Why dairies are not creaming off milk profits

The price paid to farmers for a pint of milk will fall next month. Thom Kennedy looks at what has driven dairies to slash prices:

The Muller supplier has been among three companies to have faced the ire of the farming industry after scooping the cream from the top of the price of a pint of milk.

From the start of next month, Wiseman will be paying 1.7 pence less per litre than they are now.

They aren't alone. Dairy Crest has chopped 1.65p from its price, and Arla Foods 2p, leaving farmers to make the most of 24 pence for each litre of milk provided – production costs are closer to 30 pence.

So why are these major national companies making such swingeing cuts?

The dairies know they rely on their suppliers to keep business running, so a move which could alienate them from the farmers who provide their milk has not been taken lightly.

Pete Nicholson, of Robert Wiseman Dairies, said the value of cream as a commodity on the stock exchange had left the company with little choice but to rein in its prices.

"Britain loves fresh milk, and in particular semiskimmed milk," he said.

"In fact only just over 20 per cent of milk sold in Britain is whole milk.

"Like all fresh milk processors, Wiseman must therefore find a home for surplus cream.

"It is the value of that cream that is at the core of the problems facing the dairy industry at the moment. Traded globally, this commodity has been seriously affected by higher levels of production at a time when demand for the product is weak.

"Something had to give, and it did. Cream collapsed from £1,800 a tonne in June 2011 to £1,020 a year later. And in the last few months it traded for as little as £840 a tonne.

"To put this into perspective, the cream in every litre of farm-gate milk was worth over four pence less than it had been a year before – a loss that no fresh milk processor can absorb."

Mr Nicholson added: "Wiseman had hoped that the need for further adjustment to its milk price following the 2ppl reduction in June could be negated by a sustained and significant rally of the commodity cream market.

"But whilst there has been an improvement from the lows of recent weeks, the value of cream remains around levels last seen in 2009 when the Wiseman milk price was circa 24p per litre."

Dairy Crest's group milk procurement director Mike Sheldon said his company had been attempting to minimise the impact on farmers.

Two dairies – in Liverpool and Cambridgeshire – were closed as the company looked to drive down costs, which Dairy Crest said was an attempt to maintain its milk price, but ultimately, Mr Sheldon said, the cut became unavoidable.

"We are acutely aware of the impact this price reduction could have on our farmers but we have to look at affordability and take responsible action when required," he said.

"We have agreed that we will not reduce milk prices again this year.

"We have listened to our farmers' concerns about the notice we gave of our April price move.

"Dairy Crest has been a powerful advocate for longer notice of any price changes and so we have agreed that from now on we will give a minimum of four weeks' notice. Meanwhile, we have also agreed to work with DCD to review the way we agree milk price changes in the future – with the aim of delivering improved transparency, simplicity and longevity.

"We know farmers want clarity and a process in which they have confidence. This is our agreed objective and we don't intend to let any discussion at a national level on a voluntary code slow us down in delivering this."

The message the dairies are sending out to their suppliers is simple – sit tight, and wait for an improvement.

Mr Nicholson said: "An explanation of why milk prices have been cut gives farmers little comfort. But recent history shows that markets are cyclical and highly responsive to changes in supply and demand.

"Although it should be stressed that volatility looks like it is here to stay we have no doubt that these supply and demand characteristics will again establish a healthier relationship.

"Our commitment, when markets recover, is to reflect this in improved prices for the farmers who supply us."

And Dairy Crest's Mr Sheldon said: "At Dairy Crest we are fully committed to building a strong and secure business on which our farmers can depend, even when conditions are difficult.

"I know this latest price cut will be a great disappointment but I can assure our farmers that as and when market conditions improve sufficiently we will be looking to increase the price again."

A spokesman for Arla Foods was unavailable for comment.

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