Little change means a bleak outlook for 1999

9 October 1998

Little change means a bleak outlook for 1999

Widely awaited restructuring

of dairy processing did not

take place as expected in

1998. What lessened the

pressure on dairy companies

to rationalise processing

units and what effect will

this delay have in 1999?

Roger Metcalf investigates

RECENT falls in milk prices, while hitting farmers hard, boosted processors profits and helped offset the effects of static markets and the decline in processors margins since 1994.

Such cheaper supplies, meanwhile, simply delayed long-overdue changes in the dairy industry.

Average farm gate prices over the January to July period were worth about 3.5p/litre less compared with 1997, falling from 22.4 to 18.9p/litre, a 15.6% drop. The decline was helped by two green £ revaluations, knocking about 6% off support prices.

Processors did not pass on all the savings to retailers, enabling them to reclaim some of the margins lost in the preceding 3 years, taking pressure off a wide-scale rationalisation.

However, this is likely to have been a one-off. Once again, market performance is likely to determine the fate of processors.

Apart from added-value products like yogurts and short-life desserts, which increased by around 3%, and mature cheddar which also gained, signs are not good.

Liquid decline

Liquid milk consumption has fallen, doorstep deliveries declined and UHT milks increased their share of the liquid market. Therefore liquid milk margins and throughput both remain pressured. Wholesale milk prices have slipped as more milk is sold through the multiple retailer and competition for trade increases.

Commodities are also under pressure. Cheese demand declined marginally as consumers got over BSE scares and ate more meat. Butter consumption fell and export demand has been hit, leaving butter prices down about £150/t; cheese by a similar amount. Skimmed milk powder price is around intervention levels.

EU exporters will turn to internal markets as they try to find a home for the surplus. The UK market, traditionally a home for large quantities of cheddar cheese and butter, will be put under pressure.

This all suggests a bleak outlook for producers and processors alike. One hope for farmers is that if sterling continues to weaken, it could trigger a green £ devaluation. This would push up support prices which processors should pass on to consumers.

Investigation

The current Office of Fair Trading investigation into retailers margins could help processors. Indications are that supermarkets are taking more than their fair share of the cake. Either consumer prices have to come down and/or wholesale prices have to go up.

The latter would allow dairy companies to pay a higher raw milk price but it would take some time to come through the system. It will also need determined action by a strong dairy processing industry to achieve the correct result and at the moment the processors are in a relatively weak position compared with other EU countries.

By the end of 1999 it is unlikely that the industry will be as it is now. Changes will be forced through economics and maybe by political pressures.

The constant war between Milk Marque and the dairy industry is not helping milk producers and is sapping the ability of the industry to stand up to the multiple retailers. Dairy companies do not have the resources to focus on variable raw milk supplies and be aggressive and inventive in the market at the same time.

The Monopolies and Mergers Commission report due to be published early in the new year is likely to polarise Milk Marque into one activity – either milk wholesaling or milk processing – or a total change into independent regional groups.

Material effect

Whatever happens it will have a material effect on the UK processing industry and thereby on raw milk prices. The rest of the industry will be pushed onto the hot pipes again as competition on the UK market continues and margins become less attractive.

Unless milk selling organisations change their short-sighted attitude, and processors focus on the UK retail market, raw milk prices will bump along at the lowest possible level, bringing little comfort to either processor or farmer.