Dairy industry told co-operate or lose markets

By Robert Harris

DAIRY farmers must act now if they are to prosper under increasing global competition over the next few years.

Although many have the technical excellence to survive, this alone is not enough, says Séan Rickard, economist at Cranfield School of Management, Bedfordshire. Farmers and processors must co-operate more closely if the UK is to compete with the best.

The industry must act quickly, says Mr Rickard. The recently agreed Agenda 2000 milk regime will come under enormous pressure in the next GATT round which ends in 2003, and quotas will be earmarked for phasing out.

“GATT agreements and the WTO will, in the years ahead, be remorseless in removing protection and forcing greater competition on the sector,” he writes in a recently released report on dairy farming prospects.

However, free trade presents real opportunities, he maintains. World demand for dairy products is growing at 1-2% a year, whereas demand is declining in the EU. Asia is the main growth area, and it will demand exportable, convenient, branded milk products.

Technically speaking, many farmers are well placed to compete on global markets, he maintains. Although freer trade could push prices down to 10-11ppl, higher milk yields will partly offset this fall.

Assuming continued yield growth of 1.2% a year and a modest increase in the national herd, UK milk production will increase by 8-10% within five years, he believes.

This will be driven by expansion – some two-thirds of the nations milk is already produced by the largest 25% of holdings, says Mr Rickard. He reckons the number of milk producers will almost halve to 15,000 by 2005. But average annual yields will have risen to over 7000 litres a cow.

Three other factors will also help offset the slide to world prices, he adds. The average quota leasing cost of 0.4ppl will go, and feed should be cheaper with cereal prices set to fall by 15%. And the Pound will weaken against the Euro as the UK prepares to join EMU.

However cost-efficient dairy farmers become, they will need help to succeed in a liberalised business environment, he adds. “True competitiveness can only be achieved when production efficiency is augmented with an understanding of customer requirements and a willingness to innovate to meet changing consumer demands.”

The first step is to end the antagonistic relationship between Milk Marque and the processors, and replace it with closer co-operation, including strategic alliances, joint ventures and longer-term, trusting relationships.

“They should result in an open flow of information between the parties, combined with the ability to respond quickly and flexibly to market needs.”

Processors also need to invest to meet the challenges ahead, says Mr Rickard.

“Potential investors will only be attracted to the UK dairy industry if returns can match, or better, those available elsewhere. The lower price of milk must be accompanied by the removal of quotas and the whole dairy sector must be focused on the opportunities that these changes will offer.

“The industry needs people with the vision to look beyond their own sector to the opportunities afforded by a fundamental shift in the mindset of the UK dairy industry.”

  • Dairy Farming is the first in a series of reports to be released this year on major agricultural sectors entitled Challenges and Prospects – UK Agriculture at the Millennium. The series is sponsored by Lloyds TSB. Further information on 0117-943 3114

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