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Dairy industry: milking the market Dairy industry: milking the market
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Anyone who ever wanted to get to grips with the global economics of food should be paying close attention to the current row between dairy farmers and the supermarkets about the price the latter pay the former for their milk. It is a paradigm of how an apparently straightforward market relationship can be distorted. And that is why what might look like a standard spat between rural conservatives versus urban defenders of cheap food is so significant – and why the deal forged by the farm ministers from England, Wales and Scotland, who hastened to the bucolic surrounds of the Royal Welsh Show at Builth Wells to try to arbitrate between the two sides, is unlikely to have much of a shelf life.Anyone who ever wanted to get to grips with the global economics of food should be paying close attention to the current row between dairy farmers and the supermarkets about the price the latter pay the former for their milk. It is a paradigm of how an apparently straightforward market relationship can be distorted. And that is why what might look like a standard spat between rural conservatives versus urban defenders of cheap food is so significant – and why the deal forged by the farm ministers from England, Wales and Scotland, who hastened to the bucolic surrounds of the Royal Welsh Show at Builth Wells to try to arbitrate between the two sides, is unlikely to have much of a shelf life.
The dairy industry has been under pressure for a generation, as the statistics so vividly illustrate. In 1995 there were 28,000 dairy farmers. Last year there were just over 11,000. Over the same period the average herd size has more than doubled as the less efficient holdings were forced out of the business – but even so, the UK no longer produces enough fresh milk for consumers. Meanwhile, the price of a pint of milk (or, more likely, four) has tumbled. Milk is the ideal supermarket commodity: an everyday essential with a short life span. Cut its price and it's sure to bring in the shoppers. Market fundamentalists would cheer at the benign effects of competition, and as food takes an ever larger share of the daily budget, while charities report that the demand for food handouts is reaching a new high each week, it might seem contrary to quibble. The dairy industry has been under pressure for a generation, as the statistics so vividly illustrate. In 1995 there were 28,000 dairy farmers. Last year there were just over 11,000. Over the same period the average herd size has more than doubled as the less efficient holdings were forced out of the business. Meanwhile, the price of a pint of milk (or, more likely, four) has tumbled. Milk is the ideal supermarket commodity: an everyday essential with a short life span. Cut its price and it's sure to bring in the shoppers. Market fundamentalists would cheer at the benign effects of competition, and as food takes an ever larger share of the daily budget, while charities report that the demand for food handouts is reaching a new high each week, it might seem contrary to quibble.
But the backstory to cheap milk is a tale of ever more powerful supermarkets, and their growing capacity to distort the market. Last year, a long investigation by the Office of Fair Trading resulted in fines for price fixing against eight dairies and supermarkets. But they don't need to break the law to shape the world in which they operate. According to DairyCo, the industry's independent research and advice organisation, this power is well illustrated in the rise in the margin the major retailers like Asda and Morrisons take on a pint of milk. Ten years ago it might only have been 2p on a 30p pint: now the cut can be as much as 10p. The consequence of the retailer taking more is that there is less for the middlemen, the processors who buy the milk from the farmers and sell it on to the supermarkets. They have been squeezed, often squeezed out of existence, destroying on the way ambitious attempts at producer co-ops. The ones that survive do so only by holding down the price that they pay to farmers. The news that the Royal Welsh deal will allow producers to escape unfavourable contracts with processors more quickly will not have much impact if there is no better prospect on offer.But the backstory to cheap milk is a tale of ever more powerful supermarkets, and their growing capacity to distort the market. Last year, a long investigation by the Office of Fair Trading resulted in fines for price fixing against eight dairies and supermarkets. But they don't need to break the law to shape the world in which they operate. According to DairyCo, the industry's independent research and advice organisation, this power is well illustrated in the rise in the margin the major retailers like Asda and Morrisons take on a pint of milk. Ten years ago it might only have been 2p on a 30p pint: now the cut can be as much as 10p. The consequence of the retailer taking more is that there is less for the middlemen, the processors who buy the milk from the farmers and sell it on to the supermarkets. They have been squeezed, often squeezed out of existence, destroying on the way ambitious attempts at producer co-ops. The ones that survive do so only by holding down the price that they pay to farmers. The news that the Royal Welsh deal will allow producers to escape unfavourable contracts with processors more quickly will not have much impact if there is no better prospect on offer.
And that is only part of the equation. This market is so dysfunctional that the price of milk is no longer responsive to the cost of producing it. Normally a cut in price like the one the supermarkets were imposing would be prompted by a fall in the cost of production. Unfortunately, most dairy farmers have been hit by the soaring grain prices that are also threatening global food security, This means that producers are not only facing the prospect of a 4p per litre cut in price, but also simultaneously confronting a 2p per litre rise in costs. The effect is that the average farmer who as recently as March was just about breaking even is now 6p per litre below that. The result is exactly the kind of outcome Mr Micawber would have predicted.And that is only part of the equation. This market is so dysfunctional that the price of milk is no longer responsive to the cost of producing it. Normally a cut in price like the one the supermarkets were imposing would be prompted by a fall in the cost of production. Unfortunately, most dairy farmers have been hit by the soaring grain prices that are also threatening global food security, This means that producers are not only facing the prospect of a 4p per litre cut in price, but also simultaneously confronting a 2p per litre rise in costs. The effect is that the average farmer who as recently as March was just about breaking even is now 6p per litre below that. The result is exactly the kind of outcome Mr Micawber would have predicted.
This is not a question of driving efficient production. Nor is it a nostalgic appeal for the benefits of the traditional way of doing things. Milk can be produced competitively by small farms, even though some farmers will no doubt argue that the future lies in units for 8,000 cows nurtured by teams of vets. In the end this is not about price, but about value. The issue is the value of food and the value of food security. It is about regulating the market, and keeping it regulated. Only governments can do that. And only producers can make them do it.This is not a question of driving efficient production. Nor is it a nostalgic appeal for the benefits of the traditional way of doing things. Milk can be produced competitively by small farms, even though some farmers will no doubt argue that the future lies in units for 8,000 cows nurtured by teams of vets. In the end this is not about price, but about value. The issue is the value of food and the value of food security. It is about regulating the market, and keeping it regulated. Only governments can do that. And only producers can make them do it.
• This article was amended on 1 August 2012 to remove an incorrect phrase that "the UK no longer produces enough fresh milk for consumers".