MUSTKNOW THESCORE…
CO-OPSAIMINGTO ADD VALUE
MUSTKNOW THESCORE…
Many milk producers are
holding on to the hope that
prices will improve when
more UK milk processing is
in the hands of producer-
owned co-ops, but how soon
will that be? Suzie Horne
reports on the progress of
the various groups
ALL the major milk co-ops have either committed themselves to investment in processing, or have already invested in facilities.
The options range from building a new factory on a greenfield site, through buying existing capacity, to contract processing operations where an existing business manufactures what the co-op wants to produce, leaving marketing to the group.
Adding value is usually the prime motivation for co-ops investing in processing, but there is another important reason for going down this road – security. Knowing that there is friendly capacity and a secure market for their milk is crucial to producers confidence.
United Milk is investing £45m in its 800m litre new facility at Westbury, Wilts, which is due to start taking in its first milk supplies by the end of May and be fully operational this autumn.
Chief executive Don Morris argues that the UK is effectively excluded from the intervention market by lack of processing capacity, mainly because of rationalisation and the increasingly tight specifications written for intervention.
While the Westbury site will aim primarily to supply quality ingredients to the food industry, it will also be able to manufacture butter and skim milk powder for intervention when necessary.
Apart from Wiseman Dairies, the UK has been sadly lacking in significant investment in dairy technology in recent years, says Mr Morris. He expects current low prices to be hanging around the whole market for a while.
"But we are commissioning our plant in late spring/summer and in three months time we will be processing and expect to improve our market."
Not big enough
But processing is not for all co-ops. Some simply are not large enough. Others recognise that it is not the answer for them because, like Southern Milk in Sussex, they have a large liquid market on their doorstep. These co-ops plan to maximise producer prices from that.
However, there would always be the option of affiliation with other organisations which might lead down the processing road, says Southern Milk producer-director Duncan Rawson.
Any attempt to add value must be considered, says Nick Kidd of Grant Thorntons Cambridge office. He works with many food businesses and says that as basic commodity prices are being squeezed, innovation is crucial to keep producers in business.
"Take the white meat market as an example. Chicken has benefited from single families, divorce, food on the move – where could milk do this? You have to look at things like increased shelf life and making the product more attractive to certain types of consumer.
"Carrot producers are also suffering from the fact that their traditional market – the Sunday lunch – has declined, so we now have chocolate dipped carrots for school lunchboxes.
"The further down the chain you go, the more you can control it and the more potential profit you can earn from it by cutting out the middlemen," says Mr Kidd. But he admits that it is a huge risk.
"You need a guaranteed market. Supermarkets will not hand out contracts; only open ended agreements. Against this backdrop, they are also rationalising their supplier base."
Small businesses can supply supermarkets, but usually only in niche markets with strong branding, such as regional speciality foods, says Mr Kidd.
Producer members of co-ops being asked to commit to processing must ask how value will be added. "I would be asking for evidence of where the organisation is going, how are they going to achieve what they are promising and how much is it going to cost.
Hoping to sell
"Its no good building a factory and then going to Tesco hoping to sell the product. Where are the ideas going to come from, how is it going to be innovative, different?"
Producers must, however, recruit the right people to run these new ventures. Then give them the scope to do the job properly, as well as the pay which food production and marketing at this level demands. "These people are not interested in cows and it doesnt matter to them whether its milk or potatoes, they are interested in margin."
Ken Boyns, MDC datum analyst, agrees. "Producers investing in processing capacity must ensure the total returns generated – including capital growth and dividends will be higher than are obtainable from other milk purchasers. Other issues, such as security of supply, are relevant, but must be carefully examined."
At some time in the future, there will be changes to quotas and then the limiting factor could well be the ability of the person handling your milk, says Roger Evans, deputy chairman of First Milk. The group is the UKs largest milk producer co-op, with 4500 milk suppliers.
"When I ask producers what they want from their co-op, the first thing is a better milk price and the second is a factory. It gives them a huge sense of security, but there has to be a commercial reality to that.
"When you have a good basic business plan, then lenders are quite positive. They would like to see investment beyond the farmgate and see it as critical to farmings future," says Mr Evans.
Joint venture
First Milk has chosen the joint venture/partnership route for most of its processing interests. Some of these are inherited from Scottish Milk when it merged with Axis. Scottish Milk products makes 5000t/year of branded premium cheeses and is 80% owned by First Milk. Aeron Valley Cheese is owned equally by First Milk and Irish producer co-op Dairygold, while First Milk also has a 20% stake in cheese production at Dairy Crests Haverfordwest business.
Many people still think there are far too many producer groups buying milk. Further rationalisation seems inevitable and will probably strengthen the sector. But with so many co-ops looking to get into processing, there is a danger that some poor decisions could be made.
Because of the state the dairy sector is in, there are many processing businesses actually or potentially for sale. If co-ops have money in the bank, they must be extremely careful where they invest it, as some of these businesses may not be a good bargain, warn analysts.
"Producer control of the dairy industry is never going to happen in the UK," said one industry observer. "The industry has to work together. There is also a delicate balance to be struck. People working for producer co-ops must have room to do their job properly, but, at the same time, producers must be assured that their best interests are the priority of the business."
Bankers are concerned that co-ops looking to add value must know where they are going and must make a realistic assessment of whether they can achieve this.
"The dairy sector is in massive turmoil at the moment and they must tread with some caution," warns Tim Porter of Lloyds TSB. "If weve had one proposal of this sort recently, weve had six, and there isnt room for all of them." *
Right: Some producer groups main plan is to sell liquid milk, says Duncan Rawson, producer- director of Southern Milk.
Milk could become worth more, improving producers margins, as co-ops, such as United Milk, begin processing ventures, says Don Morris.