Milk crisis: Next few months could be crucial say farmers

With their futures unclear they say the current crisis has caused uncertainty with milk contracts, and fear cow welfare will suffer and more people will be forced to work for less money if prices continue to be slashed.

About 12 months ago farmers were receiving about 32p to 33p per litre for their milk.

Before Christmas the Market Drayton-based Muller Wiseman said it would drop its price by 1.2ppl to 25.90ppl from January 10, which is to remain in place throughout February.

This is in line with the average price paid by Britain's dairy giants of around 25p per litre. But according to the National Farmers Union each litre costs farmers about 26p to produce.

Matt Jones, of Lower Grimmer Farm, Minsterley, near Shrewsbury, currently milks about 215 cows.

The 34-year-old said: "For us we have just lost our contract with Medina. A few months ago it said there was too much milk so basically a lot of farmers got sacked.

"I have been ringing around for a new contract but no one seems willing to take on the milk.

"There are some that will offer a market-related price but this is not a proper contract. It will mean we will be getting about 17p and at the moment that is unacceptable and we wouldn't be able to continue with that.

"I will be able to sustain it at 24p to 25p for a few months, but if I get a contract at 17p or lower than 24p to 25p then I will not be able to sustain it.

"Cow welfare will also suffer and there will be employees working longer hours for less money.

"Obviously a lot of things are feed price dependent and weather dependent.

Supermarkets, supply and demand and a lack of tougher government regulations are to blame for the current crisis in the dairy industry, according to MPs in Shropshire and Mid Wales.

They have expressed different views on why milk prices are continuing to fall, causing farmers to fear for their futures in the industry.

David Wright, the Labour MP for Telford, has called for a return to more stringent regulation from central government, along the lines of the former Milk Marketing Board which used to set a minimum price for milk.

"I think the government has got to explore what further regulations are needed," he said.

However, Ludlow Conservative MP Philip Dunne said the problem was a question of supply and demand, and doubted whether regulation was really the way to tackle the problem.

"It is very difficult. The fall in price has been caused by over-production over the past year, causing over-supply, and I don't think that is capable of being regulated," he said.

"It is important that the government encourages the different parties in the industry to work together."

Mr Dunne said it was not in the long-term interests of the major supermarkets to drive dairy farmers out of business.

He added that attempting to regulate the milk markets would probably fall foul of competition law.

Glyn Davies, MP for Montgomeryshire, said that problems were based on the competition British farmers faced when supplying milk to the manufacturers of non-milk dairy products such as butter, cheese and yoghurt.

"We have a free market and that means that there is competition from across the world. In places such as Holland and Portugal massive dairy farms are being built producing milk on such a huge scale that they can supply milk very cheaply," he said.

"There is also the problem of supermarkets selling milk too cheaply and using it as a loss leader."

Daniel Kawczynski, Conservative MP for Shrewsbury and Atcham, said he was concerned with the way that farmers were being squeezed by large supermarkets.

He said it was an area in which the Groceries Code Adjudicator – formed in 2013 to protect grocery suppliers – should be intervening.

Owen Paterson, Conservative MP for North Shropshire, who met local people at a current affairs group, Pints and Points of View in Whitchurch earlier this week, said he remained optimistic about the future of the industry but changes needed to be made.

"I have got until the end of April to get a new contract. Things are looking pretty sour at the moment.

"If I'm struggling to secure a contract I can't justify producing it at loss for too long."

But Mr Jones said he would like to continue farming.

"My granddad started up the farm so I would like to continue," he said. "It has been a bit of a baptism of fire.

"You can forget investment at the moment, it is just about staying afloat.

"If you spend the next 10 years of life struggling it makes staying in the dairy industry a bad decision.

"I do 60 to 70 hours a week frequently and I would like to start a family. My finance is not from a farming background so she obviously has her concerns about it."

Campaign group Farmers For Action (FFA) has been taking part in a series of protests around the country over the last couple of months after dairy processors, including Shropshire-based Muller Wiseman, slashed the price they pay farmers for milk.

"Farmers For Action is doing its part to improve milk prices. They are all peaceful protests and it is nice example of dairy farmers working together.

"Publicity, good or bad, can lead to something," Mr Jones added.

Graham Potter, of Wood Farm, Minsterley, near Shrewsbury, milks about 180 cows and currently has a contract with Arla Foods.

The 35-year-old said: "Despite milk prices dropping, everything else has not dropped with it. We have still got higher costs.

"Rents are high and feed costs are high. Fuel prices have dropped but not significantly.

"It is leaving farmers having to work harder and it makes you rely more on family labour where they are not taking a full wage.

"One of the problems is too many people are having different prices.

"Supermarkets aren't helping. There is too much milk about their saying.

"There is also too much milk being moved around, back and forward between consumers.

"They are buying milk and moving it into different places. We have to pay to have milk picked up. it is another cost we didn't use to have.

"This time of year our costings are at their highest because the cows are indoors. We wouldn't want prices to drop much more now.

"It would be good to see the government have a look at it and see what's going on.

"I do support Farmers For Action but I am struggling to see what can they do."

Mr Potter added: "I am the third generation on the farm. I have been running the business about eight years.

"I'm alright at the moment. It's a nervous time but I am not as worried as some who are looking for other contracts.

"I own 200 acres of land while 100 acres I rent. Banks are not worried about people like us because we have got a lot of collateral.

"I can take a hit for a bit but can't keep doing it. The important thing is not to keep all your eggs in one basket, which is why it is important we are also involved in beef.

"How things will go will depend a lot on how the spring goes.

Falls in value of dairy products on the commodities market have had a serious impact on the price paid to farmers for their raw milk.

Between December 2013 and December 2014, the UK wholesale price of cream has slumped by 36 per cent to £1,050 per tonne.

Butter is down by 35 per cent at £2,275 per tonne, skimmed milk powder is down by 49 per cent at £1,425, and mild cheddar cheese is 35 per cent lower at £2,250.

The fluctuating price of products such as these, which are made with whole milk, affects the farm gate milk price accordingly, and underpins part of the price fall seen over the last few months.

Graeme Jack is corporate communications director at Muller, which has recently held the price it pays for milk despite the pressures that are mounting on the firm from the fluctuations in the commodities market, and in contrast to other firms whose prices have been cut.

"It's an inescapable fact that cream is a commodity product," he said. "Even if you convert it to butter, that's a commodity product whose market has declined sharply too.

"We have had a very positive response to holding the prices, but our style is that we are hopefully regarded among most members of the farming community as telling it like it is. We can't rule out further adjustments because of the problem with poor returns from cream and butter."

Despite the low value, UK milk production is running ahead of the three-year average, with 38.6 million litres of milk produced in the UK every day, against an average of 35.8 million.

First Milk has been at the heart of the most recent row over pricing, deferring payments to suppliers in a bid to stabilise the business's cash position having traded at a loss earlier in the year.

In a video address on its website, First Milk vice chairman Nigel Evans said: "We have a situation that has arisen in terms of cash flow, partly as a result of market moves and our inability to lower the milk price sufficiently quickly to deal with the drops in commodity prices and product prices we were supplying into. A cash deficit built up and we were effectively trading at a loss for a while.

"If it is a growing spring there could be a lot of milk about and it could be the autumn by the time the prices starts to go back up. But if we have a drought it could be June or July.

"People have got to watch their costs and be cost-efficient. It is hard work out there at the moment."

Glyn Davies, MP for Montgomeryshire, has been involved in farming all his life and was a dairy farmer for 15 years.

Now in his 70s, he said the industry has never been in a more perilous state.

"I really cannot remember dairy farming been so bad, into terms of the uncertainty that farmers are facing," he said.

"I am pretty appalled by what is happening, things are far worse for the dairy farmer than I can remember."

"Unless there is a dramatic turnaround than an awful lot of farmers will be leaving dairy and many will be getting out of farming altogether."

Farmers received a further blow after the Glasgow-based firm First Milk delayed its next milk payment to its suppliers by two weeks as it attempts to put its finances in order.

Shropshire Council leader Keith Barrow said he would write to the firm about the impact on farmers.

Mr Davies said that the First Milk situation was desperate, not only in the short-term but for the long-term future.

"Dairy farmers depend on their 'milk cheque' and if that is postponed for a fortnight that can have big impact on their lives. But First Milk says that it had to make that decision to stop it going bust."

"This is a potentially disastrous position for the UK dairy industry."

Meanwhile, a group of dairy farmers have warned a Government minister they "cannot take any more pain" over milk prices.

Rebecca Evans, Welsh Government deputy minister for agriculture met with six dairy farmers at NFU Montgomeryshire chairman, Jonathan Wilkinson's Dyffryn farm in Meifod on Thursday.

Mr Wilkinson said: "The main message was please appreciate the desperate situation on many Welsh dairy farms. Please impress on milk buyers that we cannot take any more pain."

Mr Wilkinson, whose family have farmed at Dyffryn since 1955, said he was concerned for the future of many dairy farms in the current climate.

He said: "These are difficult, difficult times for dairy farmers and I worry that we have not reached the bottom yet.

"The problems are not just with First Milk, they are with all suppliers. The situation where you can buy a pint of milk for less than a bottle of water is plainly ridiculous.

"The pressures are severe enough that many farmers are having to go to the bank manager and ask for extensions on their overdraft to carry them through this difficult period."

Mr Wilkinson said that up to 250 dairy farms will be without milk contracts after April which will leave them taking "spot prices" for what they produce.

He said: "In some cases that is as low as 15p a litre and we have heard some offered weekend prices of 12p a litre.

"The cost of production varies from producer to producer but 27p a litre is conservative estimate so common sense says that cannot carry on. It is beyond most businesses ability to survive that for any length of time."

Montgomeryshire Assembly Member Russell George arranged the meeting.

Rebecca Evans said: "This is of course a difficult time for dairy farmers across the UK. Confidence on dairy farms had been building over the last year, with a better milk price and lower cost of production, leaving a margin on production.

"But we have seen further turbulence recently and a return to volatility in milk prices. By working together with the dairy sector and dairy industry as a whole, I remain convinced that we can ensure our vision of a modern, professional and profitable industry in Wales can be achieved."

MPs, farmers and FFA say supermarkets should take a lot of responsibility for the current crisis in the dairy industry and have urged them to pay their suppliers more for milk.

But Asda and Iceland maintained that they had absorbed the cost of the price cut for customers, and not reduced the amount paid to suppliers.

Lidl also said it "absorbs the costs of any market-led price reductions".

An Aldi spokesman said: "Aldi does not pay farmers directly; we purchase milk through two processors, one of whom is a farmer owned co-operative. We pay our processors above the farm gate price in an effort to continue to support UK dairy farmers.

"In line with our business model of offering customers the best possible price, in November Aldi lowered the price of four pints of milk to 89p to match the price reductions made by other retailers."

Deborah Clark, a spokeswoman for Sainsbury's, said: "Our retail price is not related to the price we pay our farmers. Our milk prices are competitive for our customers, while also paying our dedicated dairy farmers a fair price that protects them against volatile markets.

"Following a majority vote, our dairy group farmers benefit from a cost of production model – this sets a price that directly reflects their costs on the farm, building in a profit, as well as rewarding outstanding animal welfare and environmental standards.

"This price is updated every three months to ensure a fair deal for the farmers involved."

Seven years ago the Tesco Sustainable Dairy Group (TSDG) was set-up to establish a dedicated relationship between itself and the dairy farmers who supply fresh milk directly to the supermarket.

A spokeswoman for Tesco said it and the TSDG work with an independent consultancy – Promar – to set the price of milk.

She said Promar helps to make sure that price paid by Tesco is at least the average cost of production – and that price is then fixed for six months, regardless of what happens in the market.

This means all the farmers in the group have certainty over the milk price they'll receive, and is of huge benefit when budgeting and planning for the future, she added.