Growing crisis of the milk industry comes to a head

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The growing crisis in the milk industry has come to a head this week as one of the major buyers of milk, the farmer-owned co-op, First Milk, announced a rescue package in a desperate attempt to secure its very survival.

First Milk, which grew out of the old Scottish Milk Marketing Board and then merged with a major English co-op, may not source much milk in the North-east, where Muller Wiseman are the major buyers, but if it were to collapse, it would have major repercussions for the whole milk industry. The prospect of hundreds of dairy farmers with no contracts looking for a market for their milk in an over-supplied market is a real possibility and could drive many out of business.

So what is behind the crisis? Like all commodities, the market is dictated by supply and demand and markets throughout the world are saturated with dairy products, partly due to the ban on imports by Russia and the slowing down of the Chinese economy but also to the good grass-growing season in the northern hemisphere which has seen a surge of production.

The removal of milk quotas, introduced in 1984 to reduce EU butter and milk powder mountains, has also encouraged some producers to increase production. Inevitably, milk prices have collapsed. It is the perfect storm. But the real villains of the piece in the UK are the supermarkets who are using milk as a loss leader in an escalating price war, with milk retailing in some supermarkets at the ridiculous price of under a £1/litre – less than a bottle of water. Little wonder that food is a major factor in the recent fall in inflation.

Depending on the type of contract they are on, some producers have seen the ex-farm price of their milk fall by a third in a matter of months – from around 30p to 20p/litre – and many more will be selling at less than the cost of production, although feed prices have come down as a result of the simultaneous collapse in grain prices. With a perishable commodity like milk, producers have no alternative in the short-term but to keep producing. Cows need to be milked and milk can’t be stored on farm. As a result, producers are inevitably weak sellers and are currently on a hiding to nothing. It must be harrowing to keep milking cows twice a day, seven days a week, knowing before you even start that you will be selling every litre at a loss.

First Milk has described 2014 as a year of volatility in the dairy industry across the globe which has never been seen before. Returns for globally traded products have fallen by over 50% since the record levels of 12 months ago and has led to a steep fall in milk prices around the world. The co-op says it is losing 1p/litre on every litre handled which is having a dramatic effect on cash-flow. The survival package the co-op has announced includes the deferral of payments for milk to producers by two weeks, an increase in members’ capital investment contributions from 0.5p to 2p/litre for milk supplied from December, 2014, to August, 2015, and an increase in the capital investment target for members from 5p to 7p/litre. It has, however, been decided to reverse 1.1p/litre of a price reduction for the manufacturing and liquid pools planned for February.

“These moves will deliver a cash injection into the business and play an integral role in putting our finances and our business on a stronger platform as we approach the spring flush of milk,” said First Milk chairman, Sir Jim Paice, the former UK Farm Minister.

The co-op is the UK’s only major dairy company 100% owned by British farmers. It is headquartered in Glasgow and generates annual revenues of £530 million, selling raw milk and marketing cheese, butter, skimmed milk powder, whey proteins and sports nutrition brands in both national and international markets.

“We don’t know how long this current market downturn will last and we are aware that hundreds of UK dairy farmers are unlikely to find a home for their milk this spring,” said Sir Jim.

“Our priority is to make the business and our processing assets as secure as possible in order that we can continue to process and market every litre of our members’ milk.”

NFU Scotland is urging milk producers to support First Milk and putting pressure on banks to be sympathetic.