Developing new deal for the dairy sector. Still relevant today?

Farm www.farm.org.uk developed the following ask for the WI ‘plight of the dairy farmer’ camapign in 2007 when it became clear that the organisations representing the UK dairy farmer did not have an agreed mechanism to address the inequalities within the milk chain.

Combining the twin concepts of a central clearing house for milk contracts coupled to an indepedent body that would benchmark producers costs I believe the radical views expressed in this paper are as valid today as they were 3 years ago.

FARM

WI  MILK  CAMPAIGN

 From the consumer to the cow – delivering the benefits 

Issues to be addressed

  • Lack of producer negotiating strength. 
  • Price ~ breaking the linkage (sinkage?) of commodity markets determining farmgate price. 
  • Lack of linkage between market opportunities and farmgate prices  
  • Lack of transparency on costs and margins elsewhere in the dairy chain 
  • Lack of co-ordination between supply and demand
  • A plan to deliver the dairy producer base in the UK needs to be ~ diverse, viable and valued  
  • Direct action ~ a short-term fix, not a satisfactory long-term solution – we need an effective alternative. 
  • Delivering the benefits to the target through economic analysis of the milk chain
  • Opportunities for both high value / specialised markets vs. large volume commodity markets 
  • Stability & confidence required for future planning & reinvestment 
  • Raising public awareness of current difficulties, and how it affects them
  • Consumer and taxpayer are not seeing the environmental and social benefits of a viable milk chain
  • Provide the consumer with access to a genuine choice between local/ regional, extensive/intensive
  • Need to offer opportunities for new entrants and not protect the incapable and incompetent
  • Address the legitimate requirements of UK government and EU commission
  • Address the legitimate concerns of Competition Commission and Office of Fair Trading
  •  Need to consider a future without individual or national quotas

 How can these be delivered?

Investigating a number of proposals from farming organisations and the industry there are two common demands – regulation and a central milk-selling agency. 

  • Regulation: calls for OffMilk but if there is no regulation the regulator cannot regulate 
  • Milk selling agency: addresses only the relationship of the farmer, processor and retailer – largely ignoring the consumer and wider issues such as the environment, rural economy and animal welfare.
  • Current attempts to address the inequality by the retailers are basing the ‘minimum’ milk price on the AMPE and IMPE – effectively basing the price of premium milk on the ‘dumping’ price of milk destined for the commodity market.  

Our proposal 

This proposal effectively combines these elements in a way that would resolve the inherent weaknesses, whilst preserving the strengths.

However demands for a milk regulator wouldn’t stand scrutiny by either the Competition Commission or Office of Fair Trading, clashes with the Adam Smith principles embraced in Westminster & Whitehall and would be far too slow to respond to changes at farm level

Regulators are heavy-handed ways of controlling markets and have a poor track record – it is quite possible they will do as much harm as good to an already fragmented market. 

We therefore propose an independent watchdog to have oversight of the entire chain & to benchmark production / farmgate prices and establish an independent view of what is “fair”. We believe an independent watchdog would be more palatable to the industry as a whole, leaving campaigning & consumer pressure to ensure producers, processors & retailers aligned themselves to those standards. 

  • Single Milk Agency – to give producers a solid base upon which to negotiate and to act in a co-ordinating role. 
  • “Milk Minder” – independent milk chain economic analysis. Similar to the benchmarking exercise undertaken by  
  • Differentiation of the market between milk destined for premium value added products of known origin and milk destined for the commodity market 

This combined approach is designed to utilise the benefits of each element whilst addressing the inherent problems of each:

 The Single Milk Agency

  • Would act as a clearinghouse for market contracts, which could in the future largely replace national quotas.
  • Would recommend a minimum selling price based on advise commissioned from independent market analysis (see below).
  • Would co-ordinate R&D for producers
  • Scope for devolved regions to have their own Agency ~ Welsh Milk Agency, Scottish Milk Agency and English Milk Agency. To act as a co-ordinated group, potentially pooling  / sharing R&D and marketing strategies.

 Milk Minder

  • Would undertake analysis of costs & profits throughout the supply chain – to be done independently of the industry.
  • Funded by central government and coordinated by DEFRA
  • To take a longer – term view of the trends in the industry, to look beyond the current narrow definition of “efficiency” based purely on costs of production – eg, to oversee trends in employment, animal welfare, land use, diffuse water pollution, manure use & treatment etc.
  • The market analysis of costs of production and profits throughout the chain would be fed back to the Single Milk Agency and be used as a basis for approving market-related contracts.  

 Differentiation

  • A third, significant element of the proposal is that of differentiating the market for domestic milk, where there is potential for added-value products, from the commodity based markets of skimmed milk powder, butter and non-branded cheese.
  • This would be achieved through a split quota system, overseen by the Single Milk Agency, based on the relevant quantities of milk going into premium and commodity markets. (Currently approximately 70% goes into premium markets and 30% goes into commodity markets).
  • Producers would be able to trade their premium and commodity quota
  • Milk going into the commodity market would be subject to an auction market and producers, processors and retailers are free to make whatever contractual arrangements they deem fit.

 How could this transition take place?

 Single Milk Agency

  • Post- Milk Marque producer co-ops to take on the responsibilities within their own regions for distribution, logistics & producer support services 
  • Duplication between these co-ops in terms of milk brokerage – would be brought under a single, co-ordinated unit.  
  • DairyCo to continue with applied R&D role
  • Supply  / demand co-ordination through contracts which tie the supply chain closer together.  

Milk minder

  • To commission Milk chain economic analysis in the same way as EFRA, KPMG, MDC and benchmark prices. These would be used in order to provide the basis for market contracts.
  • To combine horizon scanning & economic analysis to monitor trends in the dairy industry. An early warning system to look at animal welfare, diffuse pollution and production standards that would underpin public confidence in the industry.
  • To fall under the remit of DEFRA 

Market Contracts 

  • Premium “A” quotas to specific markets
  • Value added, quality assurance + any other market-specific “bolt-on” standards.
  •  To be linked to fresh (liquid) milk supplies and processing where there is regional or brand identity that cannot be filled by “commodity” milk supplies.
  • Pricing to be reflected as a modular package – the higher the standards, the greater the price paid to the producer
  • Gives clear opportunities for smaller-scale producers to compete for high-value contracts, where greater management levels, environmental benefits etc can be recognised.
  • Would be tied to specific markets (such as the ARLA / ASDA relationship) and allow milk with regional provenance etc to be identified with local food branding. 
  • Commodity “B” quota to deal with surplus milk & milk from large volume / low cost producers. This is essentially the commodity market of unbranded cheddar, SMP etc. 
  • For “surplus” milk that cannot be sold into value-added markets,
  • Likely to be processed into commodity items such as  SMP, non-branded cheddar, etc.
  • This would effectively be the principal market for high volume, low cost producers that are currently on “white water” contracts, although it is likely that contracts would be paid on milk solids rather than volume
  • The Total of “A” quota and “B” quota for any producer would not exceed their national quota holding 
  • “A” and “B” Quotas could not be traded or exchanged, as they would effectively be a marketing contract between producer and purchaser. 
  • Farmers would be likely to have contracts that had both “A” quota and “B” quota allocations. 

The task for the Single Milk Agency, through product development and marketing, would be to effectively transfer commodity “B” quota to the higher value premium “A” quota, so that milk processed into low value commodity products gradually decreased and added-value produce replaced it 

What’s in it for me? 

Producer

  • Losses: those few with good contracts might lose a percentage of that contract or have to purchase A quota to make up the difference. Funding the Single Milk Selling Agency 
  • Gains: Guaranteed base price for the proportion of their production of the production that goes into the premium A quota market (around 70%)Stability and the ability to decide it there is a future on an individual basis and what to produce to ensure a viable future. Those wanting to produce B quota milk will be able to trade their A quota. Quota values will recover – as will land and livestock values. 

Processor

  • Losses: Anonymity and transparency.
  • Gains: Stable market to plan their future; guaranteed milk supply of known quality; ability to source milk of specific quality; a fair equitable share of the profits in the milk chain

 Retailer

  • Losses: profit on sales will probably decrease but not below a level that is inequitable
  • Gains: Stable market; guaranteed milk supply; good public relations; get FFA and WI off their backs!!!!

 Consumer

  • Losses: retail price may have to increase?
  • Gains: continued access to a safe healthy product of known origin and standard

 Taxpayer:

  • Losses: Funding Milk Minder and the independent analysis of the milk chain
  • Gains: environmental and social benefits to the countryside and ensuring high animal welfare standards

Environment and rural economy

  • Gains: environmental and social benefits in the rural economy are a by-product of viable sustainable farming
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