19-03-2014 01:52 AM | Dairy, Finance, News

Optimism in dairy industry despite 'unfair returns'



Optimism in dairy industry despite 'unfair returns'
Dairy farmers are still not getting fair returns from the market – but the expansion of Arla could finally provide transparency, according to agricultural accountants.

Pat Tomlinson, director at Old Mill, says that margins in the supply chain are still unaccounted for, despite the long-awaited Dairy Code of Conduct and supermarket Ombudsman. “In January, Defra’s average UK farmgate milk price was 33.84p/litre, which included milk destined for the premium liquid and mature cheese markets,” he says.

“Within that there is a wide range between different processors, with some farmers getting more than 35p and others as little as 31.1p/litre.”

However, DairyCo’s milk for cheese value equivalent (MCVE) shows that a litre of milk going into mild cheddar cheese production should have been worth 38.5p in January, based on reasonably efficient processing, a profit margin to the processor and actual market prices for the end product. Assuming transport costs from the farm to factory of 1.5p/litre, ex-farm prices should have equated to 37p/litre.

Similarly, milk made into butter and milk powder (the actual milk price equivalent) was worth 37.6p/litre in January – equating to 36.1p/litre at the farmgate.

“So on average, 2.7p/litre – or at its worst, 5.9p/litre, is going missing,” says Mr Tomlinson. “All sorts of factors have been blamed for this over the years, predominantly by the milk buyers, as they are the ones who have had that money in their grasp. This smoke and mirrors has been a permanent feature of the UK milk market since deregulation in 1994, with few willing to provide any transparency over that time.”

In reality there are only three potential reasons behind that lost margin, says Mr Tomlinson. “Firstly, processors are selling products at below average market prices – but by definition not all can be doing that and some must be exceeding market average. Secondly, the processors are less efficient than the formulas assume – but farmers should not be taking the penalty for that. The final explanation is that processors are taking more profit than the 3% on sales that the formulas assume.”

Farmers who feel they are not receiving a fair price should pose those three questions to their milk buyers, he added.

“Taking a look at their accounts is also a good place to start.”

But hopefully the era of smoke and mirrors may be reaching an end. “The meteoric rise in influence that Arla has in the UK milk market may start to clear the fog and end the charade of buyers trying to justify prices that do not correlate to the wider market.”

The reason for that is that Arla can answer all three of the above points very openly.

“As a large processor of a wide range of dairy products, with access to customers across a number of countries, they are more likely than any to consistently maximise returns from the marketplace,” said Tomlinson.

“Arla has very well invested processing facilities; whether that’s the new Aylesbury liquid milk factory, the Taw Valley cheese factory or the Westbury butter/powder plant. It should therefore be able to deliver very competitive costs of processing raw milk into finished products.”

Finally - and critically - it is owned by its producers, so all profits, after investment and development, are ultimately due to its farmer suppliers. “Not everyone can or wants to supply Arla – but all dairy farmers should stand to benefit from its presence in the market place,” said Tomlinson.

“I feel there is a real reason for optimism, not least because a new degree of transparency and honesty will have to become a feature of future milk pricing.”

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