processors and retailers that were unheard off only a few years ago
If we look back the milk trader who existed five or so years ago existed because of a fundamental failure of the industry to communicate – brokers filled this gap by talking to everyone, and taking excess milk from one source and moving it to another in need – and of course taking a margin on route. The industry was fragmented and the major cooperatives at that stage had not yet developed their role. This has all changed with much better planning and commitment on both sides making the broker much less strategically important to dairy customers.
2) Supply chain relationships are changing – today there is much greater emphasis on building integrated and shorter supply chains that are ring fenced around a pool of suppliers with those farmers taking more responsibility and ownership of the relationship. Retailers increasingly want assurance that they will have a supply of milk, this driver is coming from the retailer and given recent market movements this driver is only set to increase.
The key point is that as the chain integrates and strategic relationships are formed – there is less room for the milk broker and the volume they handle will be ever more marginal.
3) The milk broker is a price taker – they are not adding any value to the product of raw milk – they are simply trading a global commodity. At present the broker can name the price but the world we live in is global even for milk products, and therefore is subject to global drivers of which we have very little ability to predict or influence – who predicted the vast rise in dairy commodity prices over the last few months?
So whilst we are on a rising trend at the moment, it is highly likely that the reverse will happen at some point, plus as we know, high domestic prices will encourage production putting further pressure on our internal markets.
The life of the milk broker and therefore the returns to dairy farmers supplying the broker are not so rosy on a falling market. While the ups might balance the downs there is nothing sound or predictable on which dairy farmers can base a business plan and investment decisions.
EFFP believes that the long-term future for farmers is to develop sustainable supply chains, building relationships with customers and consumers and adding value to their milk, rather than being reliant on a commodity market.
Let’s see the industry as a price maker through providing value rather than a price taker shifting commodities.
Duncan Rawson is a project manager at EFFP.
Who do you agree with. Have your say at FWI’s forum.