May 2013 Dairy Farmer Article

 

I start by focusing on the huge monster elephant in the room - namely the threat from First Milk that unless the price it receives for its cheese increases it will be forced to cut the milk price paid to members. But that’s the dangerous position we’re in. It will have no option to do so unless it can get more money out of the market, and that will almost certainly hurt its business in the short term.

 

It will also have no option but to divert even more milk to other more profitable outlets - for example spot milk is currently at 40ppl - as opposed to turning it into cheese in the hope that in three months time and more retailers, discounters and food service sector buyers will all pay a fair price for it. That will do little for buyer certainty in the long term either. The phrase caught between a rock and a hard place springs to mind.

 

It’s easy to blame Irish imports as the sole reason for the problem. This time, though, there’s more to it. Buyer intransigence is the main reason. Both South Caernarfon Creameries and Parkham Farms (Peter Willes) have both partnered up with Adams Foods who now pack and market their cheese. Neither of these companies are idiots, nor are their milk prices at the bottom of the league table either, so Adams doesn’t seem to be selling their cheese on the cheap. South Caernarfon’s February price was 3ppl more than the First Milk cheese price in fact. Irish farmers are also getting a higher price.

 

With explosive world commodity prices providing more profitable market outlets for milk, and Irish cheddar imports down 16.5% (and production down 12%) in the first three months of 2013, the time has come for cheese customers to realize the price they pay for the cheese is secondary to ensuring continuity of supply for the rest of 2013 and beyond. But will they?

Hopefully by the time this article is published the crisis will have been averted, and First Milk will not be dropping its price but increasing it like Arla Milk Link and Dairy Crest (with others set to follow, inevitably).

 

The recent and second North of England UK Dairy Expo was staged at Borderway Market, Carlisle in March, and was well supported with over 300 dairy cattle on show.

 

It is important that the industry has successful events like this to showcase the best of the best animals in the industry, and for a morale booster. Let’s hope the Livestock Event in July (formerly the Dairy Event) is a similarly successful show, and gets a good turnout of farmers. The offer of free buses should help, although some are viewing that provision as either a shrewd insurance policy to ensure high numbers or an early sign of panic.

 

Regrettably, though, the Dairy Expo triggered multiple rumours of cattle which had been “fixed”. This is where practices like sealing teats and balancing each quarter of the udder takes place. After the event the rumours gathered pace, and, without going into detail, I was concerned to receive several calls from people who attended the event (including conversations with representatives/prominent members of two breed societies) and who said that some animals had been “fixed”.

 

I tried to make contact with the judges, who declined to comment, as well as chasing one of the show’s organisers – twice. This set me wondering why everyone had seemingly gone to ground. Then one exhibitor evidently started to trumpet that he had “got away with it”, while another has stated he will not show his animals in GB if he can’t adjust and fix them, and will show in mainland Europe instead. That’s his call. I just hope he’s not on a retailer-aligned contract, because he won’t be soon if that’s his policy!

 

The gossip may be after the event this time, but what is important is that show organisers, irrespective of size, realize that farmers and rule-abiding exhibitors are the eyes and ears of the industry and it’s their duty to police not only any show rules but the integrity of the show itself and the industry. The talk of fixing will have taken a degree of shine off the Expo event, and, as far a the whole industry is concerned, all it takes is one anti with a camera and an agenda to portray the industry as cruel and the whole industry gets tainted.

 

I now return to the raw milk selling case, where the Food Standards Agency (I am abbreviating them to FSA1, for reasons that will become clear later) is prosecuting the 70-cow family farming operation Hook & Son for selling unpasteurized milk.

 

Following that article the conspiracy theorists sprung into action and several readers were quick to alert me to the fact that Tim Smith, the former CEO of the FSA, and more importantly Arla, could have a conflict if Hooks successfully defend their case, and unpasteurized milk sales were to take off. One or two even suggested some of his former colleagues from Dairy UK might even have had a role in the aggressive stance against Hooks!

 

Jim Begg of Dairy UK has certainly commented in regard to proposed legislation on a saturated fat tax that it was not the answer and that consumers should be allowed to decide “as long as the risks are highlighted on the packaging.” (As it is with unpasteurized milk). However, Dairy UK does not seem to follow the same logic on Hooks and unpasteurized milk. It’s a curious ambiguity.

 

So why do I abbreviate the Food Standards Agency to FSA1? Cue a few comments now on FSA2 - the Financial Services Authority. They have the same initials and, it seems, the same appetite to persecute the little man – in this case it has attempted to close down Burnley businessman Dave Fishwick and his “Bank of Dave” business (http://www.burnleysavingsandloans.co.uk/). Mr Fishwick has set-up his own bank and FSA2 has effectively stopped his bank taking in deposits from locals on the grounds he was operating an unregulated, collective investment scheme. However Dave is not only taking them on he has captured the attention of Channel 4, which is filming his progress.

 

On the face of it, it appears FSA2 are sat back watching fat cat bankers (yes, spelt with a B) who have raped this country and crippled our economy get away with robbery, yet they take the easy option to close down a community bank, the brainwave of an enterprising northerner. It’s the same with FSA1 who, in the case of the horsemeat scandal have chosen not to dig deep and hit the real culprits (Big Business!), but who have chosen to pick on the easy prey who are the likes of Hooks.

 

These are both real David and Goliath battles, and I wish them success and hope the FSA’s bullies will stop harassing and picking on the small guys.

In the case of Hooks I am pleased to hear the NFU legal team are supporting the Hooks QC and legal team. They believe the case will proceed to trial so we will see what happens. Meanwhile, The Mooman Film, which films a year on The Hook’s farm, has been premiered at the O2 Arena.  Sorry, DairyCo, but this film does more for the image of real dairy farming than your recent YouTube and website films. But I guess you can’t promote Mooman given the fact your chairman is also the vice chairman of the FSA1, and thus taking Hooks to task!

The film will be available on DVD and in local cinemas from next month. Watch my weekly bulletin for further details.

 

To comment on this article email me at ianpotter@ipaquotas.co.uk

 

April 2013 Dairy Farmer Article

 

Tesco have, as we go to print, announced that their cost of production (COP) formula will see a 1.19ppl increase for the six months commencing 1st April, which will result in a TSDG contracted producer who submits costings to Promar receiving a standard litre price of 32.77ppl. That’s the good news. Now for the bad (as I see it): this is highly likely to be the last 2013 COP increase, due to two factors:

 

Firstly if milk production volumes increase by 5% nationally (as per Dairy Co.’s forecast) the production costs will be spread across more litres. In other words the 2012/13 drop in production concentrated the costs across fewer litres, hence the average COP rose. Secondly is the fact that forward feed prices are currently significantly less than the ones paid last winter, partly due to record crop  forecasts in some of the world’s major grain areas. So it is a near certainty, in my opinion, that under COP models it will be cheaper to produce next winter’s milk, and while I am not a costings guru I have checked out the relationship between a 5% increase in volume and its effect on the COP, and it’s certainly worth c. 1ppl or more, and thus is very significant.

 

There could be another big test for COP models coming if global markets continue to strengthen as they are doing, and that’s if farmgate commodity milk prices and liquid processor milk prices leap-frog retailer COP models. If that happens COP models might have a fairly short life expectancy. Having said that, markets are very unpredictable and are likely to go full circle as volumes increase, or if milk buyers back-away from their  current insatiable appetite for increased volumes of milk.

 

Farmers for Action are pushing for clearer front of pack labeling on cheese to CLEARLY state the origin of the milk it was made from. However, as one of my roving correspondents was quick to point out:  “this should be extended to butter”. She was right and Arla should be encouraged to clearly show that Anchor butter – now produced at Westbury - comes entirely from the milk of British cows. The same person recalled comments made in 2007 by the milk purchaser for retailers Booths. The buyer stated that retailers preferred own label to that of branded as they were not in favour of provenance labeling because it gave them “greater freedom to source from further afield”. I guess that’s what the beef mince people did - and look where it got them with the horse meat scandal!

 

It’s a fact that the absence of country of origin labeling can be used effectively as a big beating stick to drive down cheese prices. Retailers, the Food Service/catering sectors, as well as all Government procurement departments, should embrace clearer labeling as a way of informing customers of the source of the milk in their dairy products and as a way to encourage them to support British dairy farmers.

 

Large retailers were, not unsurprisingly, the first obvious targets of the push on clearer cheese labeling campaign. I did a bit of fact-finding and learned that none of them are squeaky clean, but some quickly could be with a bit of a push. Sainsbury’s are partnered with Arla-Milk Link for their own-label cheese, and ASDA are partnered to First Milk. That leaves Morrison’s and Tesco out of the Premier league - both of whom do trade the market for cheddar and then have it contract packed. Tesco are the biggest and, on cheese, are partnered to Adams Foods/ The Irish Dairy Board (IDB) and their Leek packing plant.

 

Adams is also tied-up with South Caernarfon Creameries and Parkham Farms, which helps Tesco in its claim that 100% of its branded  cheddar, as well as all of  its Territorial cheeses, are packed by Adams/IDB but are all produced from British milk.

 

To be fair Tesco’s CEO Philip Clark and the Tesco dairy team are changing the way they work and, from May, Irish Cheese will be packaged stating “Produced in Ireland using milk from Ireland. Packed in the UK.” It’s a step in the right direction and is certainly the sort of clear transparent labeling that FFA are calling for. Others should take note  - especially the so-called “second division” retailers, the discounters and catering people.

 

Perhaps the next step is to ensure those involved in the market improve their front of pack labeling and advertising (which is equally important). It has also been suggested that we should have a publically accessible website which states the good provenance labeling companies, and flashes-up the less transparent, ethics-bending companies for FFA’s “special attention”. It’s an idea with great potential.

 

My biggest concern with our cheese market relates to margins, however. I am worried that what happened to our liquid market in 2012 is now happening to our cheese market with margins cut wafer thin, or in some cases being non-existent, as cheese processors chase volume.

 

Our domestic cheese processors are trying hard to maintain milk volume, while their producers watch the gap between milk for cheese prices and liquid prices widen unhealthily. Consequently producers are looking at tempting offers from a myriad of liquid milk processors all eager to sign them in 12 months or less. While this courtship continues the cheese processors   are operating in a fiercely competitive market where they have to compete against the competitive advantage of the Irish, and their cheaper ‘milk from grass’ Spring prices.

 

All we can hope is that the Irish get their Chinese visitor visas quickly approved and start to produce and sell WMP to China, as opposed to selling cheese to us. When UK milk production increased in 2011 it came at the same time as the world’s dairy markets were on fire and our friends from Ireland left us alone in the pursuit of more favourable markets elsewhere. This allowed our cheddar market to grow. Demand from China is extremely strong at the moment and the drought in New Zealand’s North Island has decimated its milk output, with farmers moving to once a day milking, early drying off as well as breaking into winter feed stocks alarmingly early. It looks grim for them…  but it looks as if their loss could be our gain.

 

I wish I could envisage a situation where by one or more of our cheese processors would pull some cheese out of a supermarket contract, without breaching the terms of that contract, and put the milk through Westbury, which is doing a bit of milk but not a fat lot and is grossly under-utilised. As one industry wise owl commented “we only have one serious drying plant in the UK, but I can’t imagine a processor diverting milk through it to produce WMP for export”.

 

Finally, thank you for all the email comments in response to last month’s article and the FSA’s prosecution of Hook Farms for selling raw milk. Several readers subscribed to the conspiracy theory that the then Chief Executive of the FSA and former Arla CEO Tim Smith could have had other reasons for wanting to ensure the selling of raw milk  is nipped in the bud. Another believed Dairy UK was very inconsistent in its approach to dairy industry issues. He pointed out that Dairy UK, at one time, was concerned over a possible UK saturated fat tax and stated that legislation was not the answer and that the public  should simply be warned of the risks on the packaging. Surely Dairy UK should take a similar position with regards to the sale of raw milk, he said.

 

Finally, finally I have to thank one learned reader for pointing me in the direction as to why calving’s in Southern Ireland – currently 20% up on last year - may not be as it first appears. The increase is partly as a result of BVD tagging changes imposed on farmers which means they have to tag their calves earlier. The situation is perhaps not as bad as we first thought, but it’s still one to watch.

 

To comment email me at ianpotter@ipaquotas.co.uk

 

March 2013 Dairy Farmer Article

 

Amid the horsemeat scandal comes a dairy David V Goliath Case

 

Now I don’t claim to be an aficionado, but those who drink milk straight from the bulk tank reckon it tastes much better than normal homogenised, pasteurised milk.

 

The customers of Philip and Steven Hook certainly do. The Hooks farm 180 acres and 70 organic dairy cows and, and in April 2007 Phil Hook mentioned he had started retailing their own unpasteurised milk at 75p per pint.

 

Today, the Hooks still milk 70 cows, but their raw milk business has about 3000 customers, both local and via online sales. All are given a health warning that it is unpasteurised milk, but some buy Hook’s milk under doctors’ orders. One 82-year old customer says he has 16 pints of raw milk every week following removal of part of his colon.  Others claim it clears up eczema, while others are lactose intolerant but can drink it.

 

Then the Hooks had the opportunity to rent a small space in the prestigious Selfridges store in Oxford Street, London. In 2011 they installed a self-service unpasteurised milk vending machine.

 

Westminster City Council’s Environmental Health sanctioned the Selfridges machine and an identical machine had been approved and installed in Canterbury only three years earlier.

 

It has been an exciting time for this small family farm, who were the centre piece  of a 90-minute feature film called “The Moo Man”, which looked at a year on the family’s farm and was selected as a film in the USA’s Sundance Film Festival - see www.the-mooman.co.uk.

 

But step forward the muscle-men at the Food Standards Agency (FSA). First it tried to stop the family selling their unpasteurised milk online, but failed. Undaunted, though, the FSA has recently sent both Selfridges and the Hooks a summons banning further sales. The FSA states that Hooks have “breached food hygiene regulations”.

 

This opens up a whole heap of questions.  Is the FSA prosecuting a small family farm and Selfridges for publicity, and because they are easy targets? Would they have been so keen to prosecute if the vending machine had been located in a Tesco store?  And where does the FSA’s Vice Chairman, Tim Bennett, sit in all of this when the prosecution is discussed at FSA board meetings? 

 

Now, not only is Tim Bennett vice-chairman of that organization, he is Chairman of DairyCo, and thus represents dairy farmers. The Hooks pay levy to DairyCo so, in effect, he is authorising the FSA to prosecute one of his levy paying members. Was he involved in the decision to prosecute, for example? Answers please.

 

And while this issue affects just one dairy farmer, where would Mr Bennett sit if, say, 10, 20, 100 or 1000 farmers were involved in something the FSA didn’t like, or (heaven forbid) a food scare or scandal like the horsemeat one were to hit the dairy industry? He’d have a couple of pretty uncomfortable feet in each camp I would imagine.

 

The proverbial fans at the FSA now need a decade of servicing to recover from the volume of excrement that has hit them from the horse meat scandal. And yet, incredibly, one of its priorities appears to be prosecuting one small dairy farmer.

 

The reason I bring this up is the parallel between this and the Gangmasters Licensing Authority’s court case against “prominent” dairy farmers (its word not mine).  Here a six-figure sum was spent on attempting to prosecute a handful of dairy farmers in a three-year battle, before the Judge gave the farmers an absolute discharge last week. The NFU’s headline was that the GLA were “heavy-handed” and I think the FSA could well see history repeat itself with the Hook case. Fingers crossed that a bit of common sense prevails.

 

Last month, I was invited to chair the question time at the dairy breakout session at the AHDB’s Annual Outlook Conference in Westminster.

 

Independent international dairy consultant Mark Voorbergen was bullish for global dairy demand during the next decade, which will outpace production. That’s with the exception of the EU. In the two years post 2014 and the ending of milk quotas he believed we may, for that short period, have too much milk on our hands.

 

He posed the question as to why would UK farmers invest in growth if their milk is sold into a crowded domestic market with limited growth opportunities?  This was pointing to the fact we are obsessed with our fresh liquid domestic market and have very limited opportunities to access this exciting global market. He then stated that “being late is never a reason to do nothing” – in reference to the UK getting in on the export act.

 

The DairyCo Milkbench results for the year ended 31st March 2012 were launched at that same meeting.  The report itself, I am afraid, is extremely complex and probably only of best value to the 315 farmers who contributed, and thus who understand Milkbench.

 

The average costs of production at 28.8ppl at March 2012 excludes any cost for a farmer’s management time and hence its value is questionable. Farmer wages are a sensitive topic, with a West Midlands farmer costed in at only £8.90/hour, or less than £18,000 a year. This is for his manual work only with nothing for management, which comes “out of the profit”.

 

A week later I sat with a Welsh CARA dairy bench consultant who presented his annual costings. He said his best farmers could command a salary (including management time) of £62,500 a year. And he stated that his costs were actual, while some of DairyCo’s are imputed costs and contain assumptions.

 

For example, he claimed one of his top 25% performing farmers also participated in Milkbench and the results were “poles apart” and he believed Milkbench had too many “lets pretend” figures included.

 

The question then is are the results useable and is the data accurate? More questions for DairyCo, I’m afraid. But hey, you pay them to be accountable!

 

Comments on email to ianpotter@ipaquotas.co.uk

 

February 2013 Dairy Farmer Article

 

This month’s article concentrates on what I gleaned from this year’s excellent Semex Conference.

The opening tag team of NFU President Peter Kendall, and Ronald Kers, the boss of Muller-Wiseman, will certainly be a hard act to follow next year.  Both speakers spoke with passion, enthusiasm and with a determination to make a difference.

Kendall’s presentation title was “A future of our dairy industry and future leadership”. Ironically, his organisation has only a year to consider its future leadership, as Peter’s eight-year reign will come to an end.  That’s unless there is a need for him to serve a fifth term, of course.

 

There can be no arguing that during 2012 Peter Kendall was the heartbeat, oxygen and blood supply at the centre of all key dairy matters involving the NFU.  Cometh the hour, cometh the man - he took charge. While dairy farming is vitally important other membership areas will require Kendall’s attention in 2013 - not least of which will be CAP reform.

 

Kendall trumpeted the leadership shown by former Minister Jim Paice in getting the Voluntary Code of Practice (VCOP) signed off. He stated that the VCOP does not exclude co-ops. That’s a point up for discussion, however: what is clearly frustrating Kendall is the fact that AFMP members negotiated an exemption from the Code on the basis they were a business “in transition” to becoming a co-op. Five months later AFMP have failed to produce a road map or timetable. They are clearly directs, and Kendall wants its members to bang the drum to demand their organisation(s) sign up to the Code.

 

In my opinion the uptake of the Code has, to date, been painfully slow. I reckon that if Jim Paice were still around he would be kicking some backsides very hard now that five months have elapsed since it was signed-off.  From my research around 1773 British dairy farmers are able to change milk buyer within three months notice, and they supply Dairy Crest, Muller-Wiseman Dairies or Lactalis. Note an additional  843 producers supplying Dairy Crest and Muller-Wiseman on aligned retailer formula prices are excluded because they have signed-up to an independently verified formula.

 

Paice’s successor, David Heath, will be judged according to how successful the Code will be, but as I write only these three processors have implemented or will implement the Code’s three month’s notice.

Kendall was all guns blazing at Semex, declaring that the coalition will push Government to regulate if the Code is “not adopted and functioning as designed”. If processors and co-ops delay they “will face the consequences.” There is little doubt that from April the 80 approved purchasers who do not adopt the Code will be publically named and shamed.

 

So what do I think of it? Well I would argue that a milk supply team dealing with ex-farm gate milk price changes has a dramatically different attitude when it knows it could lose producers within three months, as opposed to a team who bathes in the comfort of a 12-24 month notice period, and who believe that if they get it wrong affected farmers will forget about and that the dissent can be smoothed over during that oh-so long notice period. At least one co-op effectively operates a once a year exit point, which means the notice period varies from one year, to one year and 364 days. Are milk purchasers with long notice periods missing a trick? There is surely hardly a better way to convince their customers that unless they pay a competitive market price for their products the milk supply will be down markedly in as little as three months!

But, in contrast, I can also understand why a company that has invested £250m or so in UK dairying, hasn’t had a culture of three months notice periods, is still grappling with a merger, two supply groups, etc etc isn’t going to gleefully shout “How high?” as soon as the NFU (which hasn’t invested a penny, remember) says “jump”. I can also understand why a buyer at or near the bottom of the milk price league table might be nervous too.

 

 

The Code has the potential to add power and value, and needs courageous producers and processors who want to make it work. The success will be dependant on dairy farmers, so, if you want the Code applied to you it’s down to you and your representatives to make sure your milk buyer – no matter how large or small - adopts it and makes it work. Two purchasers have rather smugly suggested to me that they will not adopt it either because, as a co-op they are exempt, or simply because it states it is “voluntary”.  I detect some naïve protectionism creeping in, but in my opinion such a policy will work in the short term, but not in the long term. It is perhaps no surprise that the bulk of the producers who have been in contact with me, claiming they want to leave their current milk buyer, do not supply either Muller, Dairy Crest or Lactalis.

 

Ronald Kers was bullish and positive as he took to the podium at a national UK industry conference for the first time since the takeover last year. Theo Muller wants the most successful, competitive and biggest dairy company in the UK. He outlined the devastating numbers behind the 2012 collapse in cream values - with  450,000 tonnes of UK cream valued at £710 million in 2011, and one year later its value was £520 million - representing a loss to the industry of £190 million.  (And the processors knocked it off the farm gate milk price, remember – the last domino in the pack rule again!)

 

Muller intends to take charge of its own destiny to be in a better position if cream prices collapse again, hence the building of the UK’s largest butter plant at Market Drayton costing £17 million. This will have the capacity to process all Muller Wiseman’s bulk cream (90,000 tonnes) into 45,000 tonnes of butter, and puts the company in a much stronger position. Kers pointed out that the UK imports £2.245 billion of dairy product and exports only £1.11 billion leaving a net trade deficit of a staggering £1 billion.

 

He also asked a similar question to that which I have previously asked in this column: “What is the strategy to capitalise on the opportunities these figures present?”  In reality with quotas ending in two years do we have a plan to restore the UK dairy trade balance?

 

On recruitment, it is set to be the Battle of the Giants with Arla recruiting to fill its new plant at Aylesbury and Muller keen to have a larger percentage of their milk coming from direct suppliers. I wonder how this will play out for First Milk, who currently broker close to 60% of their milk.

 

Finally, I will comment on the Irish Farmers Association’s plan for the ending of quotas in 2015, as presented at the conference by Catherine Lascurettes. Its 18,000 farmers currently produce 5.2 billion litres of milk, of which 85% is exported with a staggering peak to trough production ratio of 1 to 7.

Their target is to increase production by 50% to 7.8 billion litres and to export 7 billion litres (90%) of their production to an expanding global market selling Irish butter, cheese and powders – particularly in Brazil, Russia, India, China and Asia to which “Irish dairy farmers want a slice of”. It appears Irish dairy farmers have the enthusiasm, technical expertise and potential to aim so high, and the figures confirm they are world competitive when it comes to Cost of Production. Ms Lascurettes confirmed rapidly rising heifer numbers of all ages are now on the ground in preparation for expansion, with numbers expected to be 50% up by 2016 compared to those in 2010. The only question is whether Ireland will be able to find circa £2.0 billion to achieve its ambitions.

 

So, can GB compete with the Irish?  If not, why are they more efficient and cost competitive than we are?  Is it a mind-set, or are some of our leaders lacking the ambition and vision shown by the Irish, possibly because they are comfortable and ready to collect their winter fuel allowance and bus passes?

 

Comments on email to ianpotter@ipaquotas.co.uk

 

January 2013 Dairy Farmer Article

 

Last year was certainly an eventful one, wasn't it! One of the key moves involved industry consolidation, with Muller and Arla commencing the battle for GB dominance.

 

It will also be remembered for the awful weather, catastrophic price drops, huge farmer protests, which generated incredible media coverage and the support of top TV chefs and the wider public, and the lowest milk supply in history. Finally Jim Paice succeeded in banging heads together and announcing an agreed Voluntary Code of Practice, having threatened to legislate only hours before he was axed.

 

On legislation, I really struggle to understand how the Government could possibly legislate over the relationship between farmer, processor and retailer so as to guard against inequalities in the supply chain.  However, the threat did play a part. The Voluntary Code is primarily about processors behaving more responsibly than some did earlier in 2012 -  for example Dairy Crest when they gave producers only four days notice of a brutal 2ppl price cut in May.

 

It now needs breathing space to bed-in, and hopefully it will lead to greater transparency in milk pricing. It will be up to the NFU’s, FFA and others in the coalition to police it and persuade all milk purchasers to adopt it.  It’s unique and I can’t think of another industry which has anything similar. So let’s all hope something positive emerged from all the protests and farmer frustration.  Only time will tell whether both sides have the commitment and determination to face the challenges of 2013 and beyond together.

 

It is a fact that “No one is going to help us but ourselves.”  The adoption of the Code is a major test for all. If it is abused, or not used, processors should not expect farmers to sit back and be demoralized by a dysfunctional and de-stabilised industry.  Dairy farmers know they have influence and power and understand that if they are used wisely they can be effective.

 

As we enter 2013 it will be a challenge to significantly increase ex-farm gate liquid milk prices until the gap between them and the milk for cheese price closes. Having said that, there is clear evidence that significant quantities of milk for cheese are now going to the liquid market which will hopefully tighten-up the availability of cheese. But remember, cheese can be imported from anywhere in the world to plug any shortfall. There is evidence cheese processors are trying to get more money out of the market place but it’s far from easy. My concern is that the merry-go-round of liquid processors dropping their trousers and offering customers milk at totally unsustainable prices may well migrate to cheese processors. We shall see!

 

I am aware of cheese processors who have either defended their existing contracts by taking a price cut, or have lost business to very aggressive competitors who have under-cut them in pursuit of volume.  All of these moves simply take value out of the industry, and once margin is surrendered it’s very difficult to recoup it as liquid processors will testify to.

 

The problem is that cheese is a globally traded commodity and you would be hard pushed to believe there is significant head room to push prices up too much. That's especially the case if we get out of line with our European neighbours, who will quickly seize the opportunity to send more product through our front door.  It used to be the weather that was the one factor a farmer had no control over which influenced a farm's profitability, but now its world wide dairy product competition, which I think has leap frogged the weather.

 

Whilst average UK milk prices were in many cases below the cost of production during 2012, they moved from near the bottom of the European 27 member states milk price league table to almost the top.

Against that is the catastrophic drop in milk production which, if it were to continue in 2013, will result in factories closing and imports increasing.

 

Recently I was invited to visit the UK’s largest cheese packing site at Adams of Leek, owned by the Irish Dairy Board, where I met two of its directors and its Chief Executive. There they pack at least a third of all the hard cheese sold in UK and half of all private  label cheese, Which has a total value of £220m. The business has a £315 million annual turnover.

 

The No. 2 UK cheese brand Pilgrim’s Choice (the No. 1 is Dairy Crest’s Cathedral City) is owned by the IDB. It is sourced from the IDB  predominantly from five Southern Irish Creameries. However it was formerly a West Country Farmhouse brand, which the IDB now pump millions of pounds of promotion money into it.

 

I challenged the Organisation's bosses over the fact the packaging for Pilgrim’s states that it is "Packed in Britain".  They were adamant that the own label cheddar-buying public have provenance as a low priority, and they are probably right - Cathedral City is not promoted by Dairy Crest on provenance, and that's a brand. First Milk's Lake District, is, however.

 “The public are patriotic on cheese until it costs them money”, they said. Note, all exported Pilgrim’s Choice cheese does come from GB cow’s milk, and Adams did confirm that they will be changing their Pilgrim’s Choice mature and extra mature packaging in the New Year, highlighting  the cheese is made from Irish milk as opposed to sourced from around the world.

The IDB have recently won a contract which starts in early 2013 for somewhere in the region of 8,000 to 9,000 tonnes to supply Iceland stores, with Arla/Milk Link having lost out.  When I heard the news I thought that’s a blow to GB cheese production, but on further investigation it came to light that Arla Milk Link have, for a long time, used Irish cheese which they pack at Oswestry and put into Iceland stores. In fact, it is conceivable, even if it’s bizarre, that Iceland’s move to source its cheese from IDB could see more British milk go into Iceland’s cheese.

 

When questioned over the effect on Irish cheese production post March 2015, when milk quotas end they/IDB  research suggests  most of the extra milk will go into butter/powder for global markets.

 

The factory was very impressive and extremely efficient and well invested, with 24 lines running. Adams don’t make any cheese they just cut it, grate it, pack it and sell it. They don’t get hung up about Red Tractor. Logos or Farm Assurance and that’s the way one or two appear to be heading.  Are these dairy businesses, which are turning their back on Red Tractor Farm Assurance, becoming the Ryanair of the dairy world: "We will deliver you competitive quality cheese, no frills, no red tape, no Farm Assurance, if you want any of those extra bells and whistles you pay. If you don’t then that’s fine”

 

I questioned their view on cheese investment in the UK versus the huge investment seen and still ongoing by our liquid processors.  They agreed it’s almost non-existent, and one day someone will have to bite the bullet and build a state of the art cheese plant aka Ronald Akkerman's vision.

The Adams are and will continue to be Britain’s biggest buyer of hard cheese and from what I saw they are  certainly in Britain for the long haul. The latest trade figures to September 2012 confirm that Irish cheddar imports are up 11% on the previous year  to 58,616 tonnes.

 

The very sudden and sad departure of the Vice Chairman of FFA, Andrew Hemming, has left a huge void in the organisation, which will need to be filled quickly.

There are a number of potential candidates who aspire to become General David Handley’s lieutenant.  For my mind, for the organisation to retain its credibility the Vice Chairman must be a professional, active grass-roots dairy farmer who’s sole motivation is to work with David and FFA to the benefit of all farmers.  He or she must be a leader and good communicator and someone who can share the workload with David.  That certainly narrows down the field and demonstrates what a good man Andrew was, and how hard his boots will be to fill.

 

Finally, discounters  like  Poundland and others have decided they  can no longer do 4 pints for £1 (2.272 litres).  The word on the street is that at least one of our big three liquid processors is close to down sizing  their standard 4 pint container to enable discounters to continue to offer £1 cartons of milk. Thank goodness for that - we need some New Year cheer, and that will do for starters!

 

Comments on email to ianpotter@ipaquotas.co.uk

 

December 2012 Dairy Farmer Article

 

Recently I succeeded in taking-up a long-standing invitation from Dairy Crest to visit its HQ and have a go at its Competition Law compliance programme, and exam. It’s an area the company takes extremely seriously, following its £9.4 million fine for allegedly colluding with retailers and other companies in the Retail Price Initiative a few years ago. Penalties totalling £120 million were paid by a number of supermarkets and dairy processors after the OFT’s investigation. These fines hurt and all involved are more cautious and careful, as the legacy remains to this day. If they get it wrong the penalties are high.

 

Today all of DC’s customer-facing employees have to achieve at least 80% in the exam as a condition of employment. DC’s CEO Mark Allen describes it as “acting responsibly with a passion to do the right thing”.

 

In the UK the OFT are policeman, prosecutor, judge, jury and executioner, and if anyone falls foul of the rules the fine can be up to 10% of a company’s worldwide turnover. Individuals can also receive a maximum five-year prison sentence and unlimited fines. And it won’t get easier with suggestions that the fines could increase to 30% of turnover! It’s all about consumers enjoying cheaper products.

 

So there I was sat alone in a room having completed the online tutorial followed by the test involving negotiations with two leading hybrid retailers – inexplicably called Testburys and Masda stores, and up comes my score: 100%! Full marks! What a star! And was it easy? No. But did it make me think? Yes!  Will I be applying for a position at the company? No, but if I did one statement would stick in my mind in relation to Competition law, and it would be this: “asking a question will not get you in trouble: breaking the law will!”

 

Prices are increasing slowly and steadily, but there still needs to be more to come. Cheese prices have still not moved up, but so far there hasn’t been a major driver in the market on which the processors can push. That will change next year, I feel, because the low milk volumes and high spot prices MUST mean that the amount of cheese made is much lower in the second half of the year compared to the first, and stocks must be being whittled down. That said, there are rumours of forward deals having been done at prices that won’t deliver the sort of returns farmers need, but I have seen no evidence of that.

 

Irish imports have been as much as £400/tonne lower than GB prices this year, but that was when milk volumes were high. As volumes fall the price differential between Irish and GB closes, which is what has happened recently. Nevertheless the Irish Dairy Board are winning cheese business from our processors and are successfully migrating the Pilgrims Choice brand from a British farmhouse cheese to a 100% Southern Irish Cheddar without consumers noticing. (And not without a bit of naughty marketing too. See http://pilgrimschoiceusa.com for an example – Pilgrims Choice cheese [origin, Ireland] in packs with huge Union Jacks [origin, er, not Ireland] slapped all over them.)

 

Some of the imports are cheap, inconsistent quality cheese, but some is undoubtedly good stuff too, and winning business with retailers. If our processors push too hard for price increases and the Irish don’t then it’s obvious what will happen. At present I am attempting to find out who is importing cheese and some pricing information but it’s proving a challenge to establish who is telling the truth.  It is a fact that the farmers’ much loved retailer Iceland is only interested in the cheapest cheese, and provenance is irrelevant. Iceland are not particularly interested in Red Tractor or Farm Assured cheese or carbon footprint: they just want it cheap. I am due to go and see the Irish Dairy Board soon, so I will report back next month on Irish, and imports.

 

Sainsbury’s move to take the Red Tractor mark off its produce sticks two fingers up to the Farm Assurance brand and its red tape. In terms of Sainsburys own label cheese it tells me they can now source cheese from anywhere in the world, and when you sell around 10,000 tonnes a year of cheddar that’s a powerful negotiating position. It’s equivalent to almost 100 million litres of domestic milk production.

 

On the liquid front prices are moving-up as the liquid premium re-establishes itself at the top of the league. Escalating costs of production, particularly feed costs, along with a below cost of production milk price, make for a long hard Winter of discontent.

 

My question is whether liquid milk prices will be allowed to leap frog the Sainsburys and/or Tesco cost of production price. To my mind there should be no lid on farm gate milk prices, but I suspect behind the scenes there is, and non-aligned liquid suppliers will never receive a higher price than Sainsburys or Tesco dedicated producers. Undoubtedly 2013 will be a batten down the hatches time for a lot of farmers. The SFP money will start in December but for many it will already be spoken for and that includes the taxman at the end of January. Buckle up everyone, you are in for a storm!

 

The New Year will herald the start of the conference season and I will be attending the annual Glasgow Semex Conference, so I look forward to a natter with regulars and newcomers there. Come on, and bend my ear!

 

I will not be at the Oxford Farming Conference (OFC) in January, however, although it will be interesting to see the RSPCA’s Freedom Foods sponsored "rolling logo" there. Perhaps it will follow similar RSPCA rhetoric: "You're soaked in badger blood, you bastards" or, alternatively, “We will expose all those who participate in a badger cull. Watch your backs!” I wonder whether the OFC has thought their “partners” through carefully?

 

So here’s wishing you and your families a great festive season and a prosperous and weather-friendly New Year and 2013. In case you get bored (and randy over Christmas) here are a few facts I brought back from a recent trip to Norway, which I will write about later, that I thought you may like to ponder:

 

1) A pig’s orgasm lasts 30 minutes (apparently). 2) Some lions mate over 50 times a day.  (Mmm… I wonder if there is anything in the theory of coming back after death as another life form, after all) And 3) Starfish have no brains. (Mmm… clearly it’s not a theory it’s a fact! Some of them work in the dairy industry!)

 

Comments to ianpotter@ipaquotas.co.uk or 01335 324584 (fax)

 

IP NOVEMBER 2012

Now that Milk Link is part of a larger European co-op I have heard numerous comments suggesting GB milk processing is predominantly owned by successful foreign businesses. But is that a problem? I don’t think so.  Let’s face it, our foreign colleagues are investing in the GB dairy industry, and we need that investment.

 

I also attended First Milk’s positive AGM/conference in South Wales recently, where CEO Kate Allum stated: “If we all pull in the same direction we will become unstoppable.” She was referring to the co-op’s 2,000 farmers and 750 employees.

 

However, like all others involved in GB cheese processing they face challenges – not least cheese imports at prices considerably below UK prices at times. Will GB retailers pay significantly more for home produced Farm Assured cheese than imports? Or will those cheaper cheese imports win the day?

 

Or perhaps the third alternative will come to the fore. Some cheese producers such as Lactalis have cut cheese production and are diverting supplier’s milk into the booming liquid market and are utilising existing cheese stocks to meet demand. To me this shorts the market, and has the potential to deliver a better ex-farm gate milk price to a cheese processor’s struggling farmers. Is this an example of pulling in the same direction?

 

There were numerous excellent comments and questions about the future raised at a 500 strong FFA/NFU farmer meeting I attended at Market Drayton livestock market in early October.

 

FFA have a target for an average January 1 GB milk price of at least 30ppl (ie excluding Arla-Milk Link members, who’s milk price is based on what happens in Europe and not here).

 

The meeting agreed we have now moved into phase two, where a few week’s breathing space is needed to allow processors, their commercial teams, the NFUs and FFA to negotiate. If that fails, then by early December those who do not play their part will be exposed and held to account - mainly by FFA and its army of protesting farmers. The name of one Midlands middle ground supplier and three food service suppliers were singled out as already being on FFA’s and the NFU’s radar - Johal Dairies, Brakes, 3663 and Compass.

 

Although milk supplies in the UK, EU and the US are crashing, dairy commodity prices have levelled, with butter prices having peaked, so it won’t be easy pushing up the price. However, most retailers and processors recognise ex-farm gate milk prices have to increase to even cover cost of production, but the reality is processors will not be able to go back for more money from those retailers who have paid before December, for January 1. And some price rises paid by some processors have still yet to be fully recovered from their customers – so there’s a lot of work still to do.

 

Southern Ireland has clear post-quota expansion plans under its Harvest 2020 project where the influential Irish Farmers Association (IFA) has targets for the processing industry to invest £400 million in capital projects which would require an additional £500m of annual working capital. On top of this it predicts farmers will need to invest £1.5 billion in their own farms. In an attempt to make this happen soon the IFA has devised a tax efficient loan scheme which is attractive to farmers and non-farmer investors – now that’s what I call pulling in the same direction!

 

The funds and investments will see dairy production in Southern Ireland increase by an estimated 50%, creating almost 10,000 additional jobs. In its own words the IFA stated “we believe this is a very good deal for the Irish economy.”

 

Some European countries clearly see a green light to turn the taps on full bore after 2015 when quotas disappear – that is less than 30 months away, and it’s time British dairy farmers had a clear picture of how they fit into the equation. Are there any export opportunities we can bag, or should we brace ourselves for even more raids on our industry from Johnny Foreigner.  DairyCo are planning to do some research in this area and the results cannot come too soon for me.

 

I am worried about the outcome, and even more worried we don’t appear to have a plan of action. If we don’t look out we will continue to be fixated on our liquid market obsession while others work on maximising any potential which will arise from the removal of milk quotas - including some of our non-liquid markets.

 

Over in mainland Europe, the European Milk Board is organising a huge farmer demonstration in Brussels in mid-November ahead of the European Parliament’s vote on agricultural markets.

 

Poland, Portugal and Spain are calling for continued regulation in milk and given the current European milk price, large demonstrations by farmers calling for milk quotas to continue will be influential. As one industry insider recently commented to me: “British dairying has a perfect storm brewing, with quotas ending, Single Payments reducing, the need to spend more money to meet environmental targets and a general recession.”

 

Consequently we need a very loud call from all farmer organisations, from the dairy coalition and farmers’ representatives for clean, transparent, honest milk pricing. Today we have conditional and unconditional price increases (some dependent upon increased volumes) and I would like any of you who have milk contracts with these terms to email me.

 

I also call upon milkprices.com and DairyCo, as two respected independent analysts, to strip out the spin and conditional bits so league tables compare apples with apples and not apples with pears.

 

Call it the Potter campaign for clean milk pricing and transparency, if you like. Whatever you call it, it needs to happen, and it needs to happen now.

 

IP OCTOBER 2012

The world truly is a global village and we now know what is meant by the saying “When the US sneezes we all catch a cold.” A record US drought with numerous fields of corn and soya completely written off, and others cut for silage, will cost our dairy farmers a fortune in higher feed costs. Add to this the forecast that Russia’s wheat harvest will be 31% down on 2011 and lower than its 2010 “disaster crop” and everything is set for a very bleak, expensive winter.

Global feed costs have exploded and some US dairy units who were already finding life tough have reached the tipping point. Entire herds have been culled.

 

Back here there is no disputing that the second brutal liquid milk price drop did long-term, irreversible damage. An alarming number of dairy farmers looked at the two drops in two months and could not see even the smallest glimmer of light at the end of the tunnel. I understand why they decided to quit and wish them well.  I suspect they will miss the monthly milk payment, but in time will not miss the bills, the cows and the work.

 

This year’s annual Dairy UK Conference and dinner is likely to be the last now that the Dairy Event has moved its dates to July and somewhat diluted its emphasis on dairying through its controversial re-badge to Livestock.

 

One of the highlights of this year’s conference was the unveiling of Nicola Adams as one of three 2012 Olympic gold medalists who will front the last Make Mine Milk (MMF) promotional campaign.  Nicola, the first woman boxer to win an Olympic gold medal joins double Olympic cycling gold medalist Laura Trott and Taekwondo gold medalist Jade Jones in an “m powered make mine milk” strap line. Regrettably they could be the last celebrities, as funding is running out. MMF Chairman, Müller/Wiseman’s Sandie Wilkie, said that independent research has shown the campaign had increased awareness amongst teenagers by 73%, and in mothers by 62%. An additional 110 million litres of liquid milk were also sold in 2011. 

 

There have always been unanswered questions as to who benefits from increased sales of milk from such campaigns, and whether any of the additional income filters down to farm level. I can’t answer those, but they certainly make me proud of dairy to see Olympic stars fronting milk promotion campaigns convincingly extoling the benefits they believe they obtain from drinking milk, and how it helps them succeed in their sport. It’s a fantastic message and I do hope when the EU funding dries up at the end of this year a solution can be agreed which allows the campaign to continue.

 

The conference also held a lively debate involving key people from The Grocer, Farmers Guardian (FG) and Farmers Weekly (FW). On the question of recent farmer demonstrations Alistair Driver (FG) believed recent farmer blockades were justified and effective. However, to the surprise of some in the audience FW’s editor Jane King did not agree with blockades believing they disrupted other businesses and did not show dairy farming in its best light. One delegate challenged Jane to differentiate between types of direct action (blockades and protesting) and that FW had at the time championed direct action producing posters. It looked like a U-turn.

 

Milk Link members will (all being well) shortly receive their 57p in the £1 payment for the cancellation of their qualifying loans post the 1st October merger with Arla. All members should be immediately exploring any tax saving  opportunities, with a view to reducing or in many cases eliminating any tax bill. According to advice received from HMRC by Milk Link the entire payment will be treated as a gain and will not be available for roll-over relief. The windfall payment from Milk Link is treated as a capital receipt and therefore subject to Capital Gains Tax. Essentially we are talking about crystalizing and utilizing any capital losses, therefore.

 

That leads me onto the option available to farmers who over the years have purchased milk quota for their business, especially now quota is only worth around £1,000 for 1 million litres. There is still an opportunity to sell your existing milk quota to create that capital loss and legitimately mitigate how much money you hand over to HMRC. In many cases the amount your business will be handing over will be a five figure sum, so it’s better retaining the money in your pocket than putting it in HMRC’s! The average Milk Link member payout will be around £17,000 and a 1 million litre member should receive around £28,500.

 

For several years now a large number of dairy farmers have traded their milk quota and, after a suitable waiting period, have acquired replacement. It’s really quota re-cycling and sounds simple but it’s not as straightforward as it sounds. We have already heard of Milk Link farmers who believe they can simply swap their milk quota with a friend or neighbour and create a capital loss. Such farmers will not be the first to come to us asking for help with an HMRC investigation on the grounds that the transfers were connected, or invalid or breached anti-avoidance rules. For those who have proceeded down this route it will be six years before you can sleep easy. So please take advice before taking action.

 

Now to some porky pies in the middle ground. Reports suggest at least one middle ground milk processor is claiming Force Majeure on his contracts with several customers. Force Majeure is defined as “a chance occurrence, unavoidable accident or Act of God” and it is claimed this is the reason why they cannot supply customers the milk they have contracted to. Me thinks God is innocent in this instance. The real culprit is the processor who sold ridiculously cheap milk in a bid to chase volume, and who surrendered both its farmers and its own margins and who agreed totally unsustainable prices. They have been caught in the sea with no trunks on, and the tide is going out fast. This processor needs to be an Olympic swimmer to avoid being exposed! With spot milk at close to 40p and short term one to three month contracts on offer to farmers at 34p to 35p these processors had better pay up or they’ll reap just rewards from their suicidal volume chasing campaigns.

 

The Voluntary Code of Practice has been ably covered since it was signed-off by the industry ahead of the Livestock Event and just in the nick of time before Jim Paice was hung out to dry.  The only time I winced was when I heard one industry leader suggest any dairy processors who did not buy into the Code would need to be given “special attention”, implying they would be challenged. So, a word of warning: it’s a Voluntary Code, it’s not mandatory. I agree the industry needs to make it work but any suggestion that any rebellious processors who fail to adopt the Code will be dragged in kicking and screaming is likely to be met with the strong arm of snappy lawyers. At least one lawyer has looked at this and my advice is let’s not go down that route and potentially wreck the good work those involved in the Code have achieved. Keep moving forward together for the good of all.

 

Turning to the NEC Livestock Event I sense from the two days that attendance was well down, no doubt affected by the pressing need of many farmers to cash in on the two dry harvesting days. There was certainly lots to talk about – not least the motorised opening and closing cow legs on the JCM Shackles stand! A lot of farmer’s wives, partners, girlfriends and mistresses are clearly reading or have read Fifty Shades of Grey and view the shackles as a useful accessory!  Apparently, according to Mrs P, a red room of pain is the thing to have these days! I’m not so sure… so I’ll be keeping-up my spare tins of red Massey 1250 paint for my tractor for the time being!

 

Comment to ianpotter@ipaquotas.co.uk

 

IP September  2012

 

Demonstrations. What demonstrations! Wow. They were all a huge team effort involving farmers, their suppliers and supporters. Agricultural engineers, consultants, vets, sales people and friends completed their day’s work and joined the protests. Some brought much needed refreshments, catering and even music too. Politically, all parties and organisations worked well together under the banner of the Dairy Coalition including FFA, NFU, NFUS, NFU Cymru, RABDF, TFA & WFU. NFU chief Peter Kendall put his arm around Handley and FFA (metaphorically speaking), and worked cleverly with a good cop, bad cop routine. It was a huge test for the NFU, which Kendall took charge of. He dragged the old school NFU dinosaurs by the neck and did it his way. Credit to him it worked. Those within the NFU who argued that the NFU is big enough to negotiate this problem alone were old school, and wrong. Time to man up and remember leaders lead, they don’t sit around the table and chair committees.

 

For me it was great news that the dairy industry got its act together and also maintained public support and that we didn’t end-up dumping milk, disrupting supplies to the Olympics, or culling lots of cows. The coalition aimed at specific targets, fired and moved onto the next one rather than machine-gunning all and sundry who got in the line of fire.

 

Others behind the scenes also require some recognition.  The press and media coverage was by and large first class and very supportive. DairyCo provided credible, independent, market intelligence to the media, FFA, NFU’s and commentating dairy farmers who wanted accurate facts. This information was invaluable and almost all of the farmers and representatives I heard on the TV and radio used it and portrayed a very professional on-the-ball, no nonsense commentary with snappy, punchy answers. It’s the first time I can recall when all involved knew where to go for the facts, as well as some tips and coaching for those who wanted to get involved and do interviews, but needed some guidance. Levy money well spent, DairyCo. I have, in my time, been a critic of DairyCo and have frequently questioned how it invests, spends (and sometimes, in my opinion, wastes) levy payer’s money. But there’s no doubt it should be the automatic one-stop shop for information in these situations.

 

If I had one slight criticism of the campaign it was of the much-publicised RABDF milk bottle showing incorrect retailer profits, which was unfortunately used. DairyCo should have a new bottle ready at a moments notice, with up to date margins and profits. I guess for the short term its back to the day job for Dairy Co of promoting of all that is good and positive about our great industry (supply chain / fair pricing aside) and raising the profile of it until the next big crisis. If DairyCo hasn’t read the tea leaves I’ll spell it out: market information and promoting milk and dairying are what the majority of farmers want their levy money spent on!

 

For all the effort put in by everyone we have to be realistic and recognize that the achievement to reverse the 1st August liquid price cuts is only like sticking a plaster on a bad wound. It has changed nothing, long-term. Farmers were angrier than anyone has ever seen them before, and the protests, whilst yielding short-term results, have done damage to confidence which will take time to restore. We know the same wound will open up again when someone picks at the scab unless some major surgery is carried out to rid the disease underneath. The only language the (non-aligned) market place seems to understand is “we will pay what we have to when we have to and rarely any more”. But then who can blame them, really. Processors and retailers are price driven, and the sooner they are short of that precious liquid milk they desperately need every day the better. Today’s pricing mechanism is broken, almost beyond economical repair. We need to sell milk and negotiate differently.

 

Many milk processors and retailers listened to the cry for help, and either recognized the pain or did what it took to get the mutinous farmers off their backs and stepped forward with increases. There is still some “tidying up” to do as I write, including tackling the harder nuts like Iceland and Farmfoods, who have not even blinked at the protests and should be pressurized or shamed to pay a price for their milk which reflects the cost of production. ASDA are still on the radar, as are Freshways for importing milk from Belgium during the protests, which is scandalous and for which there is NO excuse. Not only does Jamie Oliver buy his milk from Freshways, but Vice Chairman of FFA Andrew Hemmings sells his milk to them! This prompted a headline in The Daily Telegraph of “Oliver, the fair deal champion pays farmers less than their costs for milk.” Bally (Nijjar, Freshway’s owner) is this imported milk Farm Assured, branded as Red Tractor, or is it just cheaper at 31p than paying your existing farmers more? What’s your answer?

 

Finally, its fine for Jim Paice to pressurize retailers to do the right thing when purchasing liquid milk but he should first get the Government’s own house in order for dairy product procurement. The farmers supplying the House of Commons and Lords catering suppliers are also paid below COP and the various Government departments still source on price.

 

August will be a month to get on with farming, to give the retailers and processors more time for longer term thinking, and to reflect how negotiations on the finer details of the Voluntary Code shape up. Let’s hope European milk production also continues to drop.

 

By 1st October the Tesco price will, baring a miracle on falling costs, certainly increase and if Wiseman/Muller dares to implement a 1st September price cut I think I can safely predict more than a small riot on their doorstep.

 

Returning to my last article concerning the fact that the abolition of milk quotas in 2015 would affect us and could hit us hard, I’ll share with you now the Irish Farmers Association’s (the equivalent of our NFU’s) view.

 

Its plan is called “Food Harvest 2020 Dairy Expansion” and its analysis is telling dairy farmers that “National production growth of 52% by 2020 is realistic, from 390,000 more cows and better yields.” This, it claims, would result in a 54% increase in annual export earnings, creating an additional 9,400 new jobs.  And - guess what? - not only does it have a plan the IFA is now working hard to persuade their Government to provide additional tax relief for farmers who invest in dairying. And that’s on top of the Dairy Equipment Grant Scheme in operation!

 

The IFA is travelling the country with meetings entitled “Focus on confident Growth “ asking how will the dairy expansion be funded? Where will your extra milk be sold, and into what products? Clearly the Irish are pretty confident and intent on seizing opportunities while we are in total turmoil.

 

Come on GB industry - do we want to continue to (for want of an expression) scratch around the yard with the hens or soar with the eagles? One reader suggested we need a Fonterra plan. I’m not sure what we need, but I can’t see anyone who is taking the threat and opportunities serious enough. We are looking through our rear view mirror, let alone looking forward.

 

Who is going to step forward to drive the GB dairy industry forward? Who will analyse the direction of travel, fuel, speed and engine performance? We need an experienced driver. If we haven’t we could be heading towards the brink of a disaster. The next few weeks and months will be critical, I feel.

 

Comment to ianpotter@ipaquotas.co.uk

 

IP August 2012

 

The solidarity shown by a very, very large number of dairy farmers in July has been fantastic. Well done to all and sundry – you know who you are. I have never seen so many angry farmers all wanting to have their say - many with good ideas, some tame, some radical. The August 1st price cuts by our three big dairies were described to me as a milk tornado which quickly sucked-in every liquid milk purchaser/processor which got in its way. Hence the reason why most believe if we can sort out the big three, and their big liquid customers, the rest will automatically fall into line. Not that you’ll need reminding, but here are the big three liquid non aligned prices from August 1st - Arla 24.27ppl (and this does not allow for the 0.5ppl levy), Wisemans 24.48ppl, Dairy Crest  24.58ppl. Yes, the Danes and the Germans are paying the lowest prices. Both have invaded Britain and it’s not just The Danes who, with an awful lot of help from the retailers, are doing the pillaging.

 

I still hear stories of prominent aligned farmers who are sitting back smugly thinking / commenting that they’re OK and are not joining their colleagues at any meeting or protest. Surely they realise that the bigger their price differential to “normal” farmers the less sustainable their price becomes?

 

Some so-called farmer representatives are leaving all negotiations with retailers and liquid customers to their processors. But others are actively working with their processor to extract more cash from customers. Look at the facts: Arla dropped their 1st August milk price by way more than DC and Wiseman. Does this indicate that the other two had more success in obtaining extra money from their customers, particularly those in the middle ground? Maybe, maybe not. But its high time some so called negotiators and representatives got off their backsides and started to deliver results and soon. There are still an embarrassing number of representatives who simply relay messages instead of battling for their farmers.

 

There is an awful lot wrong and immoral with this supply chain. There’s the obvious to start with – the obscenely unfair share of the margins. But there are other unseen, shady activities too. How many “back door” payments do retailers “force” processors to make, for example, which muddy the waters?  The ones I am told about make my eyes water, let alone theirs. The bottom line is dairy farmers and processors are paying for cheap milk, for this immoral activity and wanton greed. And if recent drops are not quickly reversed the cows themselves will pay the price: more, inevitably, will be culled.

 

Meanwhile the formation of British Producer Organisations (PO’s) toddles along. Farm Minister Jim Paice recently announced £5m funding to help the industry on this. But who will run them? Well I believe one outfit that could do so is First Milk, who could potentially do so alongside its other activities - assuming its members buy into the idea and do not resent their co-op representing some retailer aligned farmers whose milk is not processed by First Milk. Remember that Co-ops, in themselves, cannot be PO’s.

 

A PO is not a silver bullet, however if one is set-up correctly with the right people running it it will certainly help put dairy farmers on a more equal footing with processors and retailers when it comes to negotiating. I also envisage a PO which is involved in hedging mechanisms and futures contracts to smooth out the peaks and troughs of prices. I believe dairy futures will, during the next five years, become a useful and frequently used tool to add certainty to prices. Let’s face it fixed rate mortgages and loans are common-place, as are forward buying contracts of winter fed and fertilizer, and they are similar to futures contracts.

 

Let’s face it, this volatility isn’t going to go away. It could get worse. I am stunned at the number of farmers, experts and so called leaders who still trot out the utter rubbish that the end of milk quotas in March 2015 will not affect GB farmers and the market here because we are, and will remain, well under quota. They clearly are taking an island mentality and have failed to understand the likely effects of quota removal on EU milk supply - the signs of which are already evident.

 

Just look across the water to Southern Ireland where, if their dairy Industry only half succeeds in their eye-watering target to increase milk production by 50% post the end milk quotas in 2015, then we have a BIG problem. Any increase in milk production will not be consumed domestically and will increase their exported powder and cheese output. They will certainly be involved in futures markets and if we want to move away from our beloved liquid market we should be looking 100 yards down the road to see what is coming our way in 2015 and not looking at the dashboard as to what is happening now. We need to plan now and explore fair and transparent formulaes between markets, commodities and the ex-farm gate price and have contracts to match them. First Milk have almost got there with their Eilers and Wheelers milk contract - hence why I am legging them in for the PO job without prior warning. Yes such contracts will be more volatile – but you’ll get more of the ups as well as the downs.

 

The current uproar in the liquid market is partly because we are fanatically obsessed with what some still call the “premium liquid market”.  Post 2015 we need to be ambitious and think beyond it.  If we don’t then we may as well shrink our milk production and processing to the size of that ever-shrinking liquid market. Any extra production will have to be exported, so let’s not sit back while others explore the opportunities.

 

Most, if not all, member states are already producing significantly more milk each year as their quota increases - with the exception of the UK, which, given the current turmoil, is now in decline.  The suggestion that the abolition of milk quotas will not affect the UK could not be further from the truth.  It’s going to be a hard landing, and is likely to hit us hard.

 

Back in April the Polish Minister of Agriculture, Marek Sawicki, advocated keeping milk quotas until 2020 to give time for the Commission to come up with new solutions.  At the same time the Latvian official and milk producer Dace Pastare stated “When quotas are abolished in 2015, the dairy market will collapse with a big bang.”  She drove more than 1,000 kilometers with the Chairman of a Latvian Dairy Co-Operative to deliver her one line message to officials.

The very active European Milk Board have recently stated that the EC’s “soft landing” by 2015 will be a crash landing and have stated there is an urgent need for action.

 

I am not suggesting the EU will do a U-turn on quota abolition, however, there is clearly pressure and all, apart from most of the GB dairy industry, are gearing-up for the end of it. I admit it will be a slow burn but someone has to take the lead and we have to do things differently.  As I have stated in this article before the British dairy industry needs a Mr or Mrs Fix-It - not another maintenance and bodge it man. And it needs them fast.

 

Comment to ianpotter@ipaquotas.co.uk

 

IP July 2012

 

I start this month’s article by referring to another one -  an article by Dragon’s Den guru Deborah Meaden in a recent Farmer’s Weekly. I won’t waste valuable column inches analysing her comments, but can’t ignore the article. John Allen of Kite Consulting summed-up Meaden’s surprise appetite for dairy farming matters in his well-crafted letter with “Let’s be clear – WSPA’s agenda is not to save the dairy industry by showing farmers how pasture-based systems are better economically, it is a campaign entirely focused on trying to prevent a certain type of production system.  As an industry, we should ensure that we do not allow such an organisation to turn farmers against farmers.” Meaden openly admits she supports The World Society for the Protection of Animals Campaign “Not in My Cuppa”, and is anti large dairy farms. 

 

I was particularly disappointed that (according to my records) there was no cohesive “one hit” industry response to the article politely acknowledging her points but telling her dairying matters are in no way shape or form her area of expertise. In other words she should stick to the multitude of business opportunities she does know about.  She is undoubtedly out of her depth commenting in trade journals on the best dairy farming model farmers should adopt. If I meet her in person, for example, I can’t wait to ask her about the efficiency of processing in relation to spring calving operations. I can image her answer: “Er, wot…?” Focusing exclusively on small family farms is admirable, but it must be in conjunction with the acceptance that globally competitive commercial units in the UK need to be developed and supported.  Come on NFU, Dairy UK, DairyCo and RABDF you are once again letting the industry’s communications down.

 

The European dairy package has seen the adoption of EU wide Producer Organisations (PO’s) which for the UK means any PO will be subject to European competition law and not our infernal National competition law and bodies.

 

It’s disappointing to learn that the UK is at least a year away from having the legislation in place to enable PO’s to be formed. Germany, for example, already has 190. It was clear from the recent NFU dairy farmer representative meeting that farmers need one point of contact to which all groups of farmers investigating the PO facility should be directed to learn how they function and the benefits and pitfalls.  For me that job falls to EFFP, who are best equipped to establish and constitute PO’s.

 

There are calls from within the NFU Dairy Board for the union to set up a national dairy farmer database to help co-ordinate PO’s.  Well I know a man who already has such a database, which is always up to date and could potentially be put to good use: me. For the record I’m happy to help, but state now I won’t run one.  I am also not convinced the ability to form a PO (which has a legal right to negotiate up to 33% of the entire UK milk production, remember) will be a silver bullet.  In fact at the moment I can only really see one PO, on the radar.

 

That’s a PO for the 3,000 (1 in 4) GB producers on retailer-aligned contracts, which I would like to see kick-started by Tesco (TSDG) farmers. A PO will not be a panacea, but it will facilitate producer collaboration, help balance farmers’ negotiating power, put them on a more even, competitive footing and could prove to be a benefit to the likes of the retailers themselves. But let’s be clear: PO’s must be driven by farmers and that brings me back once again to your current producer representatives. Self-interest must not dominate decisions. What is right for the producers they represent HAS to be the objective. I hope I am wrong in my belief that one or two farmers who sit on the TSDG farmer representative committee are likely to block the formation of a PO, perhaps fearing their position, salaries and bonuses.  Time for our so-called leaders to be brave to demonstrate they want to make a difference and ensure retailer-aligned farmers are early adopters. They should take the lead and be a voice for those who feel they have no voice. Fingers crossed Tesco and other retailers will support the PO idea. It can be argued that a PO will be a threat and an opportunity, and if one or more are formed my plea is that they are professionally run with qualified negotiators doing the negotiations.

 

Recent news highlights where a PO could have had influence. DC, Arla and Wiseman have been knocking seven bells out of each other to secure extra volume from the retailers, and recently DC lost 50 million litres of Tesco business. For DC it certainly was not a case of a dedicated supply, as Tesco, in the end, were in no way dedicated to its suppliers.

 

First Tesco informed me they intended to retain the farmers by transferring them to Arla. Er, whoops  - that was not contractually possible as they are DC’s farmers not Tesco’s. Second Tesco told me they would give six months contract termination notice to the DC Tesco farmers, and pay them compensation for any shortfall. Then someone at Tesco had a look at the contract and figured out option 3 - that if the DC’s Tesco volume allocation was reduced to zero from 16th July the farmers were still TSDG members but, because no milk was going to Tesco, there was no requirement to pay any compensation.

 

The bottom line is Tesco took the decision to dump DC’s liquid contract without any consideration for the 25 farmers. It is my belief if a proper PO had been operating Tesco could have negotiated to switch the producers to Arla or Wiseman, and would not have had to resort to worming their way out of paying compensation.

 

At the Dairy UK dinner Jim Paice did not hold back in expressing how disappointed he was not to be in a position to announce more progress on the voluntary code of practice.  As it was all he could do was to inform the audience that it needed a final push with a long-stop target for an announcement of the final compromise deal at the NEC Dairy Event in September.

 

Paice clearly wants the code agreed and has minimal appetite to intervene with legislation. I have previously criticised DC for what I term a series of gaffs. Well I am pleased to say when it comes to the voluntary code DC have been on the front-line agreeing significant concessions and trying very hard to make a deal.

 

One of the hurdles appears to be that for the code to work all Dairy UK processor members need to adopt it, hopefully followed by other non member processors. Arla are currently unwilling to concede on anything less than a 12-month notice period, and there lies a major blockage to progress. Time for a good negotiator to step in and persuade Arla to join the party, I say!

 

Finally (and please don’t shoot the messenger) - by the time you read this article I fear a number of 1st August milk price cuts will be on the cards. Given the fact all intelligence points towards commodity prices having bottomed and starting to turn up it’s likely the price drops will be the last of the year, and hopefully soon will be followed by at least one price increase. That’s where I am nervous because knowing August or September could be the last chance for processors to try to justify price cuts, the word is one or two will seize the opportunity and cut deeper than necessary. I do not subscribe to the view when it comes to farmgate milk pricing the market operates normally but I do live in hope that one day at least one purchaser will take the lead and be more open, honest and transparent. Roll on the voluntary code and a new way of doing business.

 

Comment to ianpotter@ipaquotas.co.uk

 

IP June 2012 DF

 

This year’s Annual Dairy Industry Newsletter conference posed the question “Is dairy recession proof?”. A more apt title, said one acidic farmer on hearing how quickly his cheese buyer had followed DC with a nice round 2ppl price drop, would be: “Is dairy collusion proof?”

 

The volume of milk now being sold through the big supermarkets enables them to squeeze the processors hard, because with that volume it becomes an imperative part of those processors’ business to ensure that they do not lose those major customers – at all costs it would seem (which is paid for by the farmers). The only thing the processors can do is squeeze the dairy farmer, and the only thing the farmers have left to squeeze is the cow’s tits.

 

How long will the low prices continue for? Well quite a while, said David Dobbin, the boss of United Dairy Farmers, at the conference. Until next year, probably. Chinese demand has been a key factor in the rising world dairy commodity prices in recent years, and while oversupply has crashed prices it is a fact that in the long-term China’s potential is the largest cog for what looks to be an existing future in world dairying. We need them to start buying even more than it does now! Just look at the numbers - the population of China is 1.35 billion people, which is almost double that of the EU 27 population and more than four times the population of the mighty USA.

 

Worldwide the increased global production is resulting in stocks mounting. Domestically the result is all our UK processing being at 100% capacity, and we have ended-up with distressed milk delivered across the water for less than 20ppl. For the future I do worry where the phenomenal amount of milk from low cost producers in Southern Ireland, and who are already gearing-up for life post quotas, will be sold. This was another point from the conference, and it will have a significant impact on our ex-farm gate milk prices, without a doubt.

 

Between now and 2015 the industry will have to respond, and positively. At the DIN conference Kate Allum said this year would be one of major change in the industry. Well there’s only six months left so if she’s right something has to happen soon! Let’s hope the strong businesses will get stronger (for the farmers) and the weak won’t try and pass-on the pain to the farmers through the milk price.

 

Currently Arla Foods UK is seemingly on the up, but Dairy Crest isn’t. Arla has reported sales for 2011 up 7% to £1,587.2m, just 1.1% less than Dairy Crest. However operating profit was down 14% to £31.4m, and operating margin was down from 2.5% to 2.0%. However the company paid a record dividend to its Danish parent of £97.4m during the year. It’s a shame Arla’s UK farmers don’t get a share of the profits like Milk Link’s farmers did, but hopefully they will do one day. Next year Arla is likely to become the biggest dairy company in the UK after DC completes its current divestment programme.

 

Last month I said that DC was definitely the worry - especially its liquids division – and those comments were timely and appropriate. The company gave farmers a brutally short notice period for the 2ppl price cut, and instantly there were strong rumours that it was the first cut of at least two - with another planned soon. Was it coincidence that DC announced the 2p drop so close to the end of the month, making it nearly impossible for farmers to arrange another buyer, and to give notice (which they have to do before the end of each month)? This meant DC had its producers “cornered” for another 13 months. Despite that observation from a furious farmer the short timescale didn't present a hurdle to dozens of farmers who did actually submit their notice to DC, however. Their reaction to the price drop was huge.

 

No doubt DC, or whoever has its liquid business within the next 12 months, will be planning to charm and cuddle up to the resigning producers with a view to sweet-talking them into rescinding their resignation.

 

Some farmers, though, are wondering if DC’s kamikaze price moves might be a bit more strategic than it would appear. For example, they question whether it is deliberately trying to lose producers to make its liquids business easier to sell, and also speculate if it is working with a potential purchaser who will pick-up producers who leave the company. Clearly DC is currently in knots, but equally obvious is that it has a plan to untangle itself for the future. Whatever we might think we shouldn’t underestimate it. The two main questions, to me, are whether DC shrinks, or shrinks, smartens-up and sells-up. For what it’s worth my money is on the latter. It is being restructured into a fundamentally different business, especially if it concludes the side of its very profitable St Hubert business. Certainly there’s lots of speculation around at the moment concerning the major companies, some or all of whom could be involved in major moves in 2012.

 

One thing is for certain, with DC having given producers only four days notice of the price cut and Lanchester Dairies trumping it with a backdated 2ppl price cut these two companies have done more to ensure either a voluntary code and contract change will be agreed and implemented than the NFU has done in years of banging their drum. The message to Jim Paice and the devolved Governments is simple: push through change and a meaningful code, or sharpen your teeth in other ways. Such short or negative notice periods have set relations with producers back at last five years, farmer confidence has been shattered and investment and growth plans wrecked over-night. Some producers have thrown in the towel already. I hope those in this camp do not feel they have failed and enjoy, and thrive, on their change of direction.

 

I’ll finish, though, with some good news. Contrast the above with the situation of Sainsbury’s producers. At the same time as the price cuts were announced the retailer declared it would be paying a cost of production price of 30.3p to its 324 farmers supplied through DC and Wiseman. This cost of production model, prepared by Kite, is a genuine effort by Sainsburys to assist their farmers through these very volatile periods. The model is fair, uses transparent, publically available data, and is great news for those farmers. Some years they will be the winners on the scheme, other years Sainsbury will, but overall it will balance out. It is a shining example of best pricing practice in the industry, and long-may it carry on and succeed. Hopefully the model can be mirrored by others going forward. Quickly.

 

You can email any comments to me at ianpotter@ipaquotas.co.uk

 

IP May 2012 DF

 

Some farmers never cease to amaze me about the business acumen (or lack of it) they have when deciding where to sell their milk.  One particular example which caught my eye recently was the case of one of the 84 dairy farmers who were caught in the collapse of Farmright.

 

Having worked hard and to wake-up and find you have delivered up to eight weeks of milk for absolutely no return is sobering. It should make everyone scrutinize their milk purchaser/processor for “longevity” and to assess them for being a financially sound business, and the degree to which they are re-investing in their facilities on a regular basis, as opposed to sticking plasters on problems.

 

But low and behold in the case of our highlighted farmer he informed a potential new secure well-invested milk purchaser he would not be signing with them because he could get the grand sum of an extra 0.1ppl elsewhere.

 

So on 1 million litres that’s £1,000 gain per annum, and the difference between a safe haven or a risky home.  If a ppl gain is your only reason for selecting a buyer then you have a problem, given it will take any farmer years if not decades to make up the tens of thousands of pounds of losses from a buyer’s collapse.  However, perhaps I should give this farmer the benefit of the doubt on the basis he was under the impression he could negotiate a “special deal” with the ‘secure’ milk buyer who would cuddle-up, massage his ego and throw money at him to secure his milk supplies. It has worked for some with one or two buyers, but not for this farmer, and all we can hope is the new buyer is safe and secure.

 

Milk pricing is in the middle of a storm. The latest GDT auction was down nearly 10%. Full marks to Arla and Wiseman - both of whom have near enough confirmed they will not change their farmgate milk price in May. Both are taking a robust bottom-up approach to extract more money from the market place to offset increases in fuel and plastics, as well as the dramatic fall in cream values. But will these increases fix the problem?

 

The problem for some is that they have knocked seven bells out of each other in a battle to secure additional volume. In doing so they are operating on very thin, non-existent or negative margins.  It’s OK if you want to be the low cost Ryanair of the dairy industry but it’s no good if you get caught swimming with no trunks on when the tide goes out, as is the case at the moment. Some processors, in particular some who are heavily involved in the middle ground liquid market, are hurting big time.

 

The problem is if one of the big five milk buyers drops its farmer price others are almost certain to follow. Retail customers will say “I’ll have some of that, thank you” and will instantly be holding their collection tin out the next day claiming around a third of any saving. So for a 1p drop it will be an estimated 0.35ppl passed to retailers leaving 0.65ppl to cover extra processors costs.

 

Arla and Wiseman appear to be determined to hold out and not to be the front-runners with any attack on farmers. It’s going to be a rocky ride and we will all have to hang together to face up to the challenges. Dairy Crest is definitely the worry at the moment. Its liquid division is clearly in a muddle. It currently makes no money, and the loss of the Tesco business is a blow. It’s true 3% may not seem much but it was an achievement to get its toe through the door in the first place.  Closing two plants comes as no surprise really given that something has to be done to restore its business to profit if it is to keep the division.

 

The problem that Europe and indeed the world has is that collectively we are increasing milk production quickly at a time of lacklustre demand and a build-up of surpluses. There’s a perfect storm brewing of falling commodity markets (butter mainly) and rising costs. If cream drops much further it will be at the level triggering EU intervention buying, at which point we need to sell 40,000 tonnes plus as soon as possible to bring things more into balance. But the more product that goes into store now, the longer the delay for the upturn.

 

Now for a brief word on the latest investigation to cross my radar, which I briefly explored about four years ago. It concerns the calibration of flow meters on tankers which one team of trading standards officers is apparently looking into on the basis some farmers might be delivering more (or possibly less) milk than they are being paid for. Watch this space, and if you have any comments or information please let me know.

 

The appetite from the media for negative ‘large dairy’ and ‘zero grazing’ stories seems to have no end, and even our own early morning Radio 4 farming programme has jumped on the bandwagon.

 

Communicating the huge technological advances and variation in production systems is a big issue for the industry to get to grips with, and dairy farming is starting from a position of having been badly let down by previous industry communication attempts.

 

With Nocton no one informed or tackled the policy makers and MP’s – a job I believe the NFU should have taken the lead on. Instead Non Government Organisations got away with ignoring the facts.  I have seen no evidence confirming welfare declines as herds gets larger. Good communication is a task which requires commitment and will require all dairy farmers, no matter what their preferred production model is, to pull in the same direction. The clock is ticking and we need one common message from the dairy industry. Dairy Co has made a start and we need to build on that. We must explain to the public there is room for many dairy farming systems, but each has its own merits and all employ the highest level of stockmanship and animal welfare standards.

 

Finally on May 9-10 I will be in London for the Annual DIN Conference.  I will be keen to hear the speakers discussing the theme of “Is Dairy Recession Proof?”.  Next month I’ll give my take on their thoughts, in particular on whether the recent weakening of dairy commodity returns will do a U turn or whether it will take us back to the 2009 levels where they are currently heading!

 

You can email any comments to me at ianpotter@ipaquotas.co.uk

 

IP April 2012 DF

Commodity market prices continue to soften. However, this is against very low EU and international stocks.  Against that milk supplies are increasing across Europe, and there has been significant weakening in EU and world commodity returns since December.  In addition cream prices have fallen from their peak of £1.80 in June 2011 to a mid March price of £1.15 per kg, down 36%. All of this is exerting unwelcome downward pressure on our markets.

 

There is still no justification for an overly-depressed outlook on milk prices (and significant cuts), but there are bound to be plans afoot in some quarters I’d have thought for a price “correction” from 1st May. I hope if it materializes it will be minimal. 

 

Dairy farmers who can’t make a turn at these current prices are likely to struggle on until the replacement for Entitlements and the Single Farm Payment (Basic Area Scheme) is confirmed and fully tradable (expected to be in 2016). If, at that time, they are unable to receive a stable realistic return of Cost of Production + Margin then I can see a significant exodus, and consequent reduction in production.  There is little, if any, room for a reduction in farm gate prices because such a move would seriously reduce (if not eliminate) profitability. It’s a crucial junction and I worry about the long-term consequences of any major cut.  Having said that, for producers who supply milk for commodity markets a price drop is the equivalent of a train coming towards you.  You know it’s coming… it might look a way off (for now)… but when it does arrive it’s still a shock! Remember Kite Consulting has calculated a break-even milk price of 29.33p, and the Sainsbury’ figure is 30.3p - both of which are higher than the average farm gate milk price.Note the difference in the two figures is down to the additional cost for Sainsburys farmers to provide a near level supply.

 

Couple these facts with the demise of milk quota in less than three years time and the anticipated dramatic increase in production by some member states and the combination will certainly prove to be a challenge. All dairy farmers will have to hang together. Fortunately the long-term fundamentals for dairy products are very good.

 

Meanwhile farmers are playing the power card in increasing numbers. Resignations from dissatisfied milk producers are plentiful, and without doubt some of the big hitters are scratching their heads.

 

Dairy Crest continues with its fascinatingly unique milk procurement policy, where it signs-up large producers with around 3 million litres plus on its Farm Business (Special Deal) contract, also known as “Milk Suppliers Contract”. This is accompanied by a five-page confidentiality agreement, which is the Dairy Crest equivalent of the Official Secrets Act.  Several of the ones I have seen have guaranteed prices for the first six months, and most have been for a price of 30p or more, and have been offered to new suppliers and selected Dairy Crest Direct producers who threaten to tender their resignation.  It is certainly an interesting deviation from the level playing field approach that has been the case with their long-standing and loyal DCD suppliers!

 

Then there is Arla, who’s handling (mis-handling) of its so-called 4p/litre producer “investment” has resulted in unprecedented resignations, which now exceeds 100 million litres from farmers who have simply had enough. It’s a serious issue for the firm, which has resulted in its AFMP board members personally visiting the revolting farmers in an attempt to get them to rescind their resignations.

 

When a firm is building a new factory the last thing it wants is member defection and unrest.  While recent difficulties encountered by some middle ground farmer suppliers have highlighted the need to find a safe and secure house for your milk, but that has still not resulted in a rush of farmers wanting to join Arla.  Hence the new 1 billion litre Aylesbury factory is, I believe, short of at least 150 million litres. Add to this the 100 million plus currently under resignation and the 250 million total represents an eye-watering 25% shortfall. It’s a hole which has to be plugged to ensure the factory runs efficiently.

 

There are, to my mind, two solutions – one to arrest the stream of resigning producers with a combination of a market leading milk price and better investment prospects e.g. full membership of Arla or a return on producers’ investment and two to quickly team-up with someone else or buy an existing large operation to fill the shortfall. If DC, Arla or others want to retain existing suppliers the advice has to be to try and weather this commodity price storm and, where possible, maintain farm gate prices at current levels and to rectify any profit shortfalls by other means.  Shiny stainless steel processing is worth nothing without milk.

 

As I stated in this article only a few months ago 2012 will be a pivotal year for a significant number of producers, and the Wiseman-Muller deal was the tip of the iceberg.  The main question for me is not so much as who might team-up with who, but who might be next to bale-out and go under. Fingers crossed two milk purchaser collapses in two months is our full quota for 2012.

 

On the matter of the unfortunate producers who have been caught up in the collapse of Farmright and Rock Farm Dairy Limited I wonder what benefit they derived from the latest DairyCo levy payer funded report: “Is your milk buyer moving in the right direction?” Once again this report focused on the big seven “top of the premiership” milk processors which covers the lion’s share of dairy farmers’ milk processors but neglects entirely those buyers in the championship or division 1 equivalents. Time to look at all buyers, I think.

 

Finally, I cannot resist commenting on the milk quota cobblers printed every week by Farmers Weekly in conjunction with The Dairy Group.

 

For at least the past two quota years they have published weekly milk quota leasing prices under the final “Prices and Trends” prices, recently with lease values of 0.07ppl (£700 for 1 million litres) and quoting previous weeks, four weeks ago and one year ago price comparisons. If anyone still looks at these then don’t, they’re total rubbish and here’s why.  Between April 2010 and March 2012 only 11 lease transfers were submitted to the RPA and, of those, this year there have only been two.  Add to that the fact we are responsible for the lion’s share of all milk quota transfers submitted to the RPA and divulge no prices to anyone it means in the past two years the lease prices quoted are for a maximum of six deals.  Time to stop reporting on a non-existent market, me thinks.

 

Comment to ianpotter@ipaquotas.co.uk

 

IP March 2012 DF

 

This year’s NFU Conference title was Meeting the Challenge, and there certainly are some big ones to tackle! The move to the ICC at Birmingham was inspired, and  is best summed-up as one similar to the decision made by the RABDF to relocate the Dairy Event to the NEC. There can be no going back for the NFU, who saw around 1100 enthusiastic delegates enjoy their conference in identical surroundings to those enjoyed by the main political parties.  

 

Two key industry challenges were given a good hearing - namely bovine TB (inevitably) and CAP reform.

 

President Peter Kendall described TB as the biggest agricultural issue on the domestic scene.

Delegates entering  the conference  on the first day were greeted by around 50 demonstrators who would best be described as very low key and almost sleepy holding placards stating “No” to the Badger cull and “No” to a repeal of the hunting ban. All looked pretty well fed, mind. Their protests don’t extend to boycotting food!

 

Kendall emphasised how important it was for all livestock farmers to do some local PR on TB, informing the public what the badger cull trial was all about and TB’s impact on farming. He made a plea not to leave the PR to NFU Office holders, and for all to do their bit. 

 

All present, including Government, were unanimous in their opinion that if the pilot cull was successful it would take the TB battle to the next stage, but it would be many years before results are seen – perhaps 20 years. Most also agreed that the only real long-term solution to eradication is a vaccine, but that’s several years away still.

 

Minister Jim Paice commented that TB, and the decision to cull, was one of the toughest challenges facing Government. His message was that culling badgers is not the solution to eradicating TB, it is simply one tool in the toolbox. He then issued a warning that "any wrong step by anyone could jeopardise the whole process". In other words if one farmer does something stupid the consequences  are likely to be that the pilots will be axed and not rolled out to other areas. Any activity that damages the industry’s reputation will be seized on by the antis. 

 

I’ll comment on the other big topic in the Industry aired at the Conference at a later date - namely CAP reform. However it’s worth mentioning now that there is a long way to go with the proposals. At least Dacion Ciolos, as EU Commissioner, has stated publically that they will not “penalise champions”, which was taken to recognise the fact that when it comes to agri-environment schemes Britain is ahead of the other member states. However Peter Kendall was quick to point out that UK farmers are effectively penalised today, being the only member state with voluntary modulation. This has to be scrapped in order to put us on a level playing field with the other 26 states. It’s a real the challenge for our Minister to deal with in her negotiations.

 

Following last year’s “Blamefest” Dairy Breakout fiasco I am delighted to say that this year’s session saw a seismic turnaround from that demoralised, destabalised victim talk into one with positive signs of cautious optimism. 

 

Two people on the NFU's Dairy Board questioned why we (i.e the UK Dairy Industry and The NFU) did not have a strategy and plan for the Industry post 2015. The Irish have one, and it’s a certainty that Muller and Arla have their own ones. Jim Paice’s response was not that we shouldn’t have a plan, but that we certainly don't want a Government run one. It reminds me of what Kate Allum stated at this year’s Semex Conference: "The UK Dairy Industry is fiddling and faffing about at the edges and we need to think differently,” she said.  Incidentally Jim Paice did comment that he thought our two main GB milk co-ops had come of age and were "both led by extraordinary people". It was great to hear people at the very top have such confidence in them.

 

So step up to the plate the men and women who want to sort out a long term UK Dairy Industry plan. (Or was that the idea of Dairy 2020? We’ve heard very little about it for a while and I’ve never ever been briefed!). Step aside those who are only around to milk the industry and sup tea. It’s time for all parts of the Industry to work together, and the NFU will need to take a lead on this. Arguing amongst ourselves is not the solution, in fact it’s one of the main problems. This was a point highlighted by Jim Paice, which prompted a round of applause after his comment that liquid processors in GB have been squabbling over who battles for a particular supermarket’s business, and, in doing so, have failed to focus on other markets.

 

The Commission’s Dairy package was also debated, in particular the fact that regulated contracts would not be adopted in the UK. Instead Government has opted for a voluntary code of conduct. Paice is right that regulated milk contracts would be a case of farmers picking and choosing when they want regulation, which was clearly referring to the fact that only a few hours earlier a press release from Government had adopted over 150 recommendations of the MacDonald report agreeing to slash red tape. The next move must surely be for NFU and NFUS to take the lead and to set about pulling together existing farmer representatives into formal Producer Organisations, along the lines I suggested last month, and starting with Retailer aligned groups. Little mention of this unique opportunity was made at the break-out, but someone will have to grab the opportunity and make it happen.

 

By the time you read this article there will be less than 20 days to the 31st March quota deadline. Remember, if you have quota and have not milked against any of it since 1st April 2011 you have to dispose of it or face having it confiscated. Last year 339 farmers had 123 million litres of milk quota confiscated, worth around £250,000. It might not be worth much, but if you allow the RPA to confiscate it you will get nothing for it and for most producers it will pay for a very good weekend away with the wife (or someone else!)

 

As we approach the spring milk price negotiations I am going to make a prediction (which, in reality, is a calculated guess)

.

I reckon Tesco and the others who operate cost of production models will at least stand-on with prices, and could (at a push, maybe) even stretch to paying a shade more. Such a move would be a great boost for farmer confidence, however the story might not be so rosy for some other farmers supplying liquid dairies. It’s a fact some of them are hell-bent on dropping prices as soon as they can, presumably using cream and/or AMPE prices as their main excuses. It will be interesting to see how this plays out, and who dares to move in that direction first. I may be slightly biased, but as I write I can see little justification for prices coming down, although I admit commodities have fallen. Muller were more stupid than bold, and have lost significant amounts of milk as a result of their price cut. Others will suffer the same fate if they drop prices.

 

Finally a short reference to the demise of Farmright, especially the estimated £4million plus of hard earned money from farmers that they are unlikely to see again. It brings home the fact that security of supply and the financial security of the buyer are fundamental, and several farmers had better do some homework on their milk buyers PDQ. The big question is whose bankruptcy will be next? For sure there will be more.

 

Comments to ianpotter@ipaquotas.co.uk

 

IP  February 2012 DF

 

Well I was nearly right, last month. I predicted major processor mergers and rationalisation, and that three liquid milk processors might become two.  Right on the first bit, wrong on the second. The recent takeover of Wiseman by Muller came as a complete surprise - not that Wiseman sold, but who the buyer was – but this deal does not give the industry the liquid processing sector the consolidation it needs. It will be interesting to see how Muller gets on in the fiercely competitive UK liquid milk world.

 

Muller is certainly in the spotlight over prices, being the only purchaser to trigger a 2012 price drop, of 0.5ppl from 1st February. But why? Because it is under pressure to improve margins (mainly due to competition from NOM) and can’t improve them via retailers.

 

The bit that really got me was the cheek that the company had to state in their letter to farmers that the cut was due to “softening commodity prices and recent falls in the AMPE index.” How come the NFU, Muller farmer groups and others allowed it to get away with such an outrageous statement?  Muller did NOT track AMPE when the price was rising, so why the heck should it track it, and blame it, on the way down? Muller was the last milk buyer to implement a price cut in 2010 and is the first to do so in 2012. Some record. I hope it isn’t a wealth warning for Wiseman’s farmers.

                                                                                             

Muller will only fool some of the people some of the time with such statements. The real influencer on most GB farm gate milk prices is NOT what happens on international markets but the price supermarkets are willing to pay.  Retail buyers are paid big bonuses to keep prices down, and they appear to be succeeding.

 

This year’s excellent Semex Conference confirmed my belief that the day of the co-ops is dawning. Several large-scale dairy farmers have recently concluded their direct supply contract with their processor and/or a major retailer is the equivalent of a one night stand with an ugly sister, rather than being a long-term relationship with Cinderella.

 

Suddenly value is being seen in these businesses, as farmers seek to capture any value added post the farm gate, rather than let the benefit be exported out of the UK. The dam is leaking, and could soon burst as farmers once wedded to direct supply contracts decide their long term future is best served by being co-op members, taking out the middle man and profiting from as much of the supply chain as possible.

 

Mention a UK dairy co-op and the vast majority of GB dairy farmers only think of First Milk, Milk Link and (for some) the bitter experience of the chronically mis-managed DFOB. However, the most successful UK co-op post de-regulation has been United Dairy Farmers of Northern Ireland (which was allowed to keep its processing business at deregulation, unlike our co-ops.) UDF is also processing milk in England and Scotland, and is currently seeking direct supply contracts for an additional 50 million litres for their Cumbrian and Dumfries & Galloway factories.

 

The recruitment is sure to appeal to the numerous farmers in this area who have already served notice on their milk purchaser, and have no shortage of buyers looking for recruits. United has a 0.25ppl levy payment applied to the first five years deliveries , which buys a proper share holding and it has no plans to ask farmers for more. If you want to leave you can redeem your shares immediately and most years you receive bonus shares. It’s a simple system and their CEO David Dobbin CBE has been in charge of the co-op for 11 years now. He’s one of the industry’s best - a Sir Alex Ferguson of dairying. Milk Link’s Neil Kennedy is also highly rated too, which means our top three co-ops have top class managers.

 

It takes strong individual leadership to pull a co-op or any business out of a near crisis, and the early signs are that First Milk’s duo of Kate Allum and Bill Mustoe are on the right track.  At the Semex Conference Kate Allum said her company are looking beyond this island and exporting milk products and, in doing so, are shorting the domestic market and probably (by default) increasing the cost of the milk they use in their cheese plants. Their members’ future is to move away from battling with retailers on price. Other co-ops are doing the same.

 

Kate openly questioned whether the industry had a plan for the UK post quotas (2015). Her question was met with a deafening silence. She said we were not going to wake up one morning and find every dairy company in the world had screwed up. “The UK is behind other countries (particularly Southern Ireland) and they will not simply stand to one side for us.” What she effectively meant was some industry leaders simply state there’s a crisis, trumpet their passion for the industry, but don’t come-up with a plan or strategy to resolve it. If she was truly blunt she would have said the industry lacks leadership, and the ability to state the raw truth and find solutions.

 

That brings me neatly onto the NFU’s and their various Conferences/AGM’s. I will be crossing the border to join the Bravehearts of NFUS at their AGM soon. NFUS is run from a single floor in a building close to Glasgow airport and few staff, but the ones it has appear to be very effective and punch well above their weight. The NFU, meanwhile, has a huge brand new fancy office in Stoneleigh.

 

Following that we have the NFU (E&W) conference, where potential candidates appear to back off competing for the top job. The NFU has faced similar leadership problems before, when potential candidates have climbed the leadership ladder only for them to stop short of the top rung.  It has usually sorted itself out with someone parachuting in at the last minute, however.  But I have an alternative solution - why not merge and consolidate both NFU’s and let us have some of that Scottish drive and openness intravenously injected into England & Wales! I can hear the old farts and Scottish Independents groaning and resisting already, but at least it might deliver people who want to lead down here.

 

Finally, the recent milk purchaser trend to jack up milk quality standards on bactoscan and cell counts is an issue which concerns me. Numerous farmers have seen new targets introduced almost overnight and I do wonder whether milk processors and major retailers appreciate what steps farmers are taking in order to achieve the top bands, and to qualify for any bonuses.

 

If a dairy farmer wants to cut cell counts quickly he will normally cull all high cell count cows. But I have also heard of another tactic, which I don’t intend to write about now… suffice it to say that I know of farmers doing something, which they shouldn’t be doing. It doesn’t harm the cows (it is nothing to do with them)… but I can’t see the practice doing the industry’s reputation any good if the practice was widespread. That said, I do understand how far processors and retailers are pressuring their farmers to hit their targets. I will keep my ears open on this. If you hear of it you’ll immediately know what it is too, so please contact me and let me know what you come across.

 

You can email me at ianpotter@ipaquotas.co.uk

 

IP January 2012 DF

This year’s EFFP Annual conference, entitled “Volatile Landscape”, was attended by 349 of the great and good in our industry (plus me) and the concluding message was clear: we no longer have any world food mountains or milk lakes, and for many food is quickly becoming a challenge to afford.

 

Also discussed was the extraordinary punching power of the NGO’s and the multitude of pressure groups we now have who challenge farming on almost every front. This was compared to an almost “embarrassing deathly silence” from their farming counterparts, who struggle to educate and inform the public on a range of issues.

 

So far as the dairy industry is concerned, in most cases we miserably fail to dispel the myths and get on the front foot with our PR and our positive stories. Instead we either hide in the hope the issue vanishes, or mount a last minute defence attack with a very complicated message which often confuses the public. As Farmers Weekly editor Jane King commented “we seem to have lots of talking shops with no action.” How true this is - particularly in England and Wales.

 

The conference was told that farmers need to “up their game” in order to feed an extra 80 million people a year in addition to a Far Eastern population who are quickly transferring from a diet of rice to meat. The global pressure to feed this increasing population was referred to as a “Nutritional Revolution” by one speaker.  In terms of dairying, China is still the biggest cog driving the success of world dairying. The Chinese population of 1.3billion may not have the money today to buy fresh dairy products but they certainly are a very exciting long-term opportunity.

 

Whilst NIMBYS and Middle England do-gooders (supposedly) fret about plans for a 2,500 breeding sow unit less than 10 miles from my offices, China is planning to build a single 600,000 breeding sow unit. Uk Agriculture will have to pull together to do things differently and adopt new technologies. As was stated in the conference summary “The old assumptions as to how we do business do not apply”. It’s a fact that without change no living systems can survive. And remember, unlike pessimists, optimists are not afraid of change.

 

So what’s in store for our GB dairy industry in 2012 according to Potters builder’s tea leaves? Well some of my money is on major processor rationalisation and with a good wind 2012 could see the first vestiges of our largest three GB liquid milk processors concentrated to two businesses – driven largely by Arla’s new Aylesbury plant. Hopefully other takeovers and mergers will happen. When / if three become two perhaps there will be less aggression to gain market share, where, throughout 2010/2011, all three have fought like gladiators to win volume and retailers have simply sat back and said, basically, “thanks lads we will have a slice of that cake”. It cannot carry on. In addition I genuinely feel GB milk Co-ops will become more fashionable because it’s slowly dawning on most switched on dairy farmers that with good management and implementation of the right business model they will be increasingly successful. Non Co-Op minded (direct supply) farmers are increasingly starting to see the personal value in the Co-ops. It’s not been an easy birth but I sense they now have a golden opportunity.

 

If I were the UK’s Dairy fairy with my magic wand (and not the unleashed Rottweiler) I would also like to see the formation of an Association of retailer aligned producers so the 25% (1 in 4) of the GB aligned farmers join forces for discussion, representation and (who knows) negotiation purposes.

Under the new proposal from the European Commission such producer groups will be subject to EU (not UK) competition law. The new regulation will allow dairy farmers to form a group to account for up to 33% of total national milk production, which, for the UK, is around 4.5billion litres. With that quantity and the right negotiator it should be easier to collectively negotiate the right contract and milk price. Producers will be able to collectively negotiate with both the supermarkets and their processors. Only then will some normality in the balance of power kick-in, and the never ending domino effect of retailers squeezing processors, followed by processors squeezing farmers (leaving dairy farmers with only the cows tits to squeeze even harder) might stop or reverse. The only major hurdle I can see which would prevent this happening will be existing representatives who have their own personal agendas and positions at the forefront of any decisions as opposed to what is best for the collected benefit of the farmers they claim to represent.  We must not let their personal interests miss this opportunity.

 

I hope if / when such a Producer Organisation is formed the farmers will employ a professional negotiator with the skills and experience to negotiate.

 

I am afraid if the squeeze and price war which the supermarkets thrive on continues they will succeed in  permanently shrinking and shafting the UK dairy industry. I still cannot understand why numerous people in this industry still believe the retailer aligned liquid contracts are the dogs whatsits when I and many believe they are restricting all milk prices.

 

UK production next year, in my opinion, is unlikely to rise significantly. Cull cows are selling for almost record prices and farmers will offload them rather than feed them to produce marginal litres for an unreasonable return. Retailers have been given advance warning that they need to exercise extreme care over the Spring pricing signals they send down the chain.

 

GB ex farmgate milk prices are determined more by processor competition than the World and EU dairy commodity prices and Dairy Co data confirms that retailers are making far more profit from liquid milk and cheese than the farmers or their processors.

 

There is a secret ceiling/cap on the maximum price a dairy farmer can receive for his milk and it’s controlled by our much loved retailers. If one of big retailers sneezes in March you will all catch a cold.

 

Meanwhile I will continue to  voice my observations for the thousands of UK dairy farmers who feel they have no voice – unless they tell me to shut up shop. Be warned it’s inevitable I will tread on more teats as I rattle more cages. I don’t have all the answers but I do have a big stick with which I am not afraid to poke a few tigers! If anyone wants to help me counter some of the crazy proposals and the unexposed truths behind this industry then you know where I am!

 

Comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

IP December 2011 DF

 

The half year results from Dairy Crest (DC) and Wisemans confirm what we suspected, that GB liquid processors have had to pay farmers more at the same time as receiving considerably less from retailers (and, seemingly, supplying milk at prices so low in the middle ground it can practically be given away.) 

 

Given DC’s awful results I question where they intend to go with their liquid business, remembering it accounts for two thirds of its volume and returned a pitiful 0.2% margin (excluding property). And I’m questioning it even more now Arla’s new plant at Aylesbury has got the go ahead.

 

Back in September I was given a copy of a DC presentation to analysts where the firm gave an insight as to how they view the future under a heading of “full of bright ideas.” One thing hit me: out of 74 DC slides only one mentioned liquid milk as an innovation priority, with the remaining 73 slides focussed on driving DC’s brands. The rest concentrated on DC’s cheese and Friji brands.

 

The first slide was headed “An interesting year for the UK dairy sector.”  I can’t help but feel 2012 will be an even more interesting one for our three big liquid processors, and wonder what state they will be in by the end.

 

Accordingly, there is an extremely worrying whisper doing the rounds among retailers and processors, and it boils down to the fact that irrespective of world or EU commodity prices the game plan from some companies is to soften farmers up for a New-Year price drop. To my surprise one publication recently commented on Wisemans and DC’s results stating “most analysts believe farm gate milk prices will come down in the New Year, giving the dairies (processors) some welcome respite.”

Well  I have to respond to that!  Is it only NFU Scotland who can see this industry going down the plug hole?  All NFUS wants is a fair, transparent market-related price paid to farmers. If retailers / processors succeed in a move to reduce farm gate milk prices the improving commodity returns will partly bypass farmers, who will miss out on receiving a fair percentage of the gains in their pockets. Instead the extra money will end up going to retailers to fund price wars on liquid milk, which were kick started by ASDA and show no sign of ending.  Some retailers seem hell bent on doing whatever it takes to secure cheaper milk, with some farmers wondering if cost of production formulas might be a tool to do this. So just at a time when patient producers have waited long enough for the price time-lag to pass, and expect to break the 30ppl barrier early in 2012, the demons are out there plotting the opposite. Thank goodness the co-ops and cheese prices are there to bolster the market and reduce the risk. Fingers crossed that world powder and cheese prices continue to nudge upwards. The only reason people are talking prices down is to line their own pockets. There is no justification on predictions that commodity prices might fall, or that on farm costs have eased. This talk needs heading off at the pass and retailers had better get a grip and ensure sustainable realistic prices are paid to farmers and processors next year.  If they don’t we will see the GB industry follow in the same direction as the UK pig industry – down. A family farm producing one million litres of milk should be able to make a reasonable living and re-invest.

 

Exactly one year ago I closed my pre-Christmas article with the following message “Let’s not let liquid processors get away with dropping your milk price to plug their profits gap.”  Twelve months on and the same message applies. And

woe betide Dairy Crest, especially, if they try to reduce prices with some of their Countrylife branded milk being sold in middle ground stores in Birmingham for the equivalent of just 6ppl.  Yes … 6ppl!! Come on DC, tell us: why is it nearly always your milk being discounted?

 

Now Arla. Arla suppliers are generally positive about what they see as an improved business under Ash Amirahmadi, who has worked his way to the top, knows right from wrong and has respect from all in the dairy chain.  But a lot aren’t happy about MPL (Milk Partnership Limited which is the jointly owned investment arm of Arla and Arla Foods Milk Partnership), and especially its annual accounts. The section on remuneration has particularly excited some of Arla’s farmers - one or two of whom have erupted, Vesuvius style, on the matter. 

 

The Chairman and Secretary of MPL is non-other than John “Teflon” Ovens who has received a £110,000 bonus this year, taking his grand total for the year for his part time job with AFMP and MPL to around £250,000, plus expenses.

 

Other bonuses for the year were as follows (Note figures in brackets denote the total received by each director for the year excluding expenses):  Wes Abbey £50,000 (£155,000), Wil Hosford £50,000 (£105,000), Fearnall, Haydn and Evans £25,000 each (£65,000 each) and Flether £25,000 (£62,500) on account of not joining the board until July 2010. The self-awarded MPL bonus payments are in connection with their negotiations with Arla in relation to the additional farmer investment. On a ppl equivalent, based on the amount of milk each of them delivers, the figures range from 43ppl (Teflon) down to 28ppl (Fearnall).

 

Several of those who contacted me claimed the bonuses are an own goal, and sadly for some they appear to be the final straw.  They are staring down the barrel of another 4ppl deduction and watching their board take what they see as more than just the cream off the tank. As one stated “the directors have negotiated a £58 million producer investment in Arla, where farmers receive no interest and may never see the money again.” The own goals as I see them are that the MPL bonuses were paid out before the deal was finalised, were not set by an independent remunerations panel/committee and were conveniently rounded figures with everyone getting a slice of the action irrespective of input.  It’s called fixed pre-agreed fees.

 

Remuneration packages have previously caused ill feeling, especially if they are not transparent, accountable and independent.  The AFMP/MPL board’s pay packages have understandably been compared to those of Wiseman, DCD, Milk Link & First Milk directors - with the result that if you add up all four of the farmer representatives/directors’ pay for those you will come nowhere near to the £767,500 the seven Arla directors bagged in one year.

 

One thing is certain Teflon and the directors have a lot of work to do on the communications front to sell their remuneration packages. MPL must have regard to normal acceptable commercial disciplines in order to gain the support and trust of all dairy farmer members. At the end of the day, though, one question will settle the issue: if they achieve a far better milk price than the others as a result of their efforts and skills then perhaps the awards will be justifiable! We will see.

 

Finally, I wish to publically set the record straight concerning my last article and the way some readers may have mis-interpreted my observations and comments.  When I referred to a ‘defiant’ Holstein UK Chairman I was not suggesting that his replacement as Chairman was connected to the teat sealing fiasco, or any rule change.  The word was used in a different context and I apologise if I may have inadvertently trodden on a few teats.

 

Finally finally, Merry Christmas to everyone and a prosperous New year. Retailers, processors and lunatic industry – destroying middle ground wheeler-dealers allowing, of course.

 

Comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

IP November 2011 DF

 

Last month’s article on teat sealing triggered by far the most responses I have ever received in 20 years of writing this article, even eclipsing those from the Dairy Farmers of Britain suicide bombers. And not one of the 82 comments received supported teat sealing.

 

Several readers comments were amusing. For example, two suggested sealing the appendages of offending exhibitors for the same length of time as the cows were sealed, while another suggested I was not normal if I didn’t have a penchant for, well, large you know whats.

 

Even the RABDF Chief Executive congratulated me on my article, despite being in the thick of the controversy. He promised that next year there will be no teat sealing at The Dairy Event, and that he and his organisation would not cave in to any bullies. 

 

The Association of the Show and Agricultural Organisations (ASAO) were also quick to react, and have written to all members supporting a complete ban on teat sealing. The ASAO commented that “we totally endorse any Breed Society in a move to eradicate this totally unacceptable form of malpractice.”

 

Since the last article, Holstein UK have seen their defiant chairman depart and have confirmed that its show rules will ban teat sealing from January 2012 (I am not clear why a delay is necessary, and why a ban can’t be introduced now, however).

 

The next event was The Bath & West Dairy Show in early October, which fully supported a non-teat sealing policy, having previously communicated rule 41 to all exhibitors. . .  only to find, on the day, one Jersey breeder potentially sealing teats.

 

After the cow had been judged The Jersey Society, commendably, approached The Dairy Show’s Steward, and The Chairman of UKJ placed the required £50 on the table to get a vet’s opinion. The result was confirmation that the cow’s teats had, indeed, been sealed and the breeder was disciplined and suspended from showing his own, or other people’s Jerseys, until 2013. The Jersey Society should be applauded for their actions. They send a very powerful signal to all society members that they are determined to stamp out any practice which compromises animal welfare, or has the potential to adversely affect the Industry. Other Societies should follow their example.

 

The next major event on the radar as surrounds sealing is AgriScot, with suggestions circulating that a small group of cattle breeders are minded to “bully” the stewards, judges and officials at the show (16th November) with a view to getting it to allow teat sealing. My message is simple - don’t do it. The breeders should compete fairly and squarely with good stockmanship; they should think about the cows, and uphold the good name of British dairying. There is no defence for employing intrusive practices just to win a rosette or financially gain from further sales of stock and/or semen.

 

So it looks like we will soon have a level playing field for all to exhibit their cattle in a welfare friendly acceptable manner with the new rule supported by the cattle vet association BCVA. The next move should be to make sure people selling cattle comply with the same rules to include auctioneers, photographers, semen companies etc. It’s now time for all of the organisations to step forward and confine these unsavourary practices to the history books. I look forward to receiving confirmation they have received the message loud and clear, and executed the change.

 

Teat sealing needs to be stamped out now. Failure to implement this simple, non-contentious rule will result in yet another dairy industry own-goal. Selfish, over-indulgent, cheating farmers and handlers who break the rule risk damaging the industry’s reputation. The Kennel Club (KC) is under attack for having no teeth and bowing to bullying from dog owners, having suspended random testing of dogs for banned substances like hairspray. It has been described as the canine equivalent of using performance enhancing substances.

Perhaps the agricultural shows need to consider random testing of cows too, with a name and shaming

policy adopted for shows, societies and exhibitors who do not support the ban.

 

Now to Tesco and what I feel are double standards.

 

Tesco core and seasonal liquid milk suppliers are prevented from selling calves to export markets on mainland Europe and/or Southern Ireland. The Tesco ban is not connected to the journey time (as is the case with organizations like CIWF) as the export would come within Tesco’s journey limit of 8 hours. Instead it is due to the destination itself, with Tesco commenting to me that calves could end up in rearing systems which are illegal in the UK. And yet the RSPCA have no problem with calf rearing systems in Southern Ireland.

 

So far so good, until you factor in that the mighty Tesco appear to sell Irish beef raised in calf systems that Tesco does not audit. So Tesco’s rules as to what is good, bad and acceptable boils down to whether it suits their purchasing policy. They ban calf exports because it does not affect their pocket, but readily buy Irish beef, which does affect it.

 

Michelle Waterman of Tesco with whom I  corresponded with stated “I have also visited, and carried out audits on many veal units across Europe and I do not agree with your statement that the standards in these are higher than in the UK.” I wonder what the Irish Farmers Association’s reaction is to Tesco’s position.

 

However her audits must have been performed for a previous client/employer, and not Tesco, yet she is using the information to decide Tesco’s policy. It is not exactly right, or helpful. I believe Tesco should carry out their own audits on such a critical issue to their dairy farmers.

 

Finally, my jaw dropped when I read that the 2011 Supreme Champion British Cheese Award had gone to a goats cheese from Southern Ireland.  The awards are in their 18th year and described as The Oscars of the dairy world. Try as I can I just cannot see an English cheese winning an Irish cheese award, no more so than the English winning a French award. However, according to the organiser it’s only Ian Potter who seems to mind! 

And if that wasn’t enough I then saw the annual news announcement of Dairy UK’s Milkman of the Year, sponsored by Highland Spring – which is a bit like Yorkshire Tea sponsoring MacMillan’s coffee mornings! What a shame the dairy industry can’t sponsor its own awards.

 

 

Comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

IP October 2011 DF

 

Proud of Dairy? Yep – mostly, but not always as the Dairy Event show ring proves!  

The second NEC Dairy and Livestock Event appeared to be a huge success, having catapulted the UK dairy industry into the modern age when it comes to having a very professional and business-like show that ranks alongside other shows held at the NEC.  There can be no one, other than the odd nostalgic old timer, who could regret the move away from the tired-looking and out-dated old dog called Stoneleigh. The move last year did not come a moment too soon.

 

Prominent at the event was the “Proud of Dairy” Campaign, which Dairy UK kick-started, and which has been boosted by DairyCo’s injection of enthusiasm. It invited farmers and industry people to tell them why they are “Proud of Dairy”, with yours truly saying: “Me?  Proud of Dairy?  You bet!  But being proud's not enough.  We need to be loud'n'proud! That's why I hope all farmers will pledge their support for this campaign."

Attending the NEC Event gave me a sense of pride in what dairy farmers and all involved in the industry achieve.  That was until I heard about the rumpus between the show’s organisers, the RABDF, and a mob of Holstein UK (HUK) members over a very questionable practice that might have gone on in the past but in this new modern age, where dairying is far more in the spotlight than it ever was, is now definitely past its sell by date. It’s the practice of teat sealing when showing or selling cattle to artificially enhance the udder appearance.

As one of the key dairy organisations, RABDF implemented a new show rule that no teat sealing, inside or outside of the teats, would be allowed. This rule was introduced following prior consultation with all of the breeds, including HUK, and was done so for one obvious reason: animal welfare. The change  was backed by the British Cattle Veterinary Association (BCVA) and communicated to all breed societies and all exhibitors before they entered their cattle.

 

All was running fine in the judging until the first morning, when Holstein exhibitors were caught using sealant. Rules being rules the RABDF stewards promptly gave the offending exhibitors two options:

(a)         Withdraw their animals prior to going into the show ring (thereby avoiding any potential embarrassment)

OR

(b)        Go into the show ring and be immediately kicked out of the competition.

 

At this point “all hell broke out” (as it was described to me) as a “posse” of Holstein UK members/exhibitors ganged up on John Jamieson, the cattle show director, with HUK breaking rank with the other breeds and demanding they be allowed to use teat sealant on their animals.  If not they would pull out and abandon the show - the first “National Show” to be held at the event, remember, following the amalgamation of the Dairy Event showing and National All Breeds Show event last year.

 

It was, therefore, time to whistle in RABDF’s Chief Executive, Nick Everington, to calm the angry mob of rebellious cattle exhibitors, who had, by this time, got the backing from HUK. The end result was that the new rule banning teat sealant was instantly overturned, and sealing them would be allowed after all. Cue the Holstein exhibitors trumpeting their victory.  Rules, apparently, aren’t rules.

 

But that was, by no means, the end of the tale. Step forward into the argument, or rather exit stage left, the Honorary Veterinary Surgeon for the show Kim Simkins of Hampden Vets from Aylesbury – who only agreed to remain in her position for 2011 if the rules were changed. As soon as the rule was overturned Kim resigned from the 2012 event on the first morning of the show. Kim would have resigned from this event too if the welfare of the cows wouldn’t have been compromised. Kim and the BCVA have sent out a very clear signal that they cannot be seen to back or support practices that compromise animal welfare  - or could be seen to be compromising it.

 

With hindsight many will say the RABDF should have stood firm and let the angry HUK exhibitors take their cows home.  However, faced with a 20 plus strong mob on day one of effectively a brand new showing “sub event” the RABDF was stuck between a rock and a hard place.  One described the mob as intimidating whilst another commented that HUK members had blackmailed the RABDF. Adding to the potent mix of frayed tempers were other Holstein exhibitors, too, who were also pro the new rule, were abiding by it and indeed had left animals at home because of it. Several were extremely angry at the RABDF’s U turn.

 

For what it’s worth, this is one of the few areas where I am certainly not Proud of Dairy, and I simply cannot see any credible argument as to how HUK or others could defend the practice of sealing, especially to the numerous anti-dairy lobbyists.  How could we ever convince the public that using a proprietary teat sealant like Orbeseal, an aerosol gas or even dare I mention super glue to seal the teats and bag up cows for what is effectively a beauty parade is acceptable, or that these practices are not detrimental to animal welfare? I don’t think we could. Whilst this practice does not represent what happens on 99.99% of dairy units, and is not normal commercial practice, it is nevertheless irresponsible. And I am not alone in these views. Aside from the stand made by Hampden Vets it appears the incident is being looked at by at least two of our major retailers, with their dedicated farmers. As one said to me me: “since when has super glue been approved for use on a lactating dairy cow?” Another was quick to point out the advice issued by Pfizer (Orbeseal’s manufacturer), which reads “Do not use during lactation.”

 

The insinuation was clear - some of those farmers would be well advised to study their milk contract where phrases such as “compliant with UK and EU legislation” and “compliant with The Red Tractor Logo Scheme” should be fully explored to ensure no breaches of those terms and conditions are occurring.  For the avoidance of doubt “that would clearly include complying with the licensed usage of all animal medicines and our own standards”.

Now this practice is firmly on the retailer’s radar it has become a far bigger issue than the one between the RABDF, HUK and a handful of cattle exhibitors. The risks of non-compliance with the detailed terms of milk purchaser and retailer contracts are extremely high. 

This, then, is not good news for the dairy industry. So what’s the solution?

The simple one would be to remove all dairy cattle showing from the event, which, while it would not be anything like the event it is today, it would remove what must be a huge challenge to accommodate dairy cows at the NEC.  Another route is for the RABDF, having opened up the debate, to close the matter by working with the BCVA and all involved to start 2012 with new show standards for all breeds where a less than full udder is not looked at in an adverse light.  There should be new rules and standards applied fairly and evenly to all breeds in all UK shows.  These rules need to come from the top down, and they need to be adhered to.

The practice of teat sealing - some would call it the trick of teat sealing - has to stop, and the UK dairy industry has to get its house in order.  Crufts ignored the warning signs of changing public opinion and paid the penalty by being removed from the BBC’s airwaves.  The dairy teat sealing issue, whilst different, is not too far removed.

 

Here in the UK we have some of the finest cattle and breed examples in the world, and we should be proud to show them as they are, at their most practical peak, not necessarily at the peak of their beauty.

So, let’s consign this practice to the history books once and for all! The cows don’t need it, the BCVA don’t support it, the processors don’t want it, and if it is allowed to carry on it will only do the industry harm!

 

Comments please to ianpotter@ipaquotas.co.uk

 

IP September 2011 DF

 

Direct supply contracts have increasingly hit the headlines and crossed my radar in recent months - including First Milk’s Eilers & Wheeler (FM/EW) contract and some from Dairy Crest. The FM/EW contract, which I know was taken by one 20,000 plus litre a day man, guaranteed him a net price of over 30ppl for a three month period, including a volume bonus. It’s a tempting market related price and more akin to a level most producers feel they should be achieving in the current market.

Then there’s DC, who are certainly keen to secure (or retain) a greater literage on direct supply. Normally this recruitment would have been carried out exclusively through Dairy Crest Direct (DCD), however relationships between the two appear to require the service of Relate, or Dear Deardrie, and DC are now recruiting farmers outside of the DCD family. I am not clear where this milk procurement policy leaves DCD other than weakened (like The Wiseman Milk Partnership in their recent spat) and with a fight on their hands to avoid being sidelined, or even ditched. 

 

DC’s milk procurement strategy has significantly changed, with the offer of special “one off” deals to selected farmers around Davidstow, with three large producers I have spoken to all claiming different prices around 30ppl. In addition, other groups of farmers have been offered similar deals all under the basis they have signed confidentiality agreements and the DC equivalent of the Official Secrets Act (But clearly with one exception that they are allowed to tell me!) Bizarre, to say the least!

 

The evidence from the DairyCo Supply Chain Margin’s report confirms that liquid processors have had their margins seriously squeezed, again, as our giant retailers have fallen over themselves to offer the cheapest milk in Britain. Once again the report is confirmation that retailers make a healthy margin from the sale of milk, whilst farmers and processors are squeezed hard. So far the cheapest milk to date is believed to be Dairy Crest’s Country Life Milk, sold for 16ppl to customers visiting the Johal supermarket in the Midlands. So it’s 30ppl to special farmers on one hand, and half of that if you’re a special retailer buying through a special Bottle Milk Buyer. One wonders whether DC are using profitable world markets to subsidise the madness of the middle ground.

 

However, whilst DairyCo are to be applauded for their Supply Chain margin work, I think it needs to sharpen up on other areas of its work, frankly. For example, in the week our position as the lowest paid dairy farmers in Europe was confirmed DairyCo not only failed to report this significant fact it decided to lead with a story which trumpeted the fact that the DEFRA average farm gate price for May was the highest on record!  And within days its next Dairy Market Update lead story was headed “Have wholesale markets peaked?” implying that wholesale markets were falling. As one prominent dairy industry person stated in an exchange of emails to me: “What the heck is going on at DairyCo?” With liquid processors and hungry retailers examining the evidence to support liquid milk price increases in the reign of 2ppl it will be music to their ears to learn that the one “organisation working on behalf of Britain’s dairy farmers with a remit to solve market failure in the dairy industry” believes prices have peaked! It’s a staggering tone. OK, admittedly, DairyCo held their hands up for failing to report our European league position and issued an amended update, but get a grip!

 

Now more on the excellent Westminster debate on the future of British dairy farming, as prompted by Dan Poulter, MP for Central Suffolk & North Ipswich, and as reported in my July article. (See www.ipaquotas.co.uk and click on Westminster Discussion)

 

Director General of Dairy UK, Jim Begg, put a blustering pen to paper in response, stating that “normal practice in the UK is for contracts to leave pricing to the discretion of milk buyers with one of the reasons stated for this evolution of contracts being the fact dairy farmers need to sell their milk on a daily basis”.  In other words, you’ve been got by the short n’ curlies.

 

Dairy UK then stated that “unless milk purchasers continue to pay a competitive price farmers will resign”.  That may be the case with three month notice period contracts, such as those operated by Wisemans and McLelland, but this is not an option for farmers who have to give up to 21 months notice.

 

Apologies Jim, but your claim that milk purchasers “continually adjust their prices to ensure they are in line with market developments and that they are competitive and that the market is operating effectively to protect farmers” is not backed up in reality. Specifically, liquid milk purchasers adjust their prices so they remain competitive in comparison to their competitor milk processors, and not in relation to market developments. The bottom line is the liquid market is presently failing GB dairy farmers, and liquid producers are relying on the big cheese guns like Milk Link to drive prices up. The reality is that retailers and some mainstream and middle ground liquid processors are shafting dairy farmers. As for retailer aligned contracts - well most are holding prices down now.

 

If only Akkerman had built his (export orientated) cheese plant, or FFA’s planned plant was up and running, then things would undoubtedly be different. Some of our more commercial dairy farmers – such as the FM/EW man - would take a chance on world markets and take a chance on higher prices and transparency in return for volatility, and other processors would be forced to take notice rather than to sit on their backsides.

 

In his letter Begg also comments that milk contracts operate to the benefit of both producers and processors, and that they should not be subject to regulation. While I agree that regulation could easily result in more volatility with shorter contracts, I reckon if the maximum producer notice period were limited to six months and/or larger producers had the facility to sell to two milk buyers the game would change and some of our more lackadaisical milk purchasers would have to sharpen up their act.

 

It’s not healthy or sustainable for everyone in the GB dairy industry to hide from the fact that the market is failing farmers. Dairy UK claims (laughably as far as the NFU and its ardent followers are concerned) to be “The Voice of the Dairy Industry” and is commendably striving for people to be “Proud of Dairy”. Well, market failure is nowt to be proud about, frankly, and trying to justify the unjustifiable will get Dairy UK nowhere. Please, everyone, don’t miss the chance to negotiate fairer deals for hard working dairy farmers, because the consequences will be an even greater blood loss of dairy farming families. And everyone will pay the price.

 

Finally, I am hoping to visit this year’s NEC Dairy Event. However, a prior engagement in Bulgaria may restrict my visit. Regardless of my attendance, though, please go to the event, support your industry, and if you agree with what I say tell your buyer, Dairy UK, Dairy UK and whoever! If you don’t, tell me!

 

Comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

IP August 2011 DF

 

The Make Mine Milk liquid promotion campaign has passed its half way point, having started a three-year journey in October 2009. The programme involves a £9m spend, split into two campaigns of £7.5m and a £1.5m complimentary campaign, with most of the adverts appearing on the side of buses in big cities. And believe me, they have been, like, EVERYWHERE! Full marks for creativity and visibility!

 

The EU has contributed £2.5m towards the main campaign with the other main backers been Wiseman, Arla, Dairy Crest, Milk Link and First Milk. The campaign is working with the USA’s Milk Moustache Agency and has plans to add more personalities to the current ones of David Beckham, Simon Cowell, Jamie Oliver, Gordon Ramsey and Harry Potter star Rupert Grint.

 

The first 18 months research, where 100 random consumers are contacted each week to monitor what adverts they have noticed as well as sales trend data from T N Neilson, has been very encouraging, with liquid sales having increased by 2%, and with a high awareness of the adverts.

 

But what happens in October 2012 when the campaign ends?  If it has been a success the momentum from increased sales will continue and the campaign will not stop dead on one date, but there’s no doubt it will gradually peter out over a period of months. However, the big question now is whether the industry should make plans to continue to fund the promotion beyond 2012, for which a tidy budget will be required.

 

The Milk Marketing Forum (part of The Dairy Council) believes the return on investment is good, showing “both encouraging results” and that it is changing attitudes and will permanently increase liquid milk consumption. And if numerous processors and industry bodies are convinced the promotions deliver increased sales and help the long term sustainability of liquid milk consumption there is clearly merit in exploring all options for the campaign’s extension.

 

So, if the conclusion is that it’s good, and we should keep it on then who should fund it beyond 2012? In Canada farmers and processors fund similar campaigns on a 50:50 basis, and we used to here. We recently carried out a poll of over 100 random dairy farmers whilst updating our database and asked them whether they wanted milk promotion, and, if so, who they think should fund it? Their views were revealing.

 

Clearly there is significant confusion among dairy farmers of the difference between DairyCo and The Dairy Council. They didn’t know. And most of those same farmers were clearly under the impression their current DairyCo levy was either ALREADY funding the Make Mine Milk adverts, or that it should go towards it. They were shocked when we told them it wasn’t. But the fact is that not a penny of the levy is used for generic promotion of milk and dairy products beyond the farm gate.

 

This highlights the fact there is still a cloud over how farmers think DairyCo spends the levy money, which, I have to say in recent weeks, has raised an eyebrow or two. That’s because I received a couple of comments recently concerning DairyCo’s annual sponsorship and promotion of the RABDF’s Dairy Event promotional flier. DairyCo sponsors the flier which promotes the event in the first instance and then its own presence. “Talk to DairyCo about life, the universe and everything” is its “take on the world” positioning, as it was put to me. You couldn’t help but notice Barclays the main event Sponsors had one mention in the 4 page flyer whilst Dairy Co had umpteen.

 

I am sure Dairy Co have crunched the numbers and concluded that the NEC Event is the one to push and invest in on the basis they have a good chance of having face to face contact with the maximum number of levy payers. However their decision to contribute no funds to any generic campaign to promote milk and milk products is one they will have to continually re visit.

 

Anyway, clearly more accountability is required still, and more explanation of what DairyCo does and doesn’t do. I also think that DairyCo will never truly capture the hearts and minds of dairy farmers while it has a policy of rejecting generic promotion like Make Mine Milk. I know it hasn’t got much money, I understand its brief is to make farmers more competitive… but farmers love seeing their product promoted and clearly it does work!

 

I have received a couple of emails from my burgeoning fan club (No. of members, three) pointing out that I have yet to make any comment on the soon to be introduced Wiseman Co-operative Dairy Group contract/ guidelines and premium. Yep, you’re right. But the truth is, I simply haven’t had time!

 

However, news from my friends at the Co-op (CTRG) did flash across my radar when I was alerted to Compassion in World Farming’s (CIWF) “Good Farm Animal Welfare Awards”. When I learnt those idiots at CIWF had awarded one of its new “Good Dairy Awards” to CTRG for “sourcing dairy produce from higher welfare cows” my jaw fell so much I had to fetch it from Australia. If I was M&S I would be hopping mad to learn that, having worked closely with a small group of dedicated dairy farmers for several years, CTRG won this award in its first year – and for something they haven’t done yet – they haven’t yet had a cow milked on their behalf, or paid a single penny more than they have had to! Utterly crazy and not at all deserved.You couldn’t make it up!

 

Much is spoken and written by commentators on the need for further ex-farm gate milk price increases and the fact we are now firmly rooted to the bottom of the European milk price league table of all 27 member states. It’s a disgrace and embarrassment. While I have no doubt that by September at the latest one or more of our main liquid milk processors will deliver another increase to liquid contracted producers the big question is why are GB liquid prices dragging their heels, and being pushed up by cheese and manufacturing processors? Well – here’s an example: a supermarket in the Midlands is selling Dairy Crest’s Countrylife milk brand at 16ppl. Yes, 16ppl! (It’s actually six litres for £1.) At this price it’s worth buying the milk and tipping it back in the milk tank to re-sell or banging on the door of Dairy Crest and Johal Dairies, who jointly supplied the milk, to ask exactly why it is being sold at this market crashing, wholly detremental price. One for Dairy Crest Direct to get their teeth into!

 

But hey – why should people be surprised about such a price, given Dairy Crest’s desire to get hold of cheap milk!

 

Witness its latest incentive to encourage producers to increase production. This pays 2ppl on the extra litres produced in excess of 3.5% above the volume produced last year. Having crunched the numbers, a Dairy Crest producer who produces an extra 4% more milk on last year would gain less than £100 in a year! Clearly Dairy Crest are not as generous to their famers as they are to their Bottle Milk Buyers!

 

Comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

IP July 2011 DF

 

During the past month I have taken a keener interest than usual in matters political.

 

First, on the 7th June Westminster saw a one hour discussion on the future of British dairy farming, spearheaded by Dr Daniel Poulter - the Conservative MP for Central Suffolk & North Ipswich. This was triggered by the reality that in the mid 1990’s we produced 70% of our own food requirements and today it’s around 50%, plus the fact that in the European 27 milk price league table we lie third from bottom, fractionally ahead of Slovenia and Romania.

 

In March 2011 the EU average milk price was 29.72ppl, whereas the UK one was 26.59ppl - more than 3ppl or 12% below the average. And remember, if we exclude the Northern Ireland average price the GB one would be even lower at 26.33pp.

 

Such low prices to our dairy farmers are impossible to explain to consumers and farmers in a country which regularly trumpets how valuable and precious its fresh dairy market is - in particular its liquid market and its “ground-breaking” retailer-aligned and segregated contracts.

 

Perhaps the harsh reality is that the GB dairy industry and its representative organisations need to acknowledge it is our love of the liquid market and its associated contracts which are the main factors in disjoining the majority of ex-farm gate milk prices from the “normal” market. Witness the EFRA Committee inquiry hearing on the 3rd May, when the Committee asked a witness - Herman Versteijlen, Director of Directorate D in DG AGRI - to make a statement as to why the average price of milk in the UK continues to be below Europe’s as a whole and he replied “it is largely due to the high volume of liquid milk sold in the UK”.

 

Daniel Poulter’s Parliamentary debate recognised the dysfunctional market and unfair pricing mechanisms. And while it was a highly commendable achievement to see him secure the debate, surely the first step for this Government to do their bit to support farmers would be to ensure all milk and dairy products are procured at national and regional level at FAIR prices as opposed to the CHEAPEST. There’s little point lashing out at the soft and easy targets of the big retailers for their practices when national and local Government do not have a clue whether the price paid to producers is above or below the cost of production. Until this is in place I will not believe this Government is really serious about backing British dairy farmers. Let’s make sure the government, NHS etc are not guilty of paying low prices for milk and dairy products.  And the same applies to Wales and Scotland.

 

At the recent AHDB Outlook Conference, Sodexo declared it served 1 million meals daily in the UK, and that it takes its responsibilities “very seriously”, and collaborates with DEFRA over its public procurement procedure.  I asked Tony Cooke, its representative, how responsible and sustainable the approach to Government dairy product procurement was. He said the procedure was crystal clear: if it meets the quality, it’s the cheapest that wins.  “In the public sector and central Government it’s price only!”, he said.

 

In the debate Jim Paice, Minister of State, said "the Government will lead by example".  It’s time for all three devolved Governments to take the lead and accept they have a responsibility to pay above cost of production for not only their dairy products, but ALL products.

 

Jim Paice made one key observation in his contribution, which for me comes back to bite dairy farmers and dilutes the arguments for a higher milk price and the notion that the industry “is in meltdown”. He commented that "milk production in the UK increased by 500 million litres last year and is now almost back to the level of three years ago".  This fact is without doubt counter-productive to farmer’s arguments.

 

Overall. full marks to Daniel Poulter and to those who briefed him, including, I am reliably informed, Peter Kendal, Ben Watts of Kite Consulting and numerous Suffolk and Norfolk dairy farmers - all of whom are witnessing a significant 2011 run on big dairy units who are quitting in the two counties. It’s worth you reading the transcript, which covers 12 pages and which can be found at www.ipaquotas.co.uk. Click on “Westminster Discussion -The Future of British Dairy Farming”. It certainly outlines the key problems and difficulties dairy farmers face, and must be used as a spring board for change. (NB, mind, I wish to point out one typo which refers to “£300,000 for the average 1 million litre farmer”, which should read £30,000, so please don't email me thinking you have spotted that one!

 

When I took a brief look at the latest EFRA Committee enquiry investigating the EU proposals for the European dairy industry my jaw dropped: the first witness on the 3rd May was the MD of The Co-operative Farms, Christine Tacon, who was asked to comment on current problems facing the UK dairy industry. Why the blazes did EFRA call Mrs Tacon to give oral evidence when her first major decision when she took charge of the Co-op farms in 2003 was to sell ALL the co-op’s cows and its 34 million litres of quota?

 

Today the Co-op farms have no cows, having once held by far the largest dairy quota in Europe. And its retail arm – CTRG – has, to date, failed to pay any liquid premium to dairy farmers. CRTG sold its processing to DFOB for a Knights ransom (OK, so DFOB offered one), then took its liquid supply business from DFOB which was the final nail in the coffin for the co-op.  Before giving evidence to the EFRA committee Mrs Tacon had to ring round experts for a crash course on the UK dairy situation!. In my opinion the EFRA Committee has manifestly failed in its duty, because it has called for oral evidence from a business which is not relevant to the UK dairy industry and cannot possibly have legitimate concerns on the matter. What a joke! The point of an EFRA inquiry, in my book, is to call for factual oral evidence from businesses and organisations at the coal face and not from people who have no idea what they are talking about or relevance. It could only happen in England! Or maybe it’s the classic political tactic of inviting witnesses to give you the answer you want in the first place, rather the one that is required.

 

On the 27th April two of our leading representatives organizations gave oral evidence to the same EFRA inquiry. Dairy UK decided to wheel out the heavyweights and pull the stops out, and taking to the stand to give evidence were Jim Begg, Director General and Peter Dawson Policy Director of Dairy UK, plus Mark Taylor, Procurement Director of Dairy Crest and Rex Ward, Chair of Dairy UK’s Farmers Forum.

 

On the same day former NFU Dairy Board’s Chief Policy advisor Tom Hind - now Director of Corporate Affairs - gave evidence. Now I will be the first to admit Tom Hind is the best equipped person within the NFU to be cross examined on matters dairy, but how come not a single member of the NFU Dairy Board attended? It does not send the right signal to the industry or the NFU’s dairy farming members when neither the Chairman, Vice Chairman or current Chief Dairy Adviser attend! What a golden opportunity to put at least one dairy farmer in front of the committee!

 

Last month’s article concerning the need for change within the NFU certainly caused a stir, and seems to have reached arable as well as livestock members.  Comments to me fell into two camps – with by far the majority agreeing that the NFU needs to change. Others, including some Council members, were in favour of a slimmed-down Council via a one-hit cull. However, there were a few for whom the article touched nerve cords, who couldn't see a problem, but who clearly felt their positions were in danger. And didn't they let me know it!

 

The funniest one was the man who called our office to give me the benefit of his opinion but wanted to remain anonymous. Except he forgot about call line identification! If brains were dynamite!.

 

I fear that the two groups will simply end up arguing amongst themselves, rather than getting on and agreeing a plan and getting it implemented ASAP. This will involve a change to the DNA composition of the NFU and I hope they clone the right people to breed from in the future and confine some of the rare breeds to the sanctuary. At the end of the day the winners – or losers - will be the members it represents and the industry it serves.

 

Comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

 

IP June 2011 DF

 

Well this month it has been one step forward on milk prices (First Milk, Wyke farms) and a bit back (Arla, Dairy Crest  and Dairy Crest Direct), but some significant developments have taken place on a macro front too – notably from the NFU Scotland which has come out with a new idea for milk pricing, and which I will turn to in a future month. All credit to them for coming up with something new.

 

Meanwhile the NFU has held another farmer representatives summit, and has taken its ‘fairness for dairy farmers’ campaign to MP’s to lobby them to lobby Government to get stuck into the industry to sort out the mess. At a meeting on 17 May Peter Kendall, Mansel Raymond, Rob Newbery and a good number of the Dairy Board all piled into Westminster to give our MP’s and Lords the big What for on all things milk. Whether it does any good remains to be seen. A lot of MPs that should have been there  weren’t there.

 

And this gives me the perfect opportunity to cover a subject I’ve been meaning to cover for a while – the NFU itself, and The Dairy Board in particular.

 

Peter Kendall, I believe, is good. Very good. But he’s also increasingly looking like the equivalent of a lone pilot of a 747 Jumbo Jet – steering it, analysing its fuel levels, air speed, engine’s performance - everything.  I know Meurig Raymond and others are there too, and I know they do very notable stuff that is essential for the future of the industry but isn’t exactly headline grabbing, but in terms of a front man Kendall is the man of the day. But is he flying the Union in the right direction, and is his plane potentially heading for a crash landing?

 

Let me explain. That’s because the NFU needs to find the next Peter Kendall for the 2015 era and beyond – and pretty damn quick.  It’s a serious issue. The NFU needs to have the right people in place for what will be a dynamic period in agriculture, and, let’s face it, Kendall and Raymond aren’t the “next generation” men for that era. Gwyn Jones also has the sword of the GLA hanging over him, and the Court of NFU Moral indignation / Hypocrisy (depending) will more than likely sit in judgement of Paul Temple for many moons yet ignoring the fact he was of the next generation and was prepared to face change head on.

 

The problem as I see it is that there aren’t any obvious successors to Kendall and Raymond within Council and the Commodity Boards - who represent the “next generation” and who  hold in their hands the future of not only the NFU, but farming as a whole.

 

This is even more stark when it comes to the Dairy Board. I don’t know what the average age of the NFU Dairy Board is, but if I checked their teeth and sorted them there wouldn’t be many in the “youngsters” pen. A few would also struggle to score many marks on a dynamism test, or indeed a communications skills test with a few incapable of joining in on a conversation let alone starting one. Perish the thought of them interacting with politicians and the media. Mansel is doing his best for dairy, I’ll grant him that, but his Board don’t seem to be giving him much (any?) support.

 

Similarly, several County Chairmen are in their posts largely because other farmers don’t want the job. And while some are undoubtedly high calibre switched-on individuals there are some that aren’t the sharpest needles in the veterinary cabinet.

 

The reality is that an increasing number of farmers who would have climbed the NFU’s ladder in the past have decided instead to make their mark by representing farmers with their milk purchases or co-ops. Shining lights like David Christensen (Milk Link), Stuart Roberts (Wiseman MP), Arthur Fearnall (Arla FMP), Phil Allin (DCD) etc. And others like First Milk’s Roger Lewis (chairman of the Next Generation Dairy Board) want to concentrate on their own businesses for a while before getting into industry politics.

 

These farmers have been (will be) head-hunted by their processor to help take their businesses forward, which means they don’t have time for NFU business. I also suspect they’re growing tired of the NFU’s one track mind on contracts, which it has as yet failed to secure a buy-in from processors.

 

The NFU’s “recruitment” process into these important industry-shaping positions needs a radical overhaul. Currently most of them rely on elections. But this clearly isn’t working, so one solution is for the NFU to supply its regions with a detailed job specification for its vacancies so those putting themselves up know the qualities required.  If the NFU continues to rely on the (admittedly noble) but failing democratic process they will continue to lose more competent young people who could drive the organisation forward.  The NFU must have a procedure for evaluating each candidate’s strengths and weaknesses. Consideration should then be given to an independent annual 360 degree review which assesses their performance.

 

The organisation needs to think outside the box. Several years ago I controversially wrote in this column about an NFU meeting I spoke at where two candidates left the room while the small congregation of rather elderly members/committee discussed who would represent them at regional meetings for a particular subject.  The result was that George (the old man whose best mate wrote the Doomsday Book) retained his position whilst the younger farmer (aged around 35) was told “your time will come, lad”.  I could have wept, but I fear little has changed.

 

Late last year I travelled to Ontario and visited the Schouten Corner View Farms dairy farm - the home of Jessica Schouten, who was selected as the representative for the American Soybean Association and Dupont young leader programme. Jessica is involved in a programme designed to train Ontario’s future farm leaders where young people benefit from public speaking lessons and meet successful farm leaders.  The aim is to grow the next generation of well trained future potential leaders for the North American soybean industry. Jessica does not work on the farm, though, and is a crop advisor. What a contrast! I ask this, then: do the NFU’s positions all have to be filled by farmers?

 

It’s no point having Board and Councils with dinosaur members who are well past their sell by date trying to perform duties way beyond their capabilities, and who have limited motivation.  It is, therefore, time for a shake-up – a cull - in the interests of the long term future of the NFU. The NFU needs to indentify young people, head hunt them, train them and support them, and then get the old farts to move over and allow them to over take them.

 

The NFU is a fantastic organisation – farming’s best. And a lot of farmers give a lot of time and effort to do what is right for farming. I know that, I recognise that. A applaud you all for that.

 

But there is a talent and a leadership storm approaching, and it’s time the NFU looked ahead, adjusted the flaps, checked the altitude, fuel level, rev counter and so on.  The Jumbo can change course to miss it and avoid a disaster. 

There are some brilliantly talented dairy farmers out there that can step up into the cockpit – that is not the problem.

The NFU just needs a plan to attract them. And it needs one soon.

 

Comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

IP May 2011 DF

I make no apologies for returning to the subject of milk quota, and the four remaining years running up to their demise in March 2015.

 

During the past couple of months there has been a noticeable increase in the number of farmers keeping a closer eye on the production figures once again.  That’s because last year production increased by 514.3 million litres (4%), which marked the end of a seven year cycle of a continual decline in UK production.  That means, in simple terms, if we increase production by 370 million litres year on year we could get pretty close to our national threshold in 2014/2015.  Note, this back of the fag packet calculation does not take into account the 50 million litres we see transferred to direct sales quota each year, and assumes we will not trigger our 3.97% national butterfat base.  Despite the surge in interest in milk quota, and with prices up 50% in four weeks (OK, admittedly from 0.2ppl to 0.3ppl) my money is still on the UK not hitting quota. But I don’t gamble, and I won’t have to pay any of the super levy!

 

Production in this new quota year has certainly got off to a flying start for a host of reasons, but putting any threat of super levy to one side the biggest problem producers face is that more = less.  The more milk that is produced the more it will put the dampers on milk price increases as the additional production will not help processors push the market upwards or forward. The fact that production was up this year compared to last did us no favours in convincing those higher up the chain to pay more. “”What’s the problem,” was a common cry. “Farmers are producing more milk than last year so what’s the problem.”

 

Now on to our friends at Arla. There are certainly signs emerging of some green shoots of a new, improved Arla following the return to Denmark of Hanne Sondergaard and the promotion of Ash Amirahmodi.  Recently Arla pushed ahead with a 2ppl producer price increase and they didn’t opt to take the easy road by following Dairy Crest and Wisemans with a mere 1ppl.  Following their competitors and setting AFMP producer prices at the average increase was not the standard Ash and his team wanted, as Arla sent a very strong message that the new kids in town were here to set superior price increases not be also-rans. What a contrast to Dairy Crest, who, up until the last price increase, had followed the market four times.

 

In his first public statement Ash commented “I am committed to the journey towards securing a sustainable supply of raw milk and bringing AFMP closer to their processing partners.”  Does this translate to the goal of AFMP members achieving equal status with their Swedish, Danish and soon their German comrades, I wonder?

 

However, on the so called 4p “investment” levy Arla has an uphill battle to pacify the natives. The £70 million to be paid by Arla Milk Partnership producers from January 2012 is a thorny subject, mainly on the grounds that if it’s an investment it should pay a market rate on any capital invested in the business.  If as stated the £70million is to be invested in Arla Foods UK plc in the form of additional shares does such a move require the issuing of a prospectus?

 

AFMP members were told in their March AFMP gazette by partnership Chairman, Jonathan Ovens, that “We have always made a point of AFMP being an organisation that listens to members views”. Really? Grass roots farmers are questioning whether their views on the investment levy are valued, or whether AFMP are already part of the Arla business and do as they are told!  In the same article it states "Voting for your district representative at the meeting is another way to ensure that your voice is heard through the democratic structure". But does the evidence support this statement?  I agree the Board must make the final decision and, like others, I believe they decided what was happening back in 2010 and are going through the motions of listening to members, but are taking little, if any, notice of their views.

 

It has also been suggested that The Arla levy proposal could be something the Financial Services (FSA) could take an interest in. I hope AFMP and MPL have taken legal advice to ensure the correct procedure has been followed under The Financial Services and Markets Act 2000, or that this investment is a “qualified exemption” from that.

 

The area is a minefield. However, it revolves around whether this is a “financial promotion”, which in itself translates to an invitation to engage in an investment activity.  Unless MPL are authorised under The Act to communicate a proposal (e.g. solicitors etc) they could be in breach of the regulations.

 

Perhaps this could all be a red herring if members freely sign-up to allow MPL to take the money off their milk cheques.  It’s a very specialised and a complicated area of legislation, but I wouldn’t be surprised if the FSA or Financial Ombudsman were easily persuaded to take an interest in the proposal if they feel there are grounds for doing so, especially if the master plan is to eventually utilise the farmers’ money to buy shares in Arla.

 

Finally, following last month’s article I received a number of comments with reference to Farmers For Action’s idea to build a powder plant (which FFA and their International Associates call a milk fractionation plant), in the North in a bid to capitalise on world markets and short the market to hand power back to the producer.  To the retailer aligned producer and Board member who commented that “there was no benefit for him or his fellow retailer aligned friends to be involved” could I suggest he wakes up to the reality of the situation.  Don’t think milk prices are being held up by your much loved retailer aligned contractor!  In some cases, at some times, they actually cap prices and hold down milk prices. You can see that from the times the Northern Ireland price exceeds the mainland one.

 

Similarly, to those who sell milk to cheese producers (co-ops and plc) and who say it’s not in their interests to short the market because it will automatically increase the cost of the milk they put into cheese I say cobblers to this too! If the milk costs more then cheese will have to cost more too, and the processors and retailers will have to cough up. With ALL of the offers there has been on branded cheese over the last year or so (and for so long – including buy one get TWO free) – don’t tell me there isn’t the money in the supply chain to pay for it! If they can afford to give cheese away, they can afford to pay you more. So, whatever your preferred self-help idea may be, recognise that dairy farmers will have to play on the pitch to make a difference. You can’t make a difference to a game if you sit on the sidelines!

 

Send your comments and suggestions to ianpotter@ipaquotas.co.uk

 

IP April 2011 DF

 

The milk quota system has clocked up its 26th birthday and unless there is a spectacular u-turn they are set to reach their 30th birthday on April 1st 2015. Then, well, that will be it!

 

So far as the UK is concerned we have exceeded our wholesale quota in 15 out of the past 26 years, and over that time producers have paid £258.5m in super levy.  The bookies favourite is for the UK to end up failing to fill its quota as many times as it has filled it during the 30-year span. However, there are some optimistic analysts who predict we could exceed quota in the 2014 / 2015 quota year, which would tip the balance 16 to 14 in favour of exceeding our quota.

 

I admit there are groups who are campaigning for the continuation of the quota system and for so called “market management” beyond 2015, but I doubt it will happen.  I question the Commission’s appetite for the idea of paying dairy farmers to reduce production, and can’t see how that would work. All I can see from such a manoeuvre is easy compensation money which, for UK farmers, would be handled by the RPA and would be a fertile ground for some creative thinking and juggling.  Politicians controlling or supervising any market is a recipe for disaster. 

 

The after-effects of the Nocton application continue to be felt all around the industry. My jaw dropped when I read that Compassion in World Farming (CIWF) felt its Nocton campaign should be a strong contender for The Observer’s Ethical Awards 2011, on the grounds that CIWF “was instrumental in defeating the main application for Nocton Dairies”.  For CIWF to claim it was a key player to any defeat is fantasism.

 

Let’s face facts, though, Nocton has left the likes of the Daily Mail, CIWF, Peta and WSPA with an insatiable appetite for highlighting the negative aspects of dairy farming i.e., cloning, large dairies, exporting male calves (which is happening), TB and badgers, and 365 day housing, which they call zero grazing. In reality, though, was Nocton’s vision really so outrageous in its scale?

 

Recently I read up on the largest integrated dairy operation in the Middle East, and almost certainly the world. In 1976 Prince Sultan of Saudi Arabia recognised the potential to transform traditional methods of dairy farming to serve the needs of the rapidly expanding Saudi market, and decided to build a dairy farm. And now it has become the first in the world to be accredited with ISO9002. That’s impressive. But so too are the results – look at milk quality for one, normally a good barometer of standards: average mastitis levels are less than 0.5%, SCC’s are 160,000, and TBC’s less than 1,000. And do the cows go out to graze? No! Of course not - the unit is in the desert! (Bedded on, er . . . straw, do you think?).

 

And how big might this unit be? Well no less than 105,000 cows, housed on just seven farms! It’s another example that disproves the views of the antis that the greater the scale the more welfare issues arise.

 

Then I came across AF milk in Vietnam - one of Asia’s largest dairy units. It started construction of a new dairy in October 2009, and is rapidly building-up from its current 12,000 cows to a target of 137,000 cows by 2020. The lady director of the bank financing the project commented that “milk is an essential requirement for the human development of Vietnam.”

 

So, let’s see how CIWF or WSPA get on with their anti-farming campaigning in Vietnam or Saudi, and their insistence that cows graze in grass fields! We (and I mean all involved in the UK dairy industry) are in danger of allowing noisy, ignorant, tin-rattling activists and well off, Middle England, white, vegetarian do-gooders to determine the future direction of the GB dairy industry and how we – you - farm.  If we don’t override this then who knows how deep their tentacles will penetrate. We have all, thanks to Nocton, been warned.

 

Last month’s article and my call for fresh ideas and solutions prompted a flurry of emails and comments, the majority of which were constructive and positive with the odd one either completely missing the point or, in one case, rubbishing the idea simply because it didn’t come from their pet organisation. Same old, same old.

 

At the same time, David Handley and FFA came up with another idea to explore the benefit of building a new milk powder plant in the North West or SW Scotland, to take milk off the market and hand more power to producers.

 

Well, here goes with another idea that has come in. The NFU has been banging on about contracts and the need to change them for years, and has, frankly, made minimal progress. One milk buyer, or two, may have adopted its template, but that’ll be about all.

 

The idea suggests ALL contracts have a three-month notice clause on them. According to my knowledge only Wisemans and The Caledonian Cheese Company (Lactalis) operate contracts with such a short notice period. But they certainly help keep those processors on their toes.

 

Let’s face it, other than the block resignation by the Stewartry Group in 2007 neither firm has experienced problems with their notice period, and the reality is both are duty bound to pay a competitive milk price, or face resignations. Other buyers have notice periods of around 12 months, and if you are a First Milk member a producer can face almost 18 months if he times it wrong. Purchasers with long term notice periods defend them with excuses like they are needed for “security” or  “planning” etc. But the reality is long notice periods are favoured by the idle, the concerned, or the underperforming.

 

The Commission is currently proposing to allow up to a third of dairy farmers in a country to join together to negotiate contracts and terms. I wonder whether someone will be bold enough to take full advantage of its proposal to allow a third of our producers to come together to force through a change to notice periods. While the Commissions’ current proposal is that co-ops like Arla, First Milk and Milk Link are excluded from this “coming together-fest” there is strong opposition to its idea on this point, and the end result could see co-ordinated producer efforts involving all milk purchasers as well as an increase above the 33% limit. What an opportunity for pressure bodies like FFA, and Dairy Farmers of Scotland etc to sensibly improve dairy farmers bargaining power!  If I were a dairy farmer I’d be asking my processor representative to really put this at the top of the agenda.

 

All of these are fresh ideas from thinkers who are not constrained by career paths, or who duck difficult decisions. If you have an idea worthy of consideration, or comments on the others that have been sent in, then e-mail me. But only positive and constructive ones please. Keep the negative and destructive ones to yourself!

 

 

Send your comments and additional ideas please to ianpotter@ipaquotas.co.uk

 

IP March 2011 DF

 

The NFU Conference dairy breakout session was titled “Dairying for the next decade”, and consisted of a panel including Jim Begg (Dairy UK), Kate Allum (First Milk), John Allen (Kite), Mansel Raymond (NFU) and some bloke from Morrisons who looked as if he had got in the wrong queue through the door, ended up on the panel, and was hemmed in on each side.

 

Despite some occasional good points being made from the panel, there was, inevitably, much harrumphing and negativity, and questions from the floor quickly turned into an acrimonious Jim Begg / processor baiting session. Here we are again then, clearly. Back down at the bottom to where we always end up: discontent, mistrust, excuses.

 

 John Allen spelled it out that we could have a vibrant industry, if we wanted, or we could sit back and allow it to decline and be exported.  But the cautiously chaired debate generated few suggestions as to what the industry needed to do to ensure the former, and, as a result, no “strategic measures to ensure British dairy farmers are able to thrive and take advantage of the opportunities that lie ahead” (as was billed) came through.  Instead it focused on last year and this, not with a view to looking to 2020 as it should have done. No new ideas. No nothing.

 

In this article, therefore, I am going to concentrate on one idea put to me whose origins stem from the old DFB camp. But I’ve fleshed it out and developed it a bit, I think. It isn’t a solution now, but it might have something to contribute.

 

The crux of the problem is that the farm gate milk price has, put politely, been extremely slow to respond to the 2010 and 2011 market signals. Many farmers watch the world dairy commodity markets monthly and sometimes weekly through AMPE, and the United Dairy Farmers and Fonterra auctions. Farmers have plenty of instant access to up to date world dairy commodity prices, and consequently have a very clear indication of prices, and volume signals.

 

In GB, things are “different”, so we are told. That’s because we are awestruck by our beloved domestic liquid market and obsessed with dedicated retailer aligned contracts. But it’s that sector that has failed us recently. If we aspire to be one of the leading European dairy nation’s post 2015 then we have to look towards the world market more than we do. The alternative is to simply sit back, allow the retailers to dominate us through the liquid market, and see the industry shrink to less than 8 billion litres. That’s not healthy in the first place, and with advances in UHT technology is not a secure market anyway.  UHT has the potential to decimate our fresh liquid market because technology will increasingly lower the taste differential between UHT and fresh milk, it can come in from anyway, and arguably has better carbon credentials. We need to plan for the happy marriage to end now, not when it happens.

 

In GB we have two modern driers at Westbury, which, whilst not located in the ideal place, do have the capacity to process around 800 million litres/annum. As I write and since last Spring one of the two driers has been shut down, leaving one to run at around half capacity. Overall, for the majority of the year, Westbury is operating at less than 25% capacity! That’s staggeringly poorly utilised, given world prices! The efficient use of Westbury is an opportunity we are missing and I feel we need to find better commercial mechanisms to fill it. If, today, a Westbury contract delivered 28p+, then other milk purchasers would have to pay to secure supplies. Is it a coincident that Arla has come out with the highest price rise of the liquid processors but also has a share in Westbury?

 

All Westbury requires to run at optimum capacity is milk to the tune of 800m litres/year, representing 7% of each GB dairy farmer’s output, and a rejig of the contractual allocations of the three co-op owners there – Milk Link, First Milk and Arla. Currently all of them have set volume allocations, which can’t be used by the other as I understand it. But the crux of the matter is this: if we fill Westbury all year round we short our own market, and the processors and retailers have to pay more.

 

One idea put forward to me is to persuade all 12,000 producers to cooperate and  accept a transparent Westbury milk price for 7% of their milk. This could be contracted, on either a fixed price or a transparent  formula price, and would effectively be a pledge rather than result in physical delivery of 7% of each producer’s milk.  Producers would receive 93% of their milk price from their processor/retailer and 7% via Westbury. Producers contracts  would be with Westbury Dairies who would then source the milk from the market place knowing they required the milk to fill the factory.

 

An alternative idea is for Westbury Dairies to offer, say, six month contracts direct to dairy farmers on either a fixed price or on a transparent formula price linked to say the published AMPE price with say, a three month notice period. Such a contract should be attractive to a number of farmers who are fed-up with their current contract, and who can get out of it, of course. I am not sure whether the take-up would fill the factory.

 

I can’t see how either of these ideas breach our dreaded competition laws. What the first idea would require, however, is for all producers to stick together, for once, and that undoubtedly would be the hardest element. We’ve been here before of course, and nothing, whatsoever has happened.

 

That has always been the downfall of progress, but whatever you think of such ideas any new one has more merit than simply holding out the begging bowl and blaming retailers and processors, as happened at the NFU conference and all last winter.

 

Many people are telling me we need a fresh start with a blank sheet of paper, with new people and new ideas. Although there are encouraging signs of new people and new thinking (Mark Taylor, Dairy Crest, Ash at Arla, perhaps) none of “the establishment” (they know who they are) involved in GB dairy politics should be involved. They have had their chance, and we haven’t got very far with them at the moment.

 

Any project group should not be about the polite balancing of representation from the NFU’s, Dairy UK, Arla, Wiseman, DC etc but about getting fresh people with commercial experience from each end of the chain and with the right mentality who can think outside the box.

 

We need some real leadership to pull the British dairy industry out of the current crisis, and to prevent it going back into another one next year, or the year after that.  We need new thinkers, fresh ideas and people who are not constrained by the need to protect their career path, or who buckle at the first difficult decision or sign of trouble. And before you ask, no. I’m nowhere near the right man for any of this.

 

There’s an opportunity out there that the industry cannot afford not to grab. If we don’t sort out the mess and the future then John Allen’s later prediction will come right.  And the industry will pay the price for that failure!

 

Send your comments and additional ideas please to ian@ipaquotas.co.uk

 

IP February 2011 DF

 

Milk prices are creeping up at last! At bleeding last! Triggered by Milk Link’s and Tesco New Year rise others are clearly following. How much damage the intransigence of the liquid buyers over the last year will have done to the moral of farmers remains to be seen. Fair treatment, that’s all you want. Fair reward and respect.

 

Meanwhile, Dairy UK continues to wind-up producers with comments which undermine their reputation and severely hamper their efforts to forge links across the industry. They are the “Voice of the Industry”, they claim. No way.

 

Following a recent Dairy UK board delegation meeting with DEFRA Minister Jim Paice it was reported that Dairy UK argued that the UK dairy market is functioning “normally”. Normally?  Dairy Zimbabwe might claim that, but no one here 

will swallow that claptrap.

 

The GB dairy market is far from functioning properly. Only someone totally ignorant of the market or an utter fantasist could make such a claim. World dairy markets have bounced upwards in huge strides in 2010 and early 2011, but this has not resulted in a fair percentage of the gains flowing in to farmers’ pockets. But you can bet your life the moment commodity prices dip some liquid processors will execute a price drop to plug gaping holes in their profits. There is minimal transparency or accountability in today’s liquid milk pricing, and improved producer returns have been extremely slow in coming. 

 

Northern Ireland Co-op United Dairy Farmers paid a base price of 25.75ppl for December deliveries and its producer’s February base milk price is expected to be close to 28ppl. If commodity prices fall, so will its price. Now that’s a functioning market, but back on the GB mainland farmers have been insulated from such gains.  We were officially at the bottom of the Dutch 2010 LTO 12 month European milk price league table - below even Southern Ireland! And we’re supposed to have the best milk market in Europe! Working normally? Pah!

 

The price war in the supermarkets this autumn shows that the obsession with the liquid markets will limit the industry in the UK. Far from being the “cherished market to supply” it has been a liability this last year.

 

If we aspire to become a significant dairy producing nation, post 2015, we clearly need to be in quality commodity processing. Commodity is not a dirty word and it’s not a second class market, as it was once viewed.  It will suit some farmers’ to ditch producing to a level profile, cut costs and focus on margin, and not what his aligned neighbour is getting from Tesco or M&S.

 

Many are questioning whether dedicated producer groups have run their course, having set farmer against farmer with the “haves” and the “have nots”. On the one hand the NFU continue their love-in with supermarket contracts, whilst others believe they are a one way ticket to the devil, where the retailer determines the price paid to its producers, but which then has a direct and negative effect on the others. i.e the have nots.

 

 

Slowly but surely questions are being asked by grass roots farmers to those who (supposedly) represent their interests in negotiations. More and more voices are complaining about their teams’ abject failure.

 

For most of them their representatives were initially enthusiastic farmers keen to do their best. But that’s changed. They are now bogged down with politics, loyalties and conflicts and it’s evident to some that their roles are more about money, positions and the maintenance of the status quo. They don’t want to rock the boat. Something has to change.

 

Now Knockton Dairies (yeah, I know it’s Nocton, but this spelling definitely suits it better).

 

When “expert” reports land in my inbox a significant number end up in the delete bin. However, the recent Foresight report on the Future of Food and Farming grabbed my attention in its suggestions to ensure a world population rising to 9 billion plus can be fed ’sustainably and equitably’.  It made me ask what role dairy farming plays? 

 

There has been an “unprecedented” public response to the Knockton (proposal with a staggering 14,000 direct objections and petitions, with over 70,000 signatures (meaning of course that the other 59,930,000  equal to 98.88% of people in the UK don’t care a jot about it). The petitions claim the farm will be cruel and it will force other dairy farmers out of businesses, both cobblers. Many of the objections relate to welfare issues, but also, in recognition that welfare is not a planning issue, also contain objections on grounds of environmental damage. 

 

While the local council and consultees will be clear about their roles in weighing-up the application on its merits and the risks it poses, they will be acutely aware of the public pressure and scrutiny they face both collectively and personally.  The temptation to take an overly cautious and risk-averse approach must be extremely high – no one can be immune from that kind of exposure.  At the moment I can’t see planning permission being granted, unfortunately.

 

The hoops being jumped through by the Knockton duo are way beyond those any other dairy farmer has previously experienced. They have stuck their heads above the parapet with an ambitious plan that, on the face of it, could address many of the aims of the Foresight report. But in return they’ve had them shot off by masses of people most of whom have limited or no knowledge of dairy farming, nor who have any desire to know.

 

As I have previously stated in this column the time has come for the farming industry to put its foot down and take control of its own destiny.  Not all of you will like the super dairy proposal, but we must all embrace future challenges and their proposal would give us some fantastic insights into how we can adapt to meet these new challenges. Moreover we need to decide whether we are going to let people who know little about our industry manipulate its future direction in this and many other areas, for example, TB wildlife controls, GM technology and cloning.

 

For this reason I urge industry leaders to support Knockton, and to make it known that there must be fair treatment of such applications, regardless of the weight of misinformed public opinion. Such proposals must be weighed-up on their own merits and with a can-do approach.  If the proposal fails because it hasn’t had a fair hearing, then we have to ask where this leaves the dairy industry and UK agriculture for addressing the challenges of the future. Nowhere, basically.

 

This is not about one super dairy. It goes much deeper, into areas like TB and GM. It is about the industry, and about the numerous organisations who claim to represent you all taking a firm stance on its future direction, rather than hiding in case they offend someone. We have to educate the public to accept technological advances in agriculture and if we don’t do it others will step forward to do it for us and potentially damage our future competitiveness. For me the treatment of the Knockton case is pivotal for future advancement.

 

Finally, Happy Birthday to me! On the 7th February it was 25 years since I placed my first quota advert in Farming News, which started my quota business. The advert is framed in our office reception and was next to an Abertay paper sacks advert. Abertay and its girls have long gone, but not their mug coasters which I still use daily to brighten up my desk.  I bet some of you are wishing the Abertay girls had stayed and I had gone!

 

Comments please to ianpotter@ipaquotas.co.uk

 

IP January 2011 DF

 

Firstly, Happy New Year to you all! What will 2011 bring, I wonder? Well two things are certain: controversy and more agro, unless there’s a breakthorugh soon. And two organisations which could see more of these elements than most are, I believe, Arla, and Arla Foods Milk Partnership. 

Back in August AFMP unveiled plans for its supplying farmers to invest around £70m in Arla’s new £150m+ super dairy, to be deducted at a rate of 0.5ppl per annum for eight years, which will total 4ppl.

 

There is no argument that the proposal is an extremely hot potato for AFMP’s Chairman Jonathan Ovens, who claims that most members are happy about the prospect.  I have to confess I have only found three producers who fall into that category – two being on an ASDA/Arla contract and one being an ex-DFOB producer, who is no doubt happy to have any contract, with any number of strings attached. I reckon I have spoken to dozens and dozens of Arla farmers, and have also received over 50 emails from those who are violently opposed to the idea.  Some were seeking help and clarity, while others required no help with the interpretation, with statements such as: “Have you seen AFMP’s latest way to shaft members?” and “How can this be a good investment with no interest, no dividend, no equity, no trading facility and no straight forward instant escape route on retirement?” being typical. The frustration is most evident amongst Arla’s non-aligned suppliers, who desperately need the money to invest in their own businesses.

 

The question most suppliers ask is simple: Why should AFMP members invest £70m in a dressed-up contribution which is effectively an interest free loan to Arla?

 

Although the planned launch has been delayed it is surely pouring petrol on an already raging fire of discontent – especially in light of the proposed merger between Arla Foods Amba (7,625 Danish and Swedish farmers) and German co-op, Hansa-Milch (1,000 members), which might be confirmed this spring. After all, a small German co-op supplying 700m litres of milk will be given the opportunity of full and equal membership of Arla, while UK farmers who supply 2.5 times more milk than the German co-op are expected to offer free money to the businesses – WITHOUT any share! Surely the merger opens up the opportunity for GB farmers to also have full membership of Arla Amba on equal terms!

 

AFMP is trying to justify the merits of the investment through independent benchmarking via milkprices.com, carried out by Dairy Farmer milk prices analyst, Stephen Bradley who is as straight as a gun barrel. Stephen’s task is to compare a 24-month rolling average of the base liquid milk prices paid to farmers by Dairy Crest, Wiseman, First Milk and Milk Link, and the letter to producers states AFMP members should receive 0.25ppl premium above this average, which increases, following the completion of the new dairy, to 0.5ppl.

 

However, the devil is in the detail, so I decided to look back at what the past 24 months would have delivered to Arla farmers if they had been paid on the same basis - taking the average paid each month by all five stated processors, and adding 0.25ppl, and comparing it to the actual Arla price paid. And the result? - the new formula would have meant a 0.15ppl milk price CUT!  The figures were checked by another independent milk price league table expert, and he confirmed each of my figures were accurate.  So you might have a clear transparent formula on which you can monitor the value of your 4ppl investment in Arla - but don’t expect more money!

 

There is thus a real chance Arla producers will lose out in a similar fashion to how they were encouraged to change calving patterns to increase production in September and October each year, only to be penalised with a 3ppl balancing charge in 2010! They were shafted on that balancing charge and the removal of the incentive scheme, and if producers swallow Arla’s benchmarking propaganda before a full assessment of the facts and figures then the odds are they will be shafted again.

 

As the saying goes “Fool me once shame on you. Fool me twice, shame on me!”  Going back to 2004 previous farmer investments with Arla have been left wanting, with high associated costs and a significant loss for those who have retired and / or left. The proposed new investment by farmers – effectively an interest free loan – would ensure the Danes bag a benefit equivalent to nearly £100m! That results from the 0.5ppl, plus the 0.15ppl cut (assuming what happened before happens in the future) which totals 0.65ppl extra money. On a throughput of 1.6 billion litres per annum, this totals £10.4m per annum, which racks up to £83.2m over the eight years. And on top of this Arla will save in excess of £13 million in bank interest charges!

 

Have the AFMP directors crunched the numbers and realised all of this, I wonder.  If they haven’t they could arguably be guilty of negligence in confidently trying to sell the deal.  The directors have a responsibility, and must be sure they are not involved in any form of deception of the members they represent, as there are potentially serious legal implications if they are. 

 

There is certainly a lot of unease and frustration in the Arla camp and it’s time for some straight talking and not for steamrollering the idea through.  I, and they, can already see more than a few squirms by the architects of the deal.

 

Let’s face it, the easiest, most transparent, way forward is for Arla to borrow the money from the banks for its proposed investment, in the same way that farmers have to do. If the banks won’t lend the money then the investment is not worth the farmers considering it!  At least the bank would take security against any money they lend – farmers won’t have this safeguard.

 

This is a very big issue for both Arla suppliers and the whole industry.  Whilst both Wisemans and Dairy Crest have declared they “have no (current) plans to follow Arla in making compulsory deductions from its milk suppliers”, realising their producers are finding it tough to invest in their own dairy farms without having a compulsory interest free loan imposed upon them, neither can afford to sit back and see Arla gain a competitive advantage by gaining access to such cheap money for so long.

 

Like I said at the start, this will be one of many controversial subjects that will rear its head through the year. Remember, keep me posted with your news and views so they can be fully aired and debated. We wouldn’t want any wool drawn over your eyes, now would we?

 

Comments please to ianpotter@ipaquotas.co.uk

 

IP December 2010 DF

 

There’s only one topic worth discussing this month: porridge. Those who saw my weekly bulletin will know it was the hot “poll” in mid November on Dairy UK’s website. Unfortunately I know naff all about porridge, so I’m going to concentrate on a far lesser subject – milk prices and how, over the past six months, tens of millions of £Pounds have been thrown out of, or squeezed out, of the GB dairy chain.

 

Now we know farmers accept time lags between on farm price changes in relation to market realities. However, in 2010, the evidence points towards vast sums of money gained by processors from strong commodity prices having been handed over to retailers, or used to supply middle ground and discounters with cheap milk.

The reality is that improving commodity returns in 2010 have not resulted in a fair percentage of the gains flowing into farmers’ pockets, but you can bet your life the moment commodity prices dip some liquid processors will execute a price drop to plug gaping holes in their profits.

 

The bottom line is that the retailers, large and small, have been handed most, if not all, of the commodity gains by the liquid milk processors. During the last six months several contracts have been re-negotiated, and during these negotiations the big retailers have been able to squeeze their liquid processors - in some cases with just cause.  For instance, as soon as last year’s accounts were released by Wisemans retailer economists quickly worked out their contribution and concluded they were paying a high price for their processing, that discounters and middle ground retailers were obtaining cheaper milk, and that this took business from them. The big retailers were no longer prepared to sit back and watch discounters grab 250m litres of milk from them, as happened in the past two years.

 

Competition between the three largest GB liquid milk processors and other second division middle ground processors has been fierce, largely because the likes of Wiseman have decided to sacrifice margin in favour of volume (bearing in mind its desire to bring its Bridgwater factory closer to 500m litres/year capacity.)  So all the retailers  had to do was sit back whilst the processors knocked seven bells  of SH1T out of each another – with some processors  throwing up front cash payments to the retailers as they did it! All the retailers had to do was ping pong between the processors to see who would pay the biggest bounty, and then be cheeky and ask for a bit more!  Part of this freely available processor cash was squirreled away from booming cream prices, and part from previously charging too high a processing margin. The net result is that all major liquid milk retailers are now paying less for their milk than they did in summer.  Whilst Mike Coupe from Sainsburys declined to answer Ian’s question at the NFU/WI Mission Milk debate over exactly how much less they are paying Dairy Crest and Wisemans, the evidence Ian has indicates its between a whopping 5 to 6ppl less!  This equates to a £23m to £28m saving to Sainsburys, and a loss to all of you!

 

The question now is will the NFU and WI’s influence work, or is picketing the silver bullet again?

European style multi targeted protests are currently scheduled for the 15th/16th December. Whilst Jim McClaren, President of the NFU Scotland, is prepared to protest the NFU’s Peter Kendall, and the other NFU top bods, are shying away from doing so.

 

The big question for me is should the retailers with aligned dairy farmers be the target? We know that retail pools are extremely divisive, setting retailer aligned farmer against non-aligned, and creating a “haves v have not” society.

The major retailers are an easy and lucrative target in terms of gaining maximum publicity and potentially causing the most disruption. But for me they are the wrong target. If anyone is to be targeted surely it should be discounters like Iceland and Farm Foods, who are close to the heart of the problem by continuing to sell cheap milk, and have all had their snouts in the trough for years?

 

The jury is still out on whether FFA will receive the necessary support from farmers, and whether the protests will be a success. Above all I hope we do not alienate the public, but for some farmers going down and out of the industry it’s a case of wanting to go down fighting!

A less confrontational solution is to get Westbury up to full bore producing powder. Currently, as I write, Westbury is running under 25% of capacity. Isn’t it logical to use Westbury to short the liquid market of cheap liquid milk and discounted cheese, and switch milk into booming commodity markets? Those who don’t want to pay the price don’t get a drop!

 

We desperately need stronger sellers. Some say Arla recently walked away from Tesco, which cost them 85million litres. (Others say they didn’t, mind). I’d like to think they did, and that they didn’t drop their trousers on price as low as others. Because that’s what’s needed! If we are to have a sustainable supply chain, which everyone wants, then we need processors, and the likes of the brokers (First Milk mainly, as it sells far more brokered milk than Milk Link) to be stronger sellers, to sell less cheap milk into the liquid sector, to produce less value cheese, and to get powder production up.

 

Now some comments about Dairy UK, the self proclaimed “Voice of the Dairy Industry”, and its Director General Jim Begg. For those who aren’t sure about Dairy UK it mainly represents the processors, and also has a Farmers Forum to represent farmers. That does a good job on the likes of Johnes disease, but, like Dairy UK, does nothing on prices whatsoever. This year Mr Begg was awarded the Dairy Industry Award at the Dairy Show dinner, which was met with polite applause from a room full of the industry’s great and good, but who had temporarily turned into startled goldfish impersonators.

 

Increasingly, though, Mr Begg is looking either like a cross between the apologizer in chief for the retailers and processors and the conductor of the string quarter on the Titanic. In a turgid six minute plugathon at the Mission Milk conference for all things good, (nearly dressed up as a question) he was clearly trying to justify the unjustifiable, and make out that everything in the dairying garden is rosy. He also commented that “milk production, farmer confidence and farm gate prices are moving up, so what’s the problem?” and pointed out that “farm gate milk prices were rising, on farm investment and confidence was up, and that UK production was increasing”.  He said he was “trying to put my finger on what’s really troubling Britain’s dairy farmers at present.  Things should be good.”

 

Well, Mr Begg, here’s your answer, in this article. And while you may be right that farmer confidence was up, it certainly isn’t now. It, and milk supplies, definitely won’t be on the rise unless something changes, and fast. If, as some of your liquid members are lobbying for, the milk price will be savaged in January, then I’m afraid respect levels from farmers towards your organization and members will sink lower than ever. And with it will go more farmers out of the industry, and millions of litres of milk with them.

 

On that happy note, then, here’s wishing you and your families a healthy, happy Christmas and a PROPSEROUS New Year. Let’s not let the liquid processors get away with dropping your milk price to plug their profits gap!

Oh, and next year I really will talk about porridge. From “The Voice of The Industry” it is clearly vital to the success of the sector going forward!

Comments please to ianpotter@ipaquotas.co.uk

IP November 2010 DF

So Morrisons renewed their contracts with Dairy Crest and Arla, freezing out Wiseman.  But accusations are rife that both had all had to drop their trousers to retain the business.

 

We are unlikely to ever learn to what extent the retention of the Tesco, ASDA and Morrisons business has hit the profits of the likes of Arla.  However, the impact of the trouser-dropping Dairy Crest will go undetected in their current financial year, due to the fact the new extended Morrisons deal does not kick in until 2011.  Then we are sure to see which processors are swimming naked without any trunks on when the tide goes out!

I attended my third First Milk AGM recently, only this time Chairman Bill Mustoe made me sing for my supper by giving me the pre-dinner speaking slot, and promptly pincered me between Kate Allum and himself during dinner.

 

Kate is now the undisputed top girl in the UK dairy industry following the departure of the Iron Lady from Arla, Hanne Sondergaard.  In her AGM presentation she was honest with delegates, recognizing the co-op is “still off the pace on milk price” and stated that for every 0.25ppl additional money paid to producers First Milk needs to generate an additional £4 million in sales revenue.

 

Meanwhile, Chairman Bill confirmed when he joined First Milk his first job was to “muck out the stables” which to most of you and I, means get rid of the you know what.  He also commented he will continue to look at the stables and having taken the First Milk business apart, is now re-assembling it with new higher performance parts.

As much as I have christened Robert Shearlaw in the past with a few mischievous nicknames, I did recognise the fact whilst at the time he was considered by some members to be a traitor and was criticised for what he did, he officially was the catalyst for change.  He played an important role and I dare not even consider how long the previous regime would have remained in place had he not made his move.

So it’s Mustoe the Magician and his female assistant, Kate.  Let’s hope they continue to work their magic and pull more rabbits out of the hat.  Having changed the farmer representatives on the board and brought in The Magnificent 7, it will be interesting to see whether Mustoe feels further board changes are necessary when he next mucks the stable again in a few months time.

Last month’s article prompted one of the biggest responses I have ever encountered from an article from a wide range of people spread across the dairy supply chain.

One reader commented to me how his enthusiasm for dairy farming was instantly sapped when a 4 litres for £1.50 retailer liquid milk promotion mail shot dropped through his letter box.  It made a dairy farmer, who was proud to have just come into the house for his breakfast after milking his herd for almost 4 hours in a 30-year old parlour, question whether to continue.

Now DairyCo.  It is undeniably, having a tough time, and not just from a few of its levy paying farmers! Its future, and that of its parent company AHDB hangs in the balance.

For all its criticism its latest 2009/2010 Dairy Supply Chains Margins report was exactly the sort of independent well researched information those involved in the producer and processing industry require, especially running up to the second Women’s Institute Great Milk Debate in London on 16th November.

DairyCo’s report confirms that retailers have once again succeeded in increasing their gross margins in liquid milk, mild and mature cheddar, which more or less account for 80% of the UK milk product utilisation.  Here you will see my variation on the graph produced by DairyCo which shows the ppl share of the retail price each of the three segments receive.

 

 

 

 

 

 

 


So in the past 10 years retailers have increased their share of the bottle from 20% to a whopping 34% at the expense of processors and farmers.  In terms of ppl the retailers share has jumped from 7.9ppl to 22.4ppl, a mouth watering 14.5ppl increase.  It was a similar retailer success story for

Milk and mature cheddar margins.

 

Equally concerning is the fact that 94.5% of liquid milk is now sold in retail outlets with only 5.5% sold via the milkman.

You have to hand it to retailers for their brassy success to increase their margins on all three dairy products whilst processors and retailers had their margins squeezed.

Next month I will be reporting on dairy farming in Canada.  Meanwhile, log on to www.yeovalleyorganic.co.uk  to view the very impressive Yeo Valley Organics advert.  Having seen it perhaps it’s time for the milk moustaches to be shaved off once and for all, to be replaced by a more funky and fun approach!  More on that next month.

Comments please to ianpotter@ipaquotas.co.uk

IP October 2010 DF

Thursday 16th September started like every other day in the dairy industry. The fact that it quickly turned into one of the darkest for many years was lost on many, if not most, farmers. 2009 saw the demise of DFB, but unless something changes quickly then 2010 will see more permanent damage to the industry, and farmers had better buckle up for a hell of a bumpy ride. History could well mark this day as the start of the chaos.

The day began well - Tesco took the unusual step of trumpeting the fact it was to pay its direct milk suppliers an extra 1.28ppl. However, at the same time Wisemans issued a thumping profits warning. Fierce competition, coupled with a retail price war with milk at its heart, resulted in the warning, and this sent Wisemans share value plummeting 35% to £3.39 from £4.85, almost instantly wiping £100m off the company’s value. And it is likely that Tesco has also beaten up Arla as well, radically lowering both its supplier’s margins. You can be sure if Arla was still a Plc it would also have issued a similar profits warning to that issued by Wisemans. You can almost imagine the conversation to (NB not between)  Mr Tesco and Arla and Wiseman. It goes something like this:

“We are increasing our price paid to our dedicated suppliers. . .  but at the same time you will cut your processing margin or risk losing the business. Oh, and if you attempt to pass these cuts back to the farmers who supply you direct, and the finger of blame gets pointed at us, we will have you, so don’t do it.” The result is that Wiseman was stuck between a rock and a hard place and opted to retain volume at the expense of margin.

Asda takes the blame for triggering the war, after reducing its four pints at an original price of £1.53 to £1.25, which Tesco and others have subsequently followed. But with Wisemans having confirmed that negotiations with CTRG (Co-op) and Sainsburys were concluded, the Financial Times blogger Neil Hume appears to be correct in his assumption that the Wiseman profits warning was almost entirely Tesco triggered. The alternative theory is that Wisemans and Arla were both charging the retailer a high price for processing its milk, and Tesco have simply reduced the price they pay to “normal rates”. Dairy Crest certainly want more retailer liquid business and were as keen as anyone to drive a wedge into the Tesco processing instead of sitting back and saying “After you Robert”

The end result, in the case of Wisemans, should certainly sober up most, if not all, dairy farmers because a retailer has once again successfully screwed a large slug of profits out of the UK processing industry -  and that’s nothing short of a disaster for the industry. We all know who pays in the end.

The profit warning saw Wisemans declare a raft of cost cutting measures in an attempt to re-build margins, as well as attempt to increase volumes to boost throughput of its newest Bridgewater factory, whose capacity ramps up to 500 million litres per annum from next month. Marry this with the fact Arla is now building the world’s largest liquid processing plant in Aylesbury (adding a massive amount of capacity), with the fact that Medina has brought back Blaydon into being (more capacity) and it’s certainly a case that the pressure is on for all liquid retailers. I doubt Arla will decide to abort the planned super dairy due to uneconomical margins. It will be a climb-down too much, but anything can happen in this day and age.

Fortunately Wiseman’s balance sheet is strong and, yes, they can stand it (for a while). But if the exercise is repeated by other retailers, especially on Dairy Crest, the move will be harder for it to swallow, with its net debt standing at £337m compared to Wisemans mere £20m. Dairy Crest’s comment that it is “not too bothered by this price war” completely stunned me.

Nor will we see the end of musical chairs with the retailers and their suppliers. Back in March 2009 Tesco took almost 100 million litres of Wiseman’s business, and gave it to Arla, remember - once again based on price. And this January Sainsburys gave Arla 5% of its business at the expense of Wiseman and Dairy Crest.

As we stated at the time “old habits die hard” and there is only one reason these moves are made – and they aren’t to put the milk price up! So now Wiseman has been beaten-up three times, and it will be shaking its feathers to ensure the fourth bout is a knockout contest in which they are training to win.

That bout is undoubtedly the current contract negotiations with Asda (currently exclusively supplied by Arla), and Morrisons (currently 50% Dairy Crest and 50% Arla). While I would personally not bet any money on Wiseman securing a litre of the Asda business from Arla, the predictions on the outcome of the Morrisons contract could well be nothing short of a blood bath. Let’s face it, Wisemans are out to secure a greater volume of milk processing, do not currently supply Morrisons and will want to seize this opportunity to gain marginal business. It has nothing to lose by piling the pressure on its rivals. It could be mayhem in the market.

Now the Dairy Event. Few farmers or exhibitors at the first NEC Dairy and Livestock Show regretted the move, and looked back to Stoneleigh with fond memories. So what will be next to drive the Event to even greater heights?

Well one obvious move, assuming the show is to remain a two day event (which several exhibitors question the need for), is to consolidate Holstein UK’s National Show from Stoneleigh’s museum of farming. Then to move the various beef shows to appear on day 2, to bolster attendance and interest. Then bringing in Agrilive Smithfield into the event will be a further logical move. This event is the latest casualty in the RASE’s long list of failures, of course. Others mentioned bringing in a National Cheese Show as well – another good idea.

But excellent as the event was the RABDF does get a brickbat. At this year’s event the RABDF issued a crass press release calling for processor consolidation. Hold on RABDF - that’s not your area of expertise! “Button it!” was (is) the message! I suggest you stick to what you are good at, and work for the consolidation suggested above. The world is your oyster to create an event to rival those in France and Germany, as a celebration of the best in UK livestock, even if the date might have to be put back later in the year.

As ever, though, there may be one hurdle - convincing the dinosaurs and old farts in charge of the other shows that merging is a good move. As ever they fear change and the loss of their positions and egos, which could, once again, block progress.  I sincerely hope it doesn’t!

Comments please to ianpotter@ipaquotas.co.uk

 

IP September 2010 DF

 

I have attended The CLA Game Fair every year, bar two, since I was in shorts at the tender age of 8 back in 1968 and have enthusiastically followed the event around England.

 

This year 144,000 visitors attended a new location in Warwickshire, which was a shrewd move by the CLA as it gave them a golden opportunity to grab former Royal Show attendees. 

 

I made a point of listening to a panel debate billed as “Killing Foxes, Culling Badgers or Protecting Birds.  What should the new government do first to help the countryside?” This involved Jim Paice, Peter Kendall, Mark Avery (RSPB) and a hatful of others, including some of our bunny-hugging friends in rope sandals and the like.

 

Kendall thought it was open season and fired his shots off as accurately as the clay pigeon winners did: “TB is destroying our livestock industry and culling badgers is a definite priority”, he stated.

 

This prompted some amusing remarks from other panel members, including Pauline Kinder from the Secret World Animal Sanctuary, evidently the largest badger rescue operation in the UK, who is also a former dairy farmer’s wife (it was not clear whether they sold the cows or split up) and she agreed that “the TB situation is serious.”  No s**t Sherlock!  Then came Douglas Batchelor from The League against Cruel Sports whose best response was “farmers and the industry want more government money.”  As for the comments from the floor Lyn Sawyer, a self declared hunt saboteur and animal rights activist, well, I'm afraid this was comical in the extreme, but showed what we are up against. She wanted us to stop killing badgers and animals, but control the human population instead! Presumably through forced culling! And she is a midwife too! She (they?) really have ludicrous arguments and should be with the other clowns in the pantomime. 

 

Jim Paice was calm, measured and clear in his response to these irritant activists – he declared that no country in the world had reduced or controlled TB in cattle unless they control it in the wildlife.  “We need to take a balanced view and culling is part of the solution, not the solution.”  Paice made his position crystal clear; he wants to get on top of the disease and will not pander to any group or campaigners.  One person from the audience summed up his view, which judging by the audience reaction was enthusiastically shared.  He commented that we have a duty of care to all animals and must not allow the animal rights industry to make more money for their campaigns and greater fools of us again.  “Not long ago these campaigners donated £1.1 billion to the Labour funds – those days are over.” 

 

Finally, I had to smile when I overheard a lad in a café near Stoneleigh, state that the Game Fair would be worth checking out to see the latest video games.  Possibly the only Game he had heard of.

 

But onto milk matters - The NFU have been banging the drum over the need for fairer milk contracts and recently former First Milk board member, now NFU Dairy Board Chairman, Mansel Raymond, was certainly OTT in his condemnation of First Milk’s decision to only pay future milk price increases to members who had not tendered their resignation as a contractual weakness farmers should be protected from.

 

Playing Devil’s Advocate, I question why the vast majority of First Milk’s resignations are what I term “speculative” meaning they are resignations tendered with no new home to go to and in most cases with no intention to leave the co-op.  Not only are the majority speculative a number are effectively revolving evergreen notices because come 30th December some co-op members will rescind their resignations and re-submit a new one 24 hours later.  This is surely a contractual loophole Mr Raymond & Co should have plugged whilst seated around the First Milk top table.  How on earth can anyone expect Mustoe & Allum, and their sales force, to run a business when, on the 29th December they expect to lose tens of millions of million litres, only to find 24 hours later, they have to find a profitable home for most of it, if not all, of the literage.  Its madness and a better contractual way for all must be found.

 

Liquid milk price increases, or rather the lack of them, will be the number one talking point at the forthcoming NEC Dairy Event and Livestock Show.

 

For the record this is how I see the situation at the coal face.  Milk is a number one key selling item for retailers and they have struggled to compete with discounters and their mouth-watering offers on milk.  The result is, retailers have lost large volumes of milk sales and with those lost sales has gone revenue from other groceries those consumers have purchased at the discount stores.

 

Hence retailers decide enough is enough and attack the discounters to take back their sales volumes with heavily discounted milk using their margin, or so they claim.  Whilst I buy this story to a certain degree I know those same retailers have witnessed healthy end of year results turned in by the likes of Wiseman and Dairy Crest and I have the sneaky feeling they have been quick to flex their muscles to have a slice of the profits, thus squeezing processors hard instead of allowing those same processors to pay a better milk price to their non-aligned suppliers.  Is it a case of what we give the farmers with one hand we take away with the other hand?

 

Then there is what I call “The Tesco Factor”, which, simply put, means all liquid processors will sit back until late September to see what price Tesco announces for the next 6 months.  This is partly because it’s easy and they can get away with it as well as the fact the  agreement Arla and Wiseman probably have is along the lines that Tesco’s dedicated producers will always receive xppl premium above the non-Tesco aligned liquid suppliers, which means the others cannot have the increase even if it’s available.  As every Tesco   aligned supplier knows it’s very easy and quick to get out of a Tesco contract, so if other prices topped the Tesco price they could quickly lose volume.

 

So my prognosis is liquid suppliers are likely to receive little, if anything, before Tesco declare its hand and certainly not whilst the discounters and middle grounders cause chaos and bloodshed in the liquid market. 

 

Who would have thought Milk Link’s member price would eclipse that of Arla, Dairy Crest and Wiseman’s liquid price and that cheese and ingredients would exert the pressure on liquid?  So Wiseman’s Bridgwater factory recruitment field officers had better go on paid gardening leave rather than think they can tempt Milk Link members to jump ship.  As for the Dairy Event it could be another time of discontent because liquid processors and retailers should hear loud and clear how farmers’ view the lag in upward milk price movement behind the market realities.

 

Numerous dairy issues have hit the media radar in recent weeks, which have required a well informed, coordinated, industry response. Recent examples include plans for 3,000 to 8,000 cow greenfield units and milk from cloned cows.

 

Education is essential, as is a one stop shop to highlight the skilled, welfare orientated operation of a modern dairy farm.  DairyCo have, on numerous occasions, been challenged as to whether they provide value for money for levy paying dairy farmers, especially under their old guise of the MDC, where at one stage, 11 directors had 6 staff – almost 2 directors each.  Recently they have launched a well thought out website www.thisisdairyfarming.com aimed at explaining to the media, consumers, teachers etc what happens down on the farm.

 

It’s a fascinating source of information, including a virtual farm tour with video and photographs showing every aspect of milk production.  I would urge all involved in our dairy industry to take time to study the site and make any suggestions or comments to DairyCo to help them develop the site further. 

 

So, next time anyone asks you questions about dairy farming point them to this site as a one stop shop and platform to promote the positives of what you do.  The site should help consumers accept on farm technological developments and dilute their automatic resistance to the modern way milk is produced.

 

It’s time all of you held your heads up high and boasted of how proud you are of what you do.

 

I will not be taking any blackboards to the Dairy Event this year but I will be present on both days.  If anyone wants to catch up, email me or meet me at the Dairy Farmer stand both days between 2pm and 3pm with the other panel speakers.  Here milk prices, confidence to build large greenfield dairies, this is dairy farming and a clone of Potter getting into the dairy world, will be discussed.

 

Comments: fax on 01335 324584 or ianpotter@ipaquotas.co.uk

 

IP August 2010 DF

 

It may be August and the silly season, but let me assure you there's nothing silly about what will be going on in the dairy industry over the next few months.

 

Two historical and industry changing events are about to take place.

 

The first will be the inaugural Dairy Event and Livestock Show at the NEC, which I believe will catapult the RABDF’s showpiece into the 21st century with the modern facilities that exhibitors and show-goers expect these days.

 

The only problem for me is deciding whether I to go to watch Switzerland v England or attend the Event and join a breakfast panel on the new principal sponsors stand – Barclays - each day. For fear of disappointment my loyalty has gone to the show.

 

The second historical event will be the opening of the Skimmed Milk Powder futures market by NYSE Euronext.

Recently I took time out to attend one of the organisation’s seminar briefings to learn how trades will operate and who is likely to benefit.

 

Before all that, though, what’s the need for such a market? Well we all accept that there is likely to be volatile dairy commodity prices going forward. This, in itself, is not bad, in fact it can be pretty healthy. However extreme volatility and large price fluctuations are bad for all involved. The SMP futures contracts are being introduced in an attempt to provide a financial tool for businesses involved in SMP to manage this volatility.

 

Every company involved in dairy commodities says they want greater price stability, so I was expecting the room to be packed with milk buyers from every denomination. Alas, not. The main surprise was that the only UK milk purchaser who attended the seminar was arguably the one least likely to attend – Wisemans.  Their commodity trading is linked to cream, and, while prices interrelate, there are plenty of others I would have expected to see represented who are involved in powder and butter trading.

 

However, to most readers the mere mention of futures contracts leads to thoughts of arable farmers getting their fingers burnt some 20 years ago through speculative trading that went wrong, plus the image of sharp-suited speculators who play havoc with markets that would be a lot less volatile without them. Now I am not here to state whether speculators are good or bad but, like many, I am suspicious of them. However, it is clear that futures markets would not work without them, and the fact is futures markets could be good for those involved in dairying. So, we may not like them, but we need them.

 

At the seminar NYSE drew the similarity between bookmakers and speculators. Bookmakers take bets on the chances of a horse winning. Speculators take bets on what they think commodity prices will be in the future – whether higher or lower, and engage in trading to make a profit.

 

The industry should not be put off by speculators being involved in dairy futures, and we should simply go about our own business, reassured NYSE. But the good news is that experts believe there will be almost zero speculative activity in dairy futures, especially in the infancy of trading, because speculators want to be involved in fast moving, high-volume markets where they can buy and sell quickly like oil, metals, cocoa, and coffee futures. Indeed, NYSE expects most companies who take part in the market to be engaged in the physical aspect of the product - either making it or using it

So, what are futures all about? Well, the official definition of a futures contract is that it is “an agreement to buy or sell a commodity on a fixed date in the future at a price agreed now”. Most of you will have taken out a fixed rate loan, invested money for a defined term, fixed your soya price for a year or signed 12 month electricity supply contract.  All of these are effectively dabbling in the futures markets – only its just via other companies, rather than directly.

 

The market allows buyers and sellers of SMP to effectively lock-in their prices in the future. Sellers will effectively see no price reduction if the price goes down, but nor will they see an increase if the price goes up. The opposite is true for powder buyers. There is an option to deliver the products, but most futures contracts are simply financial transactions and “closed out” before physical delivery becomes due.

 

What's the relevance to dairy farmers then? Well that depends on the degree to which your buyer becomes involved, or not.

I do not believe many dairy farmers will use the futures market themselves. However, if I were going to invest, or had invested, a large amount of capital in a dairy operation, I would want to know how it works and what I could do if I believed there was a risk of prices falling and I wanted to fix my price and inject some certainty into my business. Indeed, I can see a point when a bank will not lend a farmer significant amounts of money unless there is a degree of certainty injected into the business via futures activity.

 

But while physical trading will not be for the majority, I am convinced if there are enough trades then a new information source for the future value of milk will develop, and farmers will undoubtedly want to track and monitor it. Indeed my free weekly dairy industry bulletin will trace executed contracts to ensure dairy farmers know what’s happening in the market.

 

The main question right now is will it be used? Well, that remains to be seen. Buyers aren’t exactly queuing up to engage, else the room would be full of milk buyers.  The presenters believe the dairy futures market will thrive in a Europe which had no Intervention buying safety net post 2015, but I'm not so sure I accept this is correct. I personally doubt the Commission will completely remove the safety net Intervention provides, and will decide to simply lower the bar as to when it is utilized.

 

The SMP futures will be the pilot before other dairy powder and butter contracts are introduced to the portfolio.  I have put forward some ideas which I hope will help farmers and the wider industry traders translate prices from the futures contracts back to the parlour, and from the parlour to the futures computer terminals.

 

Comments: fax on 01335 324584 or ianpotter@ipaquotas.co.uk

 

IP July 2010 DF

 

Firstly a big South African hello to you all!  I pen this not far away from the England football camp where I’m hoping to get a place in the starting line-up for the final group game.  I think I’ll try for goalie.

 

But bad as things are here, they could be worse.  I could be back in the UK and have to endure Jim Begg’s oh so smug jibes as to how badly the English are doing.  But at lease we are (were – Ed) here, which is more than can be said for the jocks, although I do have to concede they may be doing their bit at Wimbledon.

 

I’m out in the sticks, my phone barely works, and no-one has my number anyway.  There’s no internet, and I can’t be bothered reading the papers because the footie reports are so bad.  I am, effectively, incommunicado.

 

And yet still a Dairy Crest plug pops up in front of me like some ubiquitous Meerkat telling me that City analysts, Shore Capital, have recently declared Dairy Crest shares as “a good buy at £3.62” and significantly undervalued.

 

The firm’s shares were quick to respond and break the £4 barrier, but perhaps “still fall short of their true value”.

 

The moral of the story is you can fly to the other side of the world and live like a nomad (well a little bit like one anyhow) then rest assured Uncle Arthur will still track you down if there’s a DC plug to be had.  Mind you it’s all he’ll get for the next four years now.

 

Anyway, football and South Africa aside, let’s give a hearty cheerio to Sir Terry.  So long and thanks for all the fish, or whatever the expression is.

 

He certainly made his mark on retailing, and left an indelible impression on the UK dairy scene too.  He has, for anyone who doesn’t know, decided to retire.  Yep, retire.  That’s, er, the part of life which comes after work and before death for most people.

 

But not, it seems, for a lot of farmers.  Rather alarmingly (but perhaps not surprisingly) this year’s DairyCo Farmer Intentions Survey highlighted that 38% of dairy farmers have no private pension provision, and either relied on the state pension of £95.25 per week or, even worse, continued to cadge off the farm.  This latter plan simply makes the older generation a liability to their younger successors.

 

But if you think you or your parents’ pension is a muddle, then you aren’t the only ones.  If any readers bothered to study the latest results from Arla in any detail, they will have noticed its huge DKK1027m (£112m) UK pension deficit.

 

Then there’s Dairy Crest.  Last year they made the move to close their defined benefits scheme, resulting in a one off £16.9m exceptional cost.  They approved additional contributions, including £20m in the current financial year – a move which led analysts to conclude that DC “is on top of any pension problem”.  (Gosh, another plug, there’ll be none for eight years now.)

 

To give you an idea of the magnitude of the numbers, DC’s net pension liability at March 31, 2009, was £46m and at March 31 this year had rocketed up to £102m.

 

In contrast, those savvy number crunchers (or is it the short arm and long pocket syndrome) at Wisemans have effectively a zero pension liability.

 

Then there are the co-ops and the pension muddle left by DFB.  This adds more demands to the likes of First Milk and Milk Link as they take on their share of the pension deficit along with several others within the Milk Trustees Pension Fund (MTPF).

 

For those who don’t know, the fund was an MMB final salary occupational pension scheme set up in 1955 and which executes a rolling three-year Actuarial Valuation, the latest of which came at March 31, 2009, and the outcome of which is unlikely to be known until September this year.

 

Talk of deficits sounds alarming, but remember the money doesn’t have to be found all at one.

 

In fact Milk Link, when questioned about it on the publication of its latest annual report, was remarkably relaxed about the issue.

 

So let’s have all the cards on the table so that we can thrash it out in the pages of Dairy Farmer and get to know the position once and for all.

 

Finally, a few comments concerning the OFT following their head to head with Tesco and their fanatical obsession with events in the UK dairy industry.

 

In its recent report, Shore Capital summed up the situation by commenting that “bizarrely it appears that a political initiative to improve farmers’ return (in 2003) led to a charge and fine on the industry by the OFT, despite no suggestion of profiteering by anyone and a transparent benefit to the dairy producers.”

 

It could only happen here, and my hope is one day someone will stand up and say enough is enough.

 

What puzzles me though is how come Tesco’s two suppliers, Wiseman and Arla, as well as their two biggest retail competitors, ASDA and Sainsburys, were involved in the Dairy Retail Prices Investigation and all, bar one, were fined by the OFT, yet Tesco claimed they knew nothing about the initiative!

 

If I were Sir Terry I would be questioning my dairy purchasing department as to how come they knew nothing about it at a time when farmers were crying out for more money and Tesco was the UK’s biggest liquid milk purchaser.  It beggars belief!

 

Comments: fax on 01335 324584 or ianpotter@ipaquotas.co.uk

 

PS.  What are you like as a team manager? - Ed

 

IP June 2010 DF

What do you want first - the good news or the co-op news? Well, either way, I'll start with the good first.

This year’s DIN Conference entitled “Coping with the new market volatility”, saw the usual gathering of dairy experts. Most speakers expect world dairy commodity prices to remain strong throughout 2010, especially now cheese production is declining.

The CEO of Arla Foods, Peder Tuborgh, made little mention of his company’s plans for its GB operation, but he did indicate his wish that GB farmers invest in Arla and grow their share of the business alongside their 7,600 Swedish and Danish farmer owners. Sounds like he wants more money then!

David Dobbin, from Northern Ireland’s United Dairy Farmers co-op, raised the critical issue of China, which is currently sitting on more than 200,000 tonnes of home produced powder which is certain to end up on the world’s “grey” market because consumers there do not trust their own powder following the Melamine scandal. They are thus importing their requirements. He believed the short term prospects look good if we assume the Commission will be sensible in offloading intervention stocks.

The Conference’s star performer was, however, Robert Wiseman who blended humour into his message. He began by quoting evidence from DFB Council Chairman Stephen Yates to the DFB enquiry. Robert, was, said Yates, “a ruthless bastard”. Neither was true, he believed. It was just he had been, and still was, 100% focused on the UK liquid milk market, and few people could fail but be impressed with him and his business.

Now on to the co-ops. It’s the time of year when plc and co-op milk processors start to release their 31st March year end results. Dairy Crest and Wiseman have already issued, and profits were up for the pair of them. Milk Link’s are due out on 9th June and I assume all is well, as I've picked up no warning signals.

All eyes will be focused on First Milk’s results, which come later in the year, and will also be on time, according to the co-op. Although Captain Mustoe has not been in command for a full year, the results will indicate whether a deeper crisis is looming, or has been averted. Mustoe, like others, faces significant challenges in this industry, but at least he has his team in place, with a broad range of commercial experience.

But what of an often overlooked much smaller co-operative - South Caernarfon Creameries? What is to be said about them right now? This co-op started in 1938 and is the oldest GB farmer owned dairy co-op, collecting milk from close on 200 members. However the direction, strategy and health of the co-op has recently been called into question, with a number of its more progressive famers resigning.  Whatever is going on, it doesn't look good.

Let's contrast their board to Mustoe's most recent move (without taking anything away from Milk Link’s or the boards of other co-ops.) Mustoe has just invited seven “wise men” (dubbed the magnificent seven) to join, effectively, the management hierarchy of the co-op. By contrast, at SCC an analysis of the current board shows two farmers have sat on the board for 42 years and 36 years respectively, and the two most recent additions of young blood have both resigned. Within the board of directors a staggering 10 out of 11 are farmers and there are non non executive directors whatsoever.  What did I write when Milk Marque was dissolved? “Are we at the end of the dinosaur age?”  I also observed that some co-op board members cling onto their positions like drunken men do with lamp posts.

If SCC was topping the milk price league table and going from strength to strength then this would not matter a jot. But it isn't. It’s third from the bottom. Is the self interest of individual board members affecting the situation? Is the co-op benefitting individual board members, rather than the members?  Co-ops must be both democratic and accountable. Is it being? Or is there too much spin and talk of sticking together and riding out the crisis? Questions not for me, but for the members.

The bottom line is, only the best farmers should be directors.  If a farmer is not of the calibre to be considered for a plc, like Dairy Crest or Wiseman, he or she should not, in my opinion, even be considered for a co-op board.  A farmer whose only experience is in running an average dairy farm technically brings little outside experience to the boardroom. It will certainly be interesting to see the contribution of First Milk's “wise men” - most of whom do have experience outside of the world of dairy - going forward.

Remember what the EFRA Committee report into the collapse of DFB stated: “It's board composition was a weakness and the Committee was not convinced that the preponderance of directors should be farmer directors”. Director’s of plc’s are selected for their particular areas of expertise, which are relevant to the business - such as finance, raising capital, marketing, legal and governance.  If farmer directors are required they must be chosen for their experience in running large successful businesses.  Hopefully SCC will sort out its problems soon and push ahead with a complete shake up of its board. I will happily eat my words if it starts to rocket up the milk price league table.

Finally, a belated comment or two on DairyCo’s Farmer Intentions Survey, which has become the barometer of the mood and plans of UK dairy farmers. This year’s results show a cautiously optimistic mood with “some small shoots of a return in confidence” as 32% of those surveyed intend to increase milk production in the next two years  while those intending to action a succession plan during the next decade was 43% up from a pitiful 24%.

Let’s hope more of the older generation treat the farm like they do their children: having grown up with them sooner or later it’s time to let go. 

For those who are over 50, don’t feel by letting go you lose all contact, but be prepared to hand over some control to the next generation – try doing it gradually in bite size stages.  If you haven’t succeeded in dairy farming by the age of 50, or earlier, you have probably left it too late to do so.  If you have made it, and indeed over achieved, there’s still time to set new goals.

Whichever, don’t hang on to the control of the farm until your final breath!                                 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 IP May 2010 DF

 

What Future for Milk? Well, I’m sure you’ve got your own ideas, but a few weeks ago I was invited to a Conference in Brussels, organised by the European Commission, to discuss exactly that. And what a great conference it was too, although I have to report that I have heard someone make an even more ludicrous and outlandish comment about dairying than even the UK’s chief apologiser for the retailers, Kevin Hawkins, could muster! It was made by Xavier Durieu from Eurocommerce, who represent European retailers, who claimed that “retailers pay the market price imposed by their suppliers and pass it on to consumers with a low profit margin of between 3% to 4% on milk!”  Astonishing!

 

The delegate list read like a who’s who of the European dairy industry, but, interestingly, only one UK retailer was represented – ASDA - and just two milk purchasers - First Milk and Fayrefield Foods. A mighty big Potter Brownie point for them then. I wonder if this tells us anything about those who did not attend?

 

As you would expect from an EU Commission organised conference, the opening keynote address came from the new Agriculture Commissioner, Dacian Ciolos.  “Stunned” would perhaps best sum up my reaction when he left the conference immediately after he had given his paper.  After all dairying is the most valuable sector of European agriculture in both turnover and employment terms and he could only spare the delegates 30 minutes!

 

However he did confirm that he is willing to listen to new ideas and will soon stamp his own mark on the EU’s future dairy policy, rather than follow the rather liberal route set by his predecessor. Those new solutions are not ones which call for the retention of quotas “in their current form”, and are also not solutions which require injections of money to create false markets.  But his comments on quotas were interesting nonetheless. Could he be persuaded to retain quotas in a different form, because he clearly recognises that the disappearance of quotas is a major challenge to most European dairy farmers? We shall see.

 

There was lots of talk from his predecessor Fischer Boel of the need for a smooth landing when quotas end, and Ciolos used the analogy of shock absorbers that need to be adapted to the new road conditions the EU dairy industry will be driving on.  Another speaker emphasised to the delegates that the term soft landing should not mean that nothing changes and it is business as usual, because every landing encounters turbulence. Buckle up and be prepared, was the message.

 

I felt Ciolos wants all EU dairy farmers to be competitive; however, the Commission has no intention of removing all support.  He will not simply step in to smooth out normal milk price fluctuations, however, I feel the chances of the intervention safety net being abolished in 2015, or in the medium term, are zero.  The Commission will continue to have an intervention type mechanism, but one which evolves to encourage low cost producers in some countries to produce additional milk. Currently the Commission is sitting on large carry-over of stocks of 196,000 tonnes of SMP plus 25,000 tonnes of butter in intervention, which they will try to off load carefully so as not to put the dampers on milk price increases. Certainly with EU and world commodity prices shooting up almost daily the Commission will do all it can to prevent a repetition of what happened in 2007/2008 when producers across most of the EU’s 27 member states instantly responded to the price rises by rapidly increasing production, which then resulted in the price crash afterwards. The Commission knows careful off-loading of its stock levels will curb significant price increases at farm gate level, will dampen producer’s enthusiasm to chase rising markets by increasing production, and ensure quotas remain under utilised so that their values gradually reduce to zero by 2015. This way they will hope to defend any scrutiny of the Commission’s existing and future dairy policy, and avoid further troublesome mass strikes.

 

One of the Spanish panel speakers at the conference declared that the UK’s old MMB’s “worked extremely well”, and this comment follows from others that have been made in Europe recently. Clearly there are some who look back on our Boards and think they are the answer to a maiden’s prayer. Incidentally, to my utter astonishment within days of the conference I received a promotional card from the British Wool Marketing Board with the message from its Chairman “Don’t let the Wool Board be the next Milk Board because let’s face it, the dairy industry has never recovered from that one.”  Well Mr Wool Board your message is loud and clear, but is one which few in the dairy industry would subscribe to! Such boards have a limited or nil track record in encouraging healthy competition, and from my experience no competition = no future. Fortunately and predictably at the conference Dairy UK’s Jim Begg stepped up and informed the speaker and delegates that the MMB’s had hindered innovation and growth, and to return to them would be a backward step.

 

Ciolos is aware that the ending of quotas and current extreme price volatility is a real problem, and that dairy farmers across Europe are a powerful bunch. I feel there will be more to come from him as he seeks to find new solutions to the problems. I look forward to seeing what his own ideas and solutions are – they are likely to be in the Commission’s quota position report due out at the end of this year.

 

These days a significant number of member states (miraculously including Italy) are (legitimately) under quota, with the UK’s production at a 40-year low (and falling). To put that in context the volume we have lost in the past six years is equal to almost four times the current output of Wisemans Bridgwater factory.

 

The decline is an obvious barometer of previous levels of confidence, but now the general consensus throughout the world seems to be that the current outlook for dairy is more optimistic as dairy is a fast growing, dynamic food sector. (I will look at what farmer’s confidence levels are, as measured by DairyCo’s intentions survey, next month).

 

However confidence only comes when farmers see the money in the milk cheque. And with EU butter prices currently 35% above intervention and SMP 30% above (and both rising) it surely must be time for a distribution back to the farmers, who are naturally desperate to see these increases in commodity prices in their bank accounts - as is happening for members of United Dairy Farmers in Northern Ireland.

 

They certainly receive volatile milk prices, which move up and down very quickly. Sadly on the mainland the experience of many farmers is that when commodity prices drop the time lag in the drop hitting their bank accounts is much shorter than when, as is the case today, prices surge upwards. No doubt we will soon hear a list of reasons and excuses why those milk buyers who cited a drop in commodity values as the reason for price drops cannot or will not pass on the current fruits of rising markets.

 

The general tardiness, plus the EU’s stock level situation, means you shouldn’t expect too much too soon, I say.

 

IP April 2010 DF

 

The EU milk quota system has now passed its 26th birthday. Over the years UK farmers have paid £258.5 m in wholesale superlevy, plus £41.5 m in direct sales levy making a grand total of £300 million, or 2ppl on all of our quota. Wholesale producers have missed paying superlevy in only10 out of those 26 years. Most of them in the last few years.

Despite loud calls for the continuation of quotas beyond the 31 March 2015 from some quarters, my money is still with the commission killing them off once and for all on that date.  Recently a Brussels based group, The European Economic & Social Committee, who claim to represent the public, announced that they fully supported the European Milk Board (EMB) in their call for quotas to continue in a form that they call “flexible volume regulation”. This was in pursuit of fair milk prices, and for the European Milk Market not to be left to the mercy of the free market.  I don’t think this will happen. But I do believe that there will be a future quota system, and this will be controlled and operated by the milk buyers through A and B type milk pricing. And I don’t think this will be tradable. How milk buyers and milk groups organize themselves in the future will differ enormously, I think, for good and not so good reasons.

Back in February I attended the NFU’s Dairy Farmer Representative Summit, and I was particularly interested in two presentations - one from Michael Masters on the workings of Dairy Crest Direct (DCD) and the other from Jonathan Ovens on how Arla Milk Partnership (AFMP) operates.

Both have a membership of around 1400 farmers, and supply a similar volume of milk – around 1.6 billion litres. But how differently are the organizations run, and financed.

DCD are completely financially independent from Dairy Crest with a Board which is elected from its farmer forum on a rotational basis.  They have a bespoke in-house newsletter and those involved in Board meetings and other DCD business receive pre-approved out of pocket expenses and meeting fees.  All in all it costs around £400,000 per annum to run the business.

AFMP Limited is a 50/50 joint venture between Arla farmers and Arla itself, and both parties fund it equally – to the tune of £730,000, and administrative expenses of £684,000.  Directors are remunerated to the tune of £235,000, in addition to which they receive travel and out of pocket expenses.

At the meeting I questioned the cost of running AFMP compared to DCD, following which I learned that around £450,000 of expenses – and which are not detailed in the accounts - cover the cost of “attending shows and exhibitions, an office and secretarial costs in Leeds, PR, printing and communication costs, fees for meeting rooms, catering and travel expenses as well as legal fees to deal with farmer issues, auditing etc”.  These costs were based on the 2009 accounts, but with the partnership having quit the Yorkshire Show, rumoured to have cost well in excess of £100,000, expenses are likely to drop.

Following my question for a detailed breakdown of expenses I was contacted by members of the Wiseman Board who also receive pre-approved out of pocket expenses with no remuneration.  In addition, the Chairman is elected annually and can only serve for a maximum of three years. Anyone who has been on the Board for a six year term has to stand down. How differently all these groups are run – shows being an example.

Wisemans and Dairy Crest pay for any show stands and costs so DCD members do not have their pockets picked. However you have to smile when Arla farmers at shows come up to the stand saying they were going for their free lunch, obviously not realising the show stand is not Arla’ s but AFMP'S  and which the farmers pay for 100% but where Arla personnel attend for free!

Enquiries into Arla brought me back to their November 2007 producer survey, when the new iron lady of Arla, Hanne Sondergaard, decided to seek member views on a wide range of subjects, no doubt realizing that there was a feeling that Arla’s communication with its members left room for improvement.  These results were never made public, though, and were not even shared with the participating producers.  One senior Arla supplier compared the survey to the Zimbabwean elections, where President Mugabe refused to publicise the results.  I understand the exercise is to be repeated in 2010. Certainly partnership members who were recently on the receiving end of a rather brutal notice letter informing them that their ASDA premium would be terminated in just three weeks will be questioning whether communications methods have improved.

Unfortunately for Arla these “problem” issues cloud a lot of good stuff that is going on in the business, or is planned to go on. For example its investment at Stourton and its declaration to build a new dairy outside London. It’s fantastic news, but I have to say that if  Potters was a Bookie we’d be talking a fair few wagers against it ever being built.  After all, they haven’t even got the land yet.

Now, briefly, the NFU Annual Conference, where the NFU’s answer to wonderwoman, Hayley Campbell-Gibbons, gave a very interesting presentation on what farmers think about their dairy contracts.  Only 14% of respondents said they were “satisfied” with their current milk contract.

An analysis of the big three showed that only 7% of Wiseman’s suppliers were dissatisfied with their contract compared to 27% from Dairy Crest and a staggering 36% from Arla.  Whilst the numbers of people involved in the survey could be considered as not representative of the whole membership, particularly when a number were likely to be active members of the NFU and/or regional Board members, it does indicate that there are still contractual issues to be addressed.

As I pen this article, the EFRA committee have released their long awaited report into the collapse of DFB.  As expected it condemns DFB’s wholly inept management.

The report suggests that DEFRA carries out some studies on the co-operative movement, and recommends they champion them to ensure they can compete with older and larger co-operatives within the EU.  Mmm. . . do I sense the ironic possibility that DEFRA will sub-contract some of this work to English Food and Farming Partnerships  -  an organisation in which the inept Philip Moody and Steve Elwood (DFB’s former head banker) are now involved through their company Smith and Williamson.  No way, I say. I will fight this tooth and nail.

Understandably the report questions the remuneration of senior managers and the ability and qualifications of those in senior positions.  The bottom line is that co-operatives should select directors and representatives for the expertise they bring to the business just as any plc would and not select them just because they are shareholders.  The experience of co-operative directors should be no different to that required to be the director of a plc and should not be limited to being a shareholder running a small business or a dairy farm.  Directors should be chosen for their experience in running large commercial businesses.

It is less than a year since the demise of DFB, but some of those involved -  particularly those within DFB’s council and indeed its Board - are already indicating that they wish to be involved with other milk buyers in a senior position.  To me that would be like a drunk driver smashing into a police car and pleading to be let off on the basis that next time he will drive more carefully. 

I’m afraid some of these people are like the drunks who just want the car keys back. They should really have their licence taken off them. In other words, failed DFB executives should, in my opinion, play no role in anything of any importance in the future.

 

IP March  2010 DF

 

The talking point in the industry is unquestionably the submission of plans to build an 8,100 cow dairy unit in Lincolnshire, by a business spear-headed by the deadly duo of Barnes and Willies who took on Peter Walker and Arla in the David and Goliath contracts dispute and won.

 

The news coupled with current and planned processor investment is a welcome positive sign of confidence in the industry and if built will have farmers and others flocking to see how the next generation professionals intend to profitably produce cheap milk having invested towards £50 million.

 

My personal enthusiasm for confirmation of the news was soon dampened by my old friends the grim jealous farmer.  Despite the industries efforts post de-regulation and Milk Marque to ensure these dinosaurs were extinct we have failed miserably.  We still have a handful of thundering dinosaurs who are little people with small minds.

 

These dinosaurs were quick to comment on blogs, in the press and media and without going into detail they are simply jealous that someone wants to milk more cows than them.  Their solution was to tell everyone it’s un-economic, not good for the cows or the industry, will push out all the little guys and generally ensure as many negatives as possible were highlighted.

 

Let me be very blunt, the dairy industry has plenty of outsiders watching it like a hawk, ready to pounce and criticise at the earliest opportunity without farmers turning on themselves.  What is it in the genetic make up of some dairy farmers that triggers this insane jealousy?

 

CIWF were quick to put their point of view on Radio 4’s Farming Today programme, where it’s Peter Stevenson started to spout about industrial farming, the genetic selection of cows for production and that he was “very, very concerned about this development”, and that the unit “does not make economic sense.”  He must be one of the few people who has studied Nocton’s business plan, cash flow and breeding policy.  I think not.

 

Truth is he, like some farmers, just wants to stick the knife in with negatives.  He has no knowledge on which to base his accusations and would command more respect for his organisation if he were to be open-minded and comment from a position of knowledge.

 

I wish Nocton Dairies luck and pray jealous farmers shut their mouths and if it gives them a buzz to secretly pray the unit does not get planning permission.

 

These jibes do, however, highlight a problem Nocton will have to work on, namely its communication, image and general PR.

 

Perhaps issuing a statement confirming it was actually 16 x 500 cow units would have been smarter initial move.  Also to highlight that when built the unit will produce more than just milk, converting effluent into electricity to be sold back to the National Grid as well as fertiliser with the icing on the cake expected to be the generation of carbon credits, which can be sold.  It will certainly be a must visit for any progressive, nosey or jealous dairy farmer.

 

So if you have decided not to show support for fellow farmers who want to milk more cows than you please do not bad mouth them.

 

As we approach 1st April all eyes will turn towards milk price variations, in particular Tesco and how its milk pricing formula pans out.

 

Once again the industry never fails to amaze me with both farmers and commentators throwing down a few caustic comments.  I particularly take issue with one published comment suggesting that Tesco are “feather bedding some of the country’s best milk producers.”  Such comments are unlikely to be well received at Tesco HQ or by the farmers charged with over-seeing the price negotiations.  At least Tesco (and ASDA) have dedicated and segregated milk supplies and particularly Tesco are paying on a clear formula.  Recently in an article in The Grocer it suggested Sainsburys had segregated supply chains but in reality Sainsburys have no such thing and if one were to be brutal you could say they pay simply conscious money in an attempt to keep up with Tesco.  The farmers who receive the Sainsburys money do not necessarily see their milk on Sainsburys’ shelves, as is the case with Morrisons.

 

The much anticipated DairyCo Company Performance and Strategy report aimed to help you improve and understand your milk buyers business has just been published and yours truly attended the press briefing.  It was billed as DairyCo’s most politically sensitive piece of work with Bidwells attempting to analyse how well or poor seven of our largest dairy processors are performing.

 

At a cost of around only £2.30 per producer it looks like value for money to levy payers and another tool in the Datum tool box.  Whilst I would not suggest all of you trawl through 150 rather dull pages I urge you all too at least study the section relating to your milk buyer and if you are considering changing buyer study the commentary relating to your options.

 

Bidwells claim it will help producers make decisions on where they sell their milk but I am not convinced on this, however, I welcome your comments.

 

It does not cover all of the issues faced by the companies.

 

Without wishing to be too critical there are several obvious areas I feel DairyCo should consider when an updated version of the financials is commissioned later this year.

 

Top of my list is pensions, and the huge challenge it poses to most of the companies.  This is especially the case with regards to First Milk and Milk Link and the additional contributions to The Milk Pension Fund they face following the collapse of DFB.  It is certain the two co-ops face having to plug a multi-million pound hole and they cannot contract out of it.  If only the work to segment the fund a few years ago had been concluded this drain on their members returns could have been reduced.  Hopefully when the report is updated pension details for all will be covered because I feel it is a crucial area farmers need to be aware of.

 

Second, as previously suggested in this column, I believe Bidwells should have made an attempt to standardise the accounts of all 7 and I make no apologies for mentioning this requirement in connection with Milk Link member capital retentions.

 

At the Dairy Co press conference the question was asked if the report had been done 12 months ago would it have painted a rosey or truthful story for DFB.  We will never know, however, anyone seeking any nuggets and bullets from the report to tackle their milk buyer will have to dig deeper than I have because my conclusion from the report is it’s all steady away and a calm sea for all 7 milk buyers and is unlikely to stimulate the acceleration of any merger negotiations.

 

It’s a report which can be built on and hopefully next time will have more meat on the bones.  If anyone has any questions having read the report DairyCo have confirmed they are willing to answer clarification points.  However, please do not ask them to recommend to whom you should sell your milk to.

 

Comments and observations to:  ianpotter@ipaquotas.co.uk or fax 01335 324584

 

 

 

 

 

 

 

 

 

 

 

IP February 2010 DF

 

How low will DFB’s former executives sink? I mean, the word “Sorry” can be hard to say, but it can go a long way in making up for past misdemeanours. But not once at the recent Parliamentary EFRA enquiry did Moody, Knight or Cooksey apologise to the DFB members whose businesses they hurt so badly, and in some cases ruined. Shameful.

 

At the risk of alienating some readers who feel I have stalked DFB for long enough the  bulk of this article is a review of the latest comedy act from The House of our noble leaders, as I do not want DFB’s Three Muppeteers to get away with what they did.

 

But what a sham of a committee. The words of Denis Healey spring to mind, when he famously uttered one of the most memorable parliamentary jibes of our lifetime: “It was like being savaged by a dead sheep.” The Muppeteers must have felt the same way.

 

Dairy UK’s Director General Jim Begg accurately summed it up when he referred to Committee Chairman Michael Jack as being a forensic interrogator “who was not quite in the Columbo class.”   There was poor preparation, lacklustre questioning, and no grilling or probing of any complexity.

 

Jack allowed Moody to completely dominate what was close to a 2.5 hour session, and let him control the agenda. Former Chairman Rob Knight spoke for less than five minutes and as for Andrew Cooksey, well he was either asleep or a cardboard cut out as he hardly said a word.  Moody even high jacked questions which were not directed to him as he rambled on, proving to me with his testimony that not only is he clearly one of the most incompetent consultants in the industry (other than at making money for himself and his business at the expense of everybody else), but he is one of the most boring ones too.

 

So I agree with Jim Begg: it’s time to call time on the committee. It has got nowhere, will get nowhere, and all it will do is report on co-ops in general, lumping them all together rather than to get stuck in to the meat of DFB’s problem.

 

Some have suggested former members should investigate the possibility of taking civil action against those responsible.  But I doubt this would work because most former DFB members just want to put the sorry episode behind them. They have no appetite for more.

 

By the time you read this article I expect Stephen Yates and possibly Magic Malcolm Smith will have stood before the Committee, and I hope both send 50,000 volts through the room with their truthful and accurate account of what really happened, and that, unlike Moody, they give answers to questions they want to provide answers to and which the members deserve the answers to, and don't just stick to answering the soft questions from the Committee.

 

At least EFRA clocked how lucrative the DFB contract was to Smith and Williamson, and I am not convinced they swallowed Moody’s defence that he had no conflict of interest and that his judgement was not impaired.  If, as the financial specialist on the board, he had voiced any concerns over DFB’s policy he would have risked cutting S & W out of a lucrative contract, which netted them in excess of £3million in five years.  It beggars belief how no one thought about the issue of Moody’s conflict at the time the DFB council voted him onto the board. What were they all thinking and doing? Presumably just what they were told to do.

 

Rob Knight claimed he had not influenced the selection of who joined the board, however, those with any skills, talents or knowledge and who dared to challenge Knight soon realised he held the key to the exit door. Trouble makers were quickly helped through it.

 

As for Knight, his memory was surprisingly vague when questioned over how long he held the joint positions of CEO and Chairman, and couldn't recall is remuneration for both jobs. So DFB had an Executive Chairman who didn’t even have a grasp of his own finances within the business, let alone the company’s. It’s hardly a ringing endorsement of his ability. Similarly neither Moody nor Knight could recall why one or more of the banks suddenly withdrew from funding the acquisition! I bet I know!

 

Moody fled in October 2008 when he realised DFB was in danger of becoming insolvent, which would reflect on his own precious position and reputation (now happily in tatters). He commented “it was not consistent with my position as a professional to stay on the board of a company in danger of going insolvent.” A rat off a stinking ship, springs to mind, and one which he helped to sink.

 

Michael Jack did, however, rattle Moody’s cage when he suggested the DFB board had up to £150m to “blow” on a one off purchase, following which Jack agreed to Moody’s choice of the word “invest” instead of “blow”. Personally I back Jack’s choice of words on this score.

 

Moody even informed the Committee that the sale of ACC was on a sealed bid auction basis. Sorry, but it was a tender, and as all farmers know there is a difference. He then succeeded in convincing Mr Jack that the advice DFB took on board as to what the business was worth, against what a competitor might pay - taking into account synergies - was “commercially sensitive” and he would not disclose such detail. The information is only sensitive to Moody, and the other disastrous DFB execs, as it will reflect on their incompetence. Besides it is pretty common knowledge that Wiseman were only prepared to pay a fraction of DFB’s price for ACC. Readers comtemplating  engaging   Moody and S & W  prior to their appointment should evaluate what both achieved for DFB. The thousands of DFB members who lost money deserve to know more, deserve an apology.

 

Finally, to the forthcoming NFU officeholder elections, which should be the focus of all farmers in England and Wales. There are a few people employing dirty tactics, which is inevitable in politics I guess, but the bottom line is that Kendall is pretty secure, Mead will rattle a few cages while engaging in his favourite sports of NFU-baiting and plugging his own businesses (why not!), and the real action will take place at Deputy and Vice President level.

 

The position of Vice President has 10 candidates which, whilst healthy as part of the election goes, is not reflective of the fact that the NFU certainly does not  have 10 genuine candidates that have future presidential ability. The NFU must elect two people who have the calibre, enthusiasm and depth of knowledge to be future presidents of the organisation.

Only by having strong leaders with vision will the NFU be an organisation that farmers don’t think twice about paying their annual subs to. These elections will have a huge effect on the NFU, so please don’t view them with apathy. It’s not about keeping the old team or the old Council going, it’s about getting a dynamic modern thinking team with no dinosaur ideas and someone who can grab any audience and command respect and understanding from them.

 

Comments and observations to:  ianpotter@ipaquotas.co.uk or fax 01335 324584

 

 

 

 

 

 

 

 

 

 

 

IP January 2010 DF

 

Recently I was asked to speak at a European conference organised in Paris by Kemin with a truly European audience. It was a far cry from my first presentation for which I was given a pint of pedigree in lieu of my travelling and out of pocket expenses. For this my first speaking engagement in I scaled mountains, crossed streams and time zones to talk to a huge audience of 7 farmers less than 2 miles down the road from my offices at a meeting of Waterhouses NFU in the then Green Man pub at Cauldon Lowe. They were the first farmers to interrogate me and some of them would still make me slightly nervous if I were to face them again.

 

This European conference confirmed my thoughts on how I see the industry going forward. Dairy farming is perhaps as close as one can get to being recession proof during an economic recession. “Herds will get larger and more specialised and now is the time to invest” commented fellow speaker and president of the European Dairy Famrers Jean-Francois Verdenal. I agree with him and perhaps the planned 9,000 milking cow single green field site unit for the East of England might not be so futuristic and completely out of the norm.

 

The bottom line is all at the conference seemed to agree now was the turning point for the World Dairy Industry and the medium to long term outlook was certainly positive.

 

Another conference I recently spoke at was the Anglia Farmers Livestock Conference where of particular interest to me was a fascinating paper delivered by Baroness Gillian Shephered. She stated the harsh reality that each year the world’s population increases at the rate equal to the entire population of the UK and that by 2050 the predictions point towards a world population of 9 billion. She reminded the audience of a statement made by Margaret Beckett at the Oxford Farming Conference which was “The world is awash with food for us to import” – how did we allow her to get away with this was the question asked? She then stated she did not feel until the past couple of years the NFU, as our representative body, had spoken up enough and that what we need is one strong unified voice and that farmers should be farm more aggressive in defending the industry.

 

The baroness then gave us an example of how soon the position can change highlighting that 10 years ago the UK produced a surplus of pork today 30% of our pork requirements are imported. It could easily happen in dairy unless everyone get their ducks in a line. All in all a very thought provoking punchy paper.

 

Jean also believed most dairy farmers across Europe could cut costs and do things differently to increase or hold their margin. There are more savings farmers can make on farm to improve their bottom line profit figure as opposed to backing the idea that mass demonstrations together with publically dumping milk would deliver easy to grab price rises from processors. This is perhaps the point HSBC’s recently departed Head of Agriculture meant to say at last years Dairy Event press conference which due to his poor choice of words came out wrong and landed him in very hot water.

 

One speaker from the Dutch LTO, who carefully analyse prices paid for milk to dairy farmers in all 27 member states (see www.milkprices.nl), believed the UK dairy industry was playing catch up with the rest of Europe in terms of slowly moving towards market orientated milk pricing. The reason for the delay he claimed was the UK’s reliance on the old MMB’s. What he was really saying was that GB, in particular, has insulated from the milk price volatility experienced by mainland European dairy farmers in 2009 which triggered the widespread protests. I for one am not convinced by this argument believing GB is actually ahead of its mainland European neighbours. In terms of contractural relationships between GB processors and supplying farmers things have never been better but I agree there is room for improvement in some areas.

 

 

 However with recent attitudes and comments from one large and another medium sized liquid processor based in the North of England and Scotland suggesting neither had any obligation to hand over any additional money captured from the recent improvement in cream prices such improved relationships are in some instances clearly fragile. Both processors flagged up the fact they have a long list of farmers wanting to supply them, some of whom have even asked if they could do so at less money than both are paying to current supplying farmers. Press the self destruct button with farmers once again prepared to undercut other farmers. Little wonder some processors see no reason to share any upside. Certainly the days of producers tendering their resignation with a milk purchaser assuming it can be rescinded have gone. Such pressure tactics today leave you with no buyer for your milk.

 

It is a very interesting point to note that whilst at farmgate level milk price volatility has been rampant in 2008 howver little if any retail milk and milk product volatility has been witnessed in the shops. In many instances the milk commodity market volatility has simply provided by a platform for some retailers and processors to snatch some extra money for themselves resorting to the old trick of passing back to farmers what is left over.

 

 

My final speaking engagement of 2009 was at the NFU’s Northern Dairy Conference alongside First Milk’s new Chairman Bill Mustoe, the NFU’s Peter Kendall and John Giles Divisional Director of Promar International Agri Food Division. Johns talk was “10 important things in the global dairy sector you need to be aware of”.

 

Several delegates including one questioner expressed their surprise that John was the only speaker not to talk about farmer milk contracts which was especially surprising given his presentation highlighted his extensive worldwide experience in the dairy sector.

 

For me and others contractural terms and relationships are perhaps the most important area dairy farmers and processors desperately need to work on. It requires an exchange of ideas and best practice between producers and processors from all corners of the world. There can be no doubt that the 3,000 GB dairy farmers currently involved in dedicated supply chain contracts are involved in a world first particularly with reference to the Tesco formulae pricing model. On this score we can educate producers in other countries and perhaps the answer is we simply need to work on this model within GB and extend it to involve other retailers with the Co-op stores and Morrisons instantly springing to mind as key targets followed by similar contractual relationships being set up for cheese.

 

Perhaps we also need to examine contractual terms and relationships for both other agricultural and indeed non agricultural products. Let’s face facts, I cannot think of another product which is sold daily like milk where every litre produced is collected. Newspapers spring to mind but here any unsold papers are returned the next day with nothing to pay.

 

However smart we think we are we must cast our net worldwide and set in place more building blocks for an optimistic, sustainable, profitable future for dairying in which relationships between farmers, processors and retailers continue to improve and an industry in which one day each of these elements trusts the other.

 

Here’s hoping all your dreams for 2010 and the next decade come true, and that farmgate prices start to increase very early in the new year and that a fair share of the rises achieved from market returns feed back to dairy farmers. Like all of you I guess I am a born optimist.

 

Comments and observations to:  ianpotter@ipaquotas.co.uk or fax 01335 324584

 

 

 

 

 

 

 

 

 

 

 

IP December 2009 DF

Well the Scots attended First Milk’s AGM Conference in Shrewsbury, no doubt about that - by air, land and water! It has to be said that Welsh and English attendance was, at best, satisfactory, but bordering on disappointing. That’s a pity, because if I were a supplying member this would be a “must attend” event.

 

The day was dominated by the news that the co-op had been forced, on the eve of the event, to cut member milk prices by a draining 0.65ppl due to “the cheese market”. That turned the heat up on what was undoubtedly a baptism of fire for new Chairman Bill Mustoe on his debut appearance.

 

Since the event, externally, little appears to have changed at the co-op. However, all employed by First Milk are on red alert for imminent change as Mustoe attempts to implement radical solutions in a bid to turn around its fortunes.  It is likely heads will roll throughout the business as he cuts out any deadwood who are failing to deliver and hit targets. He is on a crash course, and his biggest issue is to immediately plug the haemorrhaging of cash by First Milk’s poorly performing cheese operation. But anything Mustoe can achieve will deliver little, if anything, to First Milk’s bottom line for its current year end results, ending 31st March 2010. We can’t expect miracles this financial year.

 

Although it was First Milk’s agm conference, it was Robert Wiseman who stole the show with a conference appearance almost as rare as the sight of Santa Claus. He was upbeat, humorous whilst also deadly serious, telling delegates of his story spanning 62 years since the family business started in 1947.  Wiseman has been a business which has concentrated on the GB liquid milk market involving 54 acquisitions, and is now processing 4.5 million litres per day through seven dairies, and having recently invested £450 million in new, extremely efficient world class dairies.  Robert’s philosophy is simple - he does not care what price he pays farmers for his raw material, only that he remains competitive.  No one can fault that. He also claims one of the successes has been to regularly employ people “smarter than brother Alan and himself”. Whilst a great deal was made by Robert and First Milk’s current CEO Peter Humphries over the fantastic relationship the two businesses have at the end of the AGM there would be few First Milk members in the room who would not dream of being involved with a business half as successful as Wisemans.

 

Wisemans buy 28% of First Milk’s total milk and if you add in fresh milk purchased by Dairy Crest and Nestle it results in 70% of the co-op’s members’ milk going into the premium fresh market.  Robert declared the formula they use to calculate how much they pay First Milk for the milk, which was Wiseman standard litre price (including the 0.3ppl extra paid for cream improvement) plus transport, admin and a service element to cover the fact First Milk perform all Wisemans balancing.  Dairy Crest is understood to pay on a similar formula but carry out their own balancing.

 

Thus, I conclude that at least 70% of the co-op’s milk is being consistently sold at a good price. This, of course, narrows it down to where Mustoe needs to conduct his examination and subsequent surgery– and this it definitely in the direction of its cheese business. First Milk wouldn’t have sold a sizeable chunk of its family silver in the form of 37% of its stake in Wisemans if things weren’t serious there. And, even if it was ever feasible in the first place, the move effectively kicks any Disneyland dream that some in the co-op might have to manoeuvre to merge or take over the Wiseman business into very, very long grass. Yes, some did fantasise. Some still do. Wake up to reality, I say.

 

Whilst acquisition of the shares was good business, having purchased them for £2.50 and sold them for £4.50, knowing the money will be invested in it is cheese business will be of concern to members. How much more money will it take before it turns around this part of its business? How long will it take? Can it afford to develop two cheese brands, especially when up against Cathedral City, Seriously Strong, the Irish Dairy Board and others. Is its strategy right? Key questions indeed.

 

Perhaps processing of milk is not the panacea some co-op top brass have attempted to convince the members it is? Certainly in the case of First Milk any current benefits derived from its processing are very difficult to see.  One solution could even be to ditch all or part of its cheese processing.

 

My next day out was to English Food and Farming Partnerships 6th Annual Conference called “Routes out of recession”, attended by 299 of the great and the good in our industry, and me. EFFP, remember, was set up in 2004 following the Curry report to create and capture value and achieve greater security of supply through co-operation.

 

Throughout what was an excellent conference with some top speakers my mind kept constantly drifting back to the catastrophic collapse of DFB. This was probably inevitable - given the fact that Smith & Williamson (S & W) were the conference’s main sponsor, because Steve Ellwood (former head of HSBC Agriculture and key banker to DFB) is EFFP’s Chairman and head of food and agriculture at S & W, plus the fact I saw ex DFB chief advisor and former director Philip Moody, and head of S & W, face to face for the first time. I’m not sure how they can show their faces in public really, let alone continue to “advise” on finance and co-operation. Especially given all the DFB member money which was lost and all the people they let down.  Especially since neither had the balls to give oral evidence in front of the EFRA Committee investigation in to the collapse of DFB, whether invited to or not. Shameful stuff.

 

Only 12 months earlier Moody was scheduled to present a paper at EFFP’s 5th conference titled “Addressing the funding gap and financing change”. A few days before the October 2008 conference his fellow DFB board members instructed Moody to go sick on the day and not to attend or give such a paper given the precarious position DFB was in and the role that Moody, S & W and EFFP had played. Only a few days earlier DFB was unable to pay its members £1.8m they were due in half year interest payments resulting in calls for Knight & Moody to be hanged.  Both departed DFB within days.  Low and behold this year’s conference saw Steve Ellwood stand up at the conference and present a paper with precisely the same title. How ironic that Moody, Ellwood, S & W nor EFFP managed to solve the issues within DFB, yet all are now creeping out of hibernation and acting as if DFB was nothing to do with them.  It’s a joke.

 

It wasn’t until NFU President Peter Kendall took to the platform as the 12th person in giving what was called “the farmers response” that the letters DFB were mentioned at the conference.

 

But it wasn’t all a case of “if only”.  There was a  top class paper from Jonathan Warburton (the bread maker) with his family business which started in 1876 and whose philosophy is not to copy what others do and to always source and pay for the best staff – almost identical to Robert Wisemans policy.

 

EFFP’s chief executive Sion Roberts said “2009 has been a momentous year”. It certainly has for all dairy farmers with milk and or investments in DFB. For all the wrong reasons.

 

So, as we draw the final curtain on 2009 I hope you will all look to 2010 and beyond with as much enthusiasm and positive energy as you can. The collapse of DFB was a disaster but nobody died, as they say. Well, apart from said individual’s reputations. As we put 2009 behind us then, I would like to take this opportunity to wish all readers a happy festive season and prosperous New Year, and sincerely hope that those of you receiving a bottom of the table “relegation” milk price will witness a complete reversal in your milk price fortunes next year.

 

IP November 2009 DF

 

An explanation. An apology - if not justice. Asking for them isn’t too out of order for DFB’s Board and management, is it? Well apparently – for most of them - it might be.

 

At the time of writing Lord Grantchester, DFB’s chairman at the end, is, wholly and inexplicably, the only DFB director giving evidence by the EFRA All Party Select Committee looking at DFB’s collapse. As I write he hasn’t gone up before them, so I can’t comment on his performance. But I must say that it’s either shame on the others who aren’t giving evidence, especially those who have been called but have refused to go, or incredibly, suspiciously, they haven’t even been asked!

 

Knight? Moody? Smith? Cooksey? Strickland? Loftus? Yates? Ellwood? None of them are up before the Committee.  Why? Why is it ignoring ALL of the key DFB witnesses who should be called to account? What a joke of an inquiry! For that reason I feel EFRA’s deliberations will be a complete and utter waste of time. But perhaps it’s too early to judge, so we’ll keep monitoring and assessing the inquiry and we’ll deliver our verdict next month when more witnesses will have been heard.

 

First to give evidence was the NFU and two council members of DFB. Dairy boss Gwyn Jones was repeatedly grilled by the committee on one question: “What reasons do you feel resulted in the failure of DFB?” He didn’t know, of course – neither he, nor the NFU, were in the DFB room when key decisions were made. The seemingly poorly briefed and ill-prepared Jones didn’t say that though, and flapped around like a rabbit in headlights giving answers that the EFRA chairman Michael Jack didn’t want to hear. Because of that Jack relentlessly pressed that same question for the best part of 15 minutes. The best Jones could come up with was to point the finger of blame towards “commentators”. Me, in other words! If you can’t target the culprits then shoot the questioner and blame the messenger, seemed to be the order of the day. Perhaps Jack was so aggressive to Gwyn because the NFU lobbied hard for the inquiry and he was expecting some real insights or bombshells from the organisation. But clearly, from what was said during the session, the NFU had no smoking gun. Nothing.

 

And Gwyn didn’t exactly look prepared by his media team either! Cue a potentially fatal catastrophic line of questioning which the equally ill-prepared Jack failed to take advantage of. Had he done so the whole of the NFU’s testimony would have been dead in the water:

 

"Can you recall,” said Jack, “when, even informally, the NFU as an organization first picked up concerns that all was not well at DFB?" To which Gwyn replied: "Well I think the first concern probably was raised at the purchase of ACC.  If you are talking about people being worried was this the right thing to do, was it worth that money.  Certainly there was an awful lot of people in the industry questioning that."

 

Well the NFU certainly didn’t! In a press release dispatched at precisely 9.41 on the 11th August (the day after the ACC acquisition) the NFU “hailed the acquisition as a positive step towards getting farmers closer to their market”. One Gwyn Jones in particular said: "Vertical integration, which comes as a result of this announcement, is a critical element to allowing farmers to achieve a sustainable milk price. This is a move which results in UK dairy farmers getting closer to their marketplace and is welcomed by the NFU." NFU President Tim Bennett added: "I am delighted to learn of DFB's bold move. It is a real sign of theirs and dairy farmer’s commitment to a long term, prosperous milk industry in this country." Fancy that!  This illustrates that neither Jones nor Jack had really done any basic let alone in-depth research into what was said at the time, and, by who, and begs the question as to whether Jack and his committee have done their homework to ask any of the necessary questions. DFB members deserve more, I think.  

 

I was also particularly disappointed to see that a minimal amount of the questioning focussed on the collapse of DFB, with EFRA preferring to naval gaze at extraordinary lengths on the relative health or otherwise of First Milk and Milk Link, of “the co-op model”, the structure of the industry and weaknesses in producer contracts (yawn). At one point the questioning to the two DFB farmer council members proceeded along the lines of “Name me a practical advantage a farmer has ever got out of supplying a co-ops as opposed a plc?” , followed by “Can you explain to me why would you want to go into another co-op?”. By default the negative tone of the questioning effectively put all co-ops in the same box as DFB.

 

As I have previously commented perhaps the big surprise is that DFB did not fold earlier.  Memories are short, but the co-ops did not enter the big boys processing league on level terms with existing processors.  They were thrown out of the proverbial airplane effectively by, er, meddling politicians and parachuted into a fiercely competitive UK, European and global market up against established, aggressive well-funded processors. They had to build a customer base, retain supplying farmers and provide the finance for all these activities. Some say, with hindsight, that keeping out of processing and remaining as brokers would have been a better route for DFB to pursue, but remember at that time the politics and atmosphere in the industry was such that brokers had no future either. A better question is whether DFB should have so relentlessly pursued the pot of gold at the end of the rainbow that Smith and Knight saw as the liquid milk market, and which so hypnotically mesmerised them as far as the ACC deal was concerned.

 

Council members within DFB have some serious pondering to do themselves, mind, because whether they recognise it or not they presided over the collapse.  Back in an interview in this magazine in September 2004, vice chairman David Wilkinson claimed the council sanctioned the acquisition of ACC and had the power to block it.  “They (council) saw the potential returns to them and the support was overwhelming,” he said.

 

But the two farmers who gave evidence confirmed what most members suspected - that the council trusted the directors and relied on DFB’s board recommendations.  Indeed any council member who asked sticky questions or challenged the Board’s recommendations was quickly silenced. The result was that “amateur” farmers believed all they were spoon fed.  It’s a lesson to all that any farmers who wish to be involved at any level beyond the farm gate that they need to be competent and to receive the appropriate training, especially in reading company accounts so they can spot when a business is in trouble.  Only capable farmers should be recruited as directors - it’s not a tea and biscuits jolly which they get paid to attend.

 

In summary then, Jack’s question MUST be put to all of the DFB directors, past and present and key executives involved in the key decisions.  Grantchester shouldn’t carry the whole can. Yes, he was a director from the start and shoulders as much blame as anyone else, but by the time he became chairman it was too late. If Jack wants to maintain the credibility of his committee then he must grill DFB’s former executives in exactly the same way that he grilled Jones. Nothing less will do.

                                                                              

IP October 2009 DF

 

The final Dairy Event at Stoneleigh was certainly a success, and as ever, promoted an image of dairying being a positive, vibrant industry. So well done RABDF. Inevitably there were numerous rumours and concerns over the Event’s move to the NEC next year, particularly concerning increased costs for both exhibitors and attending farmers.  The RABDF have confirmed that exhibitors will not be obliged to utilise the services of the NEC’s contractors and that the deal includes free car parking. So fingers crossed for little, if any, cost increase for all involved in the 2010 Event. Only time will tell whether the move to hold the Event some 10 days earlier will result in a drop off in attendance as some farmers complete harvesting, drilling and third cut silage. Nevertheless it is timely move away from an aging, tired, showground and should be welcomed.

 

I took part in a lively, well attended Dairy Farmer speaker’s soap-box corner, hosted by our esteemed editor Peter Hollinshead. It was especially entertaining when a farmer who was having numerous pops at me grabbed the microphone to ask me a question and ended up speaking into his bottle of beer and attempting to drink from the microphone. Clearly Dairy Co’s free beer had gone down well with him!

 

Milk prices for 1st October were the top topic of the day.  Not wishing to miss an audience and an opportunity to get my point across I pointed out that the recent improvement in cream prices has added towards 1ppl to the value of liquid milk and when cream prices fell Wiseman, Arla and Dairy Crest (liquid) were quick to highlight the falls as a reason to reduce ex-farm gate milk prices.  Now prices have risen only Wiseman has passed some of the money onto its direct suppliers in the form of a 0.3ppl rise, so I questioned what the position was with Dairy Crest and Arla (representatives of which both joined me on the panel?)  I gave both two scenarios - (a) they were pocketing the money from the cream increase simply because they could or (b) they were putting it on deposit with the aim of paying farmers a big hit price increase all at one go!

 

Surprise, surprise in true political style the question was side stepped in a ay that would do Jonny Wilkinson proud. But I have to confess I failed to fire a third bullet at my other panel speaker, First Milk Director Mansel Raymond, who, given his forthright defence and promotion of the co-op promoted him to the position of First Milk’s No 1 suicide bomber. No doubt about it – he’ll be first over the top of the trench in support. My question should have been this: First Milk’s biggest customer is Wisemans and they received the 0.3ppl increase so did they pocket it or put to one side safely for their farmers?

 

My message was clear: there is no justification for farm gate price drops for liquid contracted farmers (although this comment does not apply to Tesco farmers who have a formulae price.) Those not on liquid contracts will have their fingers crossed, and as I write it is becoming clear some cheese processors are set on dropping prices and I have sympathy - the pressures they are under from low value imported cheese, mainly from Ireland, is crippling. However, with the world dairy markets at last beginning to show early signs of a rapid improvement their position should soon change.

 

Auction prices from both Fonterra and United Dairy Farmers are rising quickly having previously attracted criticism for accelerating and exacerbating the downward slide in prices as buyers sat back and waited.  As a livestock auctioneer in a previous life I am acutely aware of the instant barometer the auction system provides for commodities across the world, and without auctions we would be in the dark and in many cases at the mercy of a handful of buyers.

 

If the Commission can carefully manage the off-loading of the high tonnage of intervention stocks they have accumulated in recent months, at a healthy profit, next time we talk about milk prices it will not be a “stand on” but upwards by whole pennies again. Hopefully.

 

That said, though, we can’t build an industry on “hopefully”. Co-ops, milk processors and all retailers, large and small, must work towards setting fairer milk prices for all dairy farmers and must follow the leading role set by Tesco with its liquid prices.  They all need to be transparent about when they move prices up and down, need to be consistent, and ultimately have successful profitable dairy farmers who are proud to supply them.  Oh, and as I stated at the milk debate, back-dated milk price cuts are now morally unacceptable and I intend to publish each and everyone I am made aware of in my weekly bulletin’s Hall of shame.  It’s up to you to notify me of them.

 

The Dairy UK Annual Conference held a few nuggets of information worth sharing with you.

 

Professor Quintin McKellar asked one simple, but puzzling question, “How can milk cost less than mineral water?” To my astonishment he stated that Claridges Hotel sell “Mahaol Deep Sea Water” as “aged water” for £40 a litre, and “Iceberg water” from Newfoundland at £30 a litre.  This costs 10,000 times more than tap water, but does the same job. When I was a lad ( not so long ago as some of you perhaps think) the idea of paying for bottled water was a joke. So how has mineral water become the fastest growing sector of the non-alcoholic drinks market?  How have marketers succeeded in branding a basic commodity like water, he asked.

 

Milk is produced in a variety of tastes and textures and is a wholesome natural food. Yet consumer concerns over the purity of what we drink has seen water branded, packed, sourced, marketed and priced to over take milk in spectacular style.  The last time I saw anything as boring as water successfully marketed it was in the 1970’s when Abertay marketed brown paper potato sacks by putting scantily clad girls inside them.  Even if you didn’t grow potatoes the brand awareness was high and the two table mats they produced are still two of my treasured keep sakes.  Perhaps milk simply needs to find new innovative and stimulating ways to be marketed.

 

Bottled water is certainly not in tune with environmental concerns and waste packaging and recycling, especially that sold at Claridges. 

 

Another speaker of particular interest to me was Ian Dudden from The New York Stock Exchange LIFFE market, who are on track to trade SMP, whey and butter futures from early 2010. This will be the topic for a future article but the basics are that the participants are likely to be established companies e.g., Nestle, traders, financiers, banks, brokers and investors with 99% of contracts cancelled out on paper as opposed to taking physical delivery of the products

 

From a farmers point of view, although you will not be directly involved in any trades it is another barometer of what the view is of the markets.

 

Today’s dairy farmers have much more access to up to date information e.g., the globally renown megasite www.ipaquotas.co.uk and even lesser ones like www.dairyco.org.uk.  All of them mean you are better informed than ever and cannot be conned as easily.  All of this information on futures, spot and auction markets is positive and if you take an active interest it should keep your milk buyer on his toes.

 

We are certainly in for volatile milk pricing across the world and mechanisms to smooth out the feast and famine prices is the biggest challenge the industry faces.   The traditional April and October Tesco type price reviews may be a thing of the past for the majority as price reviews take place four to seven times a year to reflect wide price savings.

 

Comments to:  ianpotter@ipaquotas.co.uk or fax 01335 324584

 

IP September 2009 DF

 

What’s on your mind the most? Yep, I know! It’s your herd’s carbon footprint! Course it is!

Sorry everyone, but I’ve been getting it wrong over the years. I’ve always thought that receiving a sustainable milk price and having confidence in the future to invest for the future was priority number 1.  And apologies again, but I won’t be turning to the issue of carbon again until around 2023, by which time I might be genuinely interested in the subject.

 

As we know, in the past year a huge reduction in ex Farmgate milk prices has occurred on a global scale

due to a surge in production following the price hike in 2007. Only external factors outside of the EU can truly underpin the milk prices here in the UK, but thankfully there are some signs of improvement in world commodity prices.  For example there was a 26% rise in the Fonterra Auction results in the space of four weeks and spot prices are nudging up towards 24ppl as I write!

If this “recovery” can be sustained or improved on it could see an overnight switch into the production of powder by countries like Ireland, who have a small domestic market and are presently sending us daily truckloads of both liquid milk and cheese, which, as we know, are undermining our prices. If we are lucky this resurgence could come in time to halt what I think are already planned price reductions from October 1st.

 

But it won’t be over then, of course. The bottom line is farmers will have to manage frequent wide swings in ex-farmgate price volatility. Stability is not on the horizon, but a roller coaster of boom and bust cycles are here to stay unless mechanisms can be established to iron them out.  Farmers ability to ride out the troughs and bank the peaks will be one key to a sustainable future.

 

By the time you read this article we will be days away from the traditional six monthly 1st October contract price negotiations by everyone’s favourite Tesco. To what degree will their market related and cost tracker inputs affect their price? Will a spike in the market related element be sufficient to nullify a reduction in the cost tracker? We shall see. Every little helps. Then all eyes should be on the likes of Arla, Dairy Crest and other liquid buyers who appear to have dropped under the farmer radar for not passing on any price increase as result of improved bulk cream prices (which Wiseman, commendably did).  Have those buyers pocketed the money themselves, or saved it up for their farmers later?       

              

Now to politics. The NFU are pushing hard for a farming Ombudsman watchdog, which has been recommended by the Competition Commission recently. I wonder what the rest of the Dairy industry thinks, in particular the co-ops? That’s because the ombudsman would be all about ensuring fair play through the supply chain (we hope). But will that extend down to farmers, I wonder? How will he deal with complaints from Co-op farmer members about prices if their co-op is shown to be selling cheap mild cheddar to one of the big retailers? Will the farmers count? Or will “fair play” just apply to how the retailers treat the “middlemen” like the processors or the slaughterers?

 

I have to confess I am less than enthusiastic about the effectiveness of an ombudsman as far as dairy farmers are concerned. For the dairy industry 98% of complaints from milk producers are price related.  Each complaint would create another layer of bureaucracy in our industry which is crying out for less red tape, and   the time it would take an ombudsman to investigate and conclude on a complaint means that events will overtake most complaints before judgement is made.

 

The reality is anyone involved in morally unacceptable bad practices will be found out (usually by me!), or who is commercially naïve and thus undersells will eventually sink to the bottom of the pile as their farmer price falls, they lose milk suppliers, then supplier and customer confidence, and finally contracts.  Sustainability of supply is the best card dairy companies have in their hand.  I am afraid you only have to look at the collapse of DFB as evidence of what eventually happens.  Finally, we all know that as far as liquid milk is concerned the retailers are not the major problem, but the middleground battleground. And we all know what has happened there recently. Sadly any ombudsman would have no remit there.

 

For me the market place will sort out the problems, but, admittedly, as with DFB, it may be very painful.  I question whether we want extra interference which has the potential to slow down the commercial processes which are already leading to consolidation and rationisation of the UK industry. I feel the industry is progressing towards long term structure with less animosity and adversarial trading relationships.  Well I’d like to think that anyway. Let’s see if the Government are persuaded by the arguments to step in.   

 

Now to DFB. Numerous enquires are now in the pipeline with a view to investigating what went wrong at DFB and let’s hope at least one of the reports comes out with a “lessons learnt” summary.  I particularly hope PWC’s efforts to halt a Welsh Assembly enquiry (they have visited the Assembly twice) are unsuccessful. The Welsh put serious money into Bridgend and will want to know where the money went and what went wrong.

 

Whatever evidence comes to light from the various enquiries there is no doubt the root course of DFB’s problems started when Zenith merged with The Milk Group to form DFB who then got involved in processing, and then began to be run not for the farmers but for greedy managers and executives. You don’t need big enquiries to see that. Some big names and organisations are set to be seriously embarrassed over the coming weeks, and I, for one, can’t wait to see justice done. They will end up keeping the money they wheedled their way. But their reputations, and those of their organisations may well be shot to bits, and personally I cannot wait to see this. (And that may include companies who paid DFB farmers a pitiful 14ppl, which, despite the statement made by the NFU’s Gwyn Jones declaring that “any buyer proven to be profiteering and exploiting farmers will be exposed”, and who have still not been exposed.)

 

The collapse of DFB has been a disaster for the farmers involved, but aside from the executives, The Board and some council members and former council chairmen DFB members can still hold their heads up high.  For the rest of the industry it should sharpen up the scrutiny of financial and trading performance, so that the spin put forward by fellow farmers in senior positions who couldn’t even read their own name let alone a set of accounts won’t be simply swallowed.

 

Finally, don’t forget the dairy event – the last one at the RASE. Let’s hope the weather holds and turnout is good. The chickens have come home to roost at the RASE on this. Remember the 2007 event which was cancelled at the last minute due to FMD? The breathtakingly arrogant and incompetent RASE showed zero compassion and still charged the RABDF the full rent, which then contributed to a £133,000 loss to the  organisation which is far from awash with cash and there to help dairy farmers.

At least bad weather will not have a catastrophic effect on the RABDF’s 2010 and beyond events at the NEC that it could do at the archaic NAC showground. Not only is the NEC move a fantastic one for the RABDF and the industry, but a welcome knee in the balls to an organisation which, frankly, deserves it.

 

Remember I can be found both days with my famous blackboard on the Farmers Guardian / Dairy Farmer stand on the corner of 6th street. See you there!

 

Comments to:  ianpotter@ipaquotas.co.uk

 

IP August 2009 DF

The Scots started it with their Dairy Summit a few weeks ago. Now the Tories have had one too, run by the Batman and Robin of the Tories farming department – the knowledgeable and respected Jim Paice MP, and his immediate Guv’nor and Shadow Environment Secretary, Nick Herbert. The summit looked at barriers to processor and on-farm investment particularly red tape and additional costs of the likes of NVZ regulations, which will lead to National Muck Spreading Day, and the proposed cost and responsibility sharing. “The market place, and (Jim’s pet hate) those businesses, including Government, who source dairy products from abroad, rather than from the UK, also got an airing – no doubt in light of  David Cameron recently declaring his support for clearer food labelling and demand for a complete review of Government purchasing.

 

Delegates I spoke to felt it was a very worthwhile, constructive meeting and thought Paice’s team would be resolute in their efforts to halt the current slide in UK milk production and nervousness within the industry.  His aim is to develop policies and a manifesto which will not only demonstrate their in-depth knowledge of the problems our industry faces, but which will find solutions and make all parts of it feel more important to the country.  Having heard both Paice and Herbert at this year’s NFU Conference, and spoken at the Semex conference with Paice, there is no doubt in my mind they understand this industry more than most, if not all, of their colleagues.

 

So it’s all eyes peeled for developments following the meeting, and let’s hope it achieves more than the recent Scottish summit has done. The only headline to come out of that was “Dairy farmers angry as Tesco, ASDA and Sainsburys snub milk summit.”  Some two months later and we are still waiting for news on the progress and/or some solutions following the meeting (although to be fair, the Scottish Government did give First Milk a wodge of cash to rebuild Campbeltown, but that only directly effects 42 farmers). The fact is it’s the farmers en-mass who are not aligned to Tesco, ASDA, Sainsburys, or Campbeltown for that matter, who need confidence-building stability and solutions, so I suggest the NFUS picked the wrong targets.  Let’s hope the Conservatives do not miss the opportunity.

 

Now DFB – again. My call for an independent investigation last month on what went wrong was met by a positive barrage of approval from DFB members who have lost considerable amounts of money. Not. The half a dozen or so emails that came in support of the idea must mean that 1800 or so farmers don’t want it, and are thus happy with their lot. Frankly, with such a couldn’t care less attitude is it any wonder some senior execs ran off with the booty?

 

 

But there is a twist. DairyCo are currently out to tender with the intention of investing levy payers money on a “tangent” report to the one I am suggesting.  They have put out to tender for a report to cover seven of the UK’s largest milk buyers (three of which are co-ops) to examine their business strategies and performance to enable farmers to “make comparisons and decisions to suit their businesses”.  It will certainly be interesting to see whether the successful author and DairyCo succeed in comparing Milk Link, First Milk and Arla with Wisemans, Dairy Crest, Muller and Meadow, bearing in mind the differences between the businesses and the anomalies of co-ops.

 

The reality is DairyCo, with this report, are embarking on the most politically sensitive piece of work they have ever embarked on, which is, effectively, comparing Milk Link and First Milk with the others.  The results, in my opinion, will have to be communicated accurately, tactfully, and responsibly because total blunt honesty is likely to result in one or more of the famous seven fighting a fierce PR fire, with confusion and potentially panic spreading among its producers. It’s a very delicate area but at least DairyCo can say all seven milk buyers’ Chief Executives have discussed the matter and consented to the work, but quite what they actually tell them is anyone’s guess.

 

There is also no doubt in my mind that industry organisations will be gearing-up to use the findings to push what are seen as the “weaker” milk purchasers into merger negotiations. That, of course, points the finger in Milk Link and First Milk’s direction (again) as they are the last out of the processing blocks and (regardless of their balance sheets or financial performance) it’s easier for the rest of the industry to lecture co-ops on what they should or shouldn’t be doing. It comes with the “farmer owned” territory.

 

But an in depth analysis of co-op accounts to present their financial position in a form that can be easily compared to a plc accounts is a must. That will cut through the spin and bullshit which the likes of DFB managed to get away with.  I sense DairyCo top brass could receive a few high level representations before the outcome of their investigations is made public, and I hope it has some well briefed lawyers ready!

 

It’s just a shame such an exercise wasn’t carried out in the autumn of 2007 and 2008 when I was questioning DFB. Had there been one DFB’s demise may never have happened. But back to the investigation I would like to see into DFB. My perception is ex-DFB members are losing interest in the subject, and in view of the fact only a handful of DFB members have indicated to me they want to uncover the truth, I am liasing with the NFU to put a list of points to put to PWC.  If they decline to address all of our points we will have to reassess the situation.

 

I would like to think ex-DFB suppliers want answers. Like the activities which led to the firm’s demise documented, or the lack of governance of executives who basically did as they wanted and sucked farmers’ money out of the business confirmed. Or whether the DFB board were all sufficiently competent to direct the business?  Or whether PWC and/or HSBC personnel contributed to the demise, and whether anyone will be brought to task?  I feel some justice is needed for DFB farmers and employees, so no investigation and no report would equal no answers and no justice.  No one can change what happened, but perhaps it’s time for exposure of the facts and truth so lessons can be learned. 

 

Meanwhile, life goes on for around 1,750 ex-DFB producers who have elected to stay in the industry, and it’s clear their new milk purchasers are taking either long or short term views of their new friends.

 

When DFB folded its members panicked and were desperate to instantly find a milk buyer who would collect their milk the next day.  But having received their June supplies milk money the initial panic has turned to a longer term focus as many decide their initial choice was more like a one night stand with an ugly sister than a long term partnership with Cinderella. Already resignations are going in, and buyers are having to up their game or risk losing producers.  One buyer openly declared to another they intended to fill their boots and it was a case of make hay whilst the sun shines.  The lowest price we heard was 14ppl paid by Wensleydale Creamery until 18th July, when it was suddenly lifted to 18ppl. Another was 15.8ppl paid for June milk by brokers, Chestnut Dairies of Hull (who also supply local choice milk to tesco!); some are being paid 16ppl by one small liquid dairy, with a number of buyers paying between 18 to 18.5p with others in the early to mid 20p’s and just one at 24.4ppl.

 

However, with June AMPE at 19.1ppl if the milk is genuinely going into the likes of Westbury these prices are perhaps the best that can be achieved. Once again it’s about transparency, and fairness.  

 

Finally, early warning of yours truly’s attendance at this year’s Stoneleigh Dairy Event, where I will not have my usual stand but will be touting my wares on Speakers corner on 6th Street, courtesy of Dairy Farmer and Farmers Guardian . I look forward to supping Hollinshead’s tea, eating the finest assortment of sandwiches and cream cakes through the day (how about it, eh?) and to chewing the cud with you.

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584       

 

IP July 2009 DF

 

Time to find out how DFB ever got into this position

I’ve been writing this column for 16 years now, and have covered a multitude of issues. But few of them have resulted in the degree of hate mail coming my way as a result of my comments about DFB. Whenever I dared to question its finances or management, my inbox was pelted with angry comments from furious farmers. 

 

“What the ***k do you know Potter? How dare you question our co-op!”

It reached a head in September 2007 when I questioned the value for money in paying Chairman Rob (Garfield) Knight £409,000 for achieving a loss of £6.2 million and carrying a debt of £100 million. I stated it was “time for Garfield Knight to perform”. I then suggested the £60 million capital contribution paid by members could have already been lost and that the business was in a perilous state and on the brink of disaster.

 

In that article I suggested a value of 16p for every member £1 invested was a realistic value, and subsequently learned that Knight and Co had turned down a 32p in the £ offer from another processor to buy out DFB. Now the value is 0p in the £.

 

Well, if more DFB members had spent more time scrutinising their leaders instead of having a pop at me, then what happened on Wednesday, June 3, might not have transpired.  

 

The demise of DFB has left numerous questions I’d like to see, as a matter of urgency, an independent industry investigation into what went wrong.  This will uncover some truths, which should help future co-operative ventures rather than find similar ideas are simply binned because of what has happened.  Surely it’s in Dairy Co’s and Dairy UK’s interests to fund such an in depth report for the good of the industry and its future?

 

Everyone, in particular those who invested in DFB, need all the facts to analyse who took the decisions, who trousered the money – their money.

 

Neither PWC nor HSBC must be engaged to produce this report.  It must be open and honest and declare all the fees sucked out of the business.

 

There are many queries and I first call into question the conduct and ethics of The Co-op towards the UK dairy industry.  It is the second largest buyer of liquid milk to Tesco, yet has no aligned farmers or dedicated supply premiums.  It trumpets its social responsibility and fair trade for growers and producers but just try convincing a DFB member of those morals.

 

What of PWC’s conduct and role? PWC and others have executed the equivalent of a speedy ethnic cleansing of small and remote dairy farmers as they come to terms with the fact that no one has the social or moral responsibility to collect every dairy farmer’s milk, as they did in the days of the MMB. It is astonishing that immediately PWC were promoted to become the receivers they let all members leave immediately, which  instantly devalued the business by £millions overnight. Has it acted in the best interest of members at all times?

 

Where lies HSBC in all of this? Is its reputation in tatters, or did it do exactly what any bank would have done? We’ll see at the Dairy Event what reception it gets but I’ll bet the topic is not on their programme as one of the HSBC spotlight forums! 

 

What of Disciple Number 1, John Loftus? First he led farmers into the promised land at The Milk Group, then led a campaign to woo more farmers into co-ops and DFB, before becoming Council chairman. He then quietly slinked away like a rat from a sinking ship to join Wiseman well before the good ship DFB finally succumbed to the waves of debt.

 

And what of Disciple Number 2, Stephen Yates. I have read dozens of paragraphs of DFB spin, but a quote from Yates really takes the biscuit for me. In what to me is the dairy industry quote of all time, and one that rivals Cantona’s “seagulls following the trawler” quote, Stephen Yates stated that, in reference to DFB, “The Stone Age didn’t finish because they ran out of stones – it finished because they learned how to make bronze.” Maybe, Mr Yates, but the sharp cave men at the time didn’t then just sit back and watch someone else pinch the bronze, did they?

 

Yates is the man of the moment it seems, joined at the hip to PWC. Loyal to the carcass of DFB, while oh so desperate to join NOM and to supply DFB’s ex-Commercial Director, David Potts, at his exciting new yoghurt factory near Telford.

 

And what of all the DFB men who just blindly believed and trusted their “management”? Well I respect and admire them, and sympathise enormously. They should not feel anyone is sneering at them because all of us know it’s not a case of that. 

 

The collapse has split families, destabilised good businesses and devastated the almost 2000 DFB employees, most of whom did an honest days work.  It’s a fact that any co-op members who succeeded in taking their businesses forward whilst paying capital retentions are exceptional farmers. 

 

And what of the future? Well for the majority they’ll have a new buyer and hopefully a better price that will soon start to claw back some of the lost milk cheque. For the rest of the industry though ….  well the harsh truth is the UK dairy industry is healthier now DFB has gone. That’s a story for another day, another issue, though.

 

To all of those DFB farmers who have milked their last, and to all of DFB’s former employees who no longer have a job may I therefore sign off by wishing you well. You have been badly let down, and what has happened is not your fault. Nobody can change anything now, but people like me can strive to find out the truth, and to expose those who acted in ways that contributed to your downfall.

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584       

 

 

IP June 2009 DF

 

Ex-DFB man strikes out on yoghurt trail

 

The Dairy Industry Newsletter Annual Conference was another gathering of the movers and shakers involved in the UK and European dairy industry. Well most of them anyway. A quick look down the delegate list revealed that this year’s most notable absentee was from Dairy UK, with not a single representative there. There were strong rumours it had thrown its toys out of the pram over some caustic comment made by Mr Wilson. It’s a good job not everyone has that attitude else Mr Wilson wouldn’t have a conference! Come to think of it. . . I knew there was a good reason for me to not organise one either. On the same basis the only person guaranteed to turn up would be the person booked to do the lunch.

 

The conference presentation that grabbed my attention the most was from David Potts, the MD at NOM’s new £60 million yoghurt factory at Telford. What an apt name he has! Potts, who previously spent two years as Commercial Director with DFB, and prior to that 15 years as Sales Director of rival yoghurt maker Muller, in charge of a factory filling, er, pots.

 

But what an exciting project he is in charge of, and vision that he has - a far cry from the depressing story he would have been telling if he were still with DFB. The UK imports a staggering 3 billion pots of yoghurt a year (equivalent to around 500 million litres of milk) mainly from France and Germany. This means half of our yoghurt consumption is imported, with the market (value £1.1 billion) growing by a whopping 13% per annum.

 

NOM is an Austrian company started 100 years ago, and its new Telford plant can accommodate a doubling of output from its initial processing of around 120 million litres by the end of this year, equivalent to 600,000 pots. If import substitution is successful, then the UK will need another new yogurt factory in a few years time, said Potts.

 

Initially milk will be sourced from DFB. However, NOM’s plan is to get close to a selected group of dedicated farmer suppliers and to “communicate with them openly and honestly” about when prices move. Potts said they are even prepared to discuss the merits of the NFU contract as a base. I wonder whether NOM’s contract will agree to buy every litre at a contracted price or only a pre-determined litreage at a price? The reason I ask is that despite the often justified criticism of our so-called standard contracts I cannot think of another contract where the buyer agrees to take all that a farmer produces. This is the age of sale or return, remember. Email me if you can think of one.

 

But there was one question Potts posed to the cream of the European dairy industry, which not one delegate answered: “Why do processors and retailers put liquid milk on special offer and reduce the price? Consumers do not drink more milk as a result!” No, but they sell more “other” products, say the retailers. But should you pay the price?

 

On a European front Erhard Richarts, who many UK farmers won’t have heard of but is considered the encyclopaedia of market price reporting, highlighted the simple fact that EU milk supplies increased by 1.2 billion litres between 2007 and 2008, at a time when both EU exports and domestic consumption fell. If you want to know why your milk prices have fallen then there you have it in a single sentence. Too much supply, not enough demand. He subscribes to the view that low prices will simply reduce production, by the way. The UK’s scenario certainly proves that.

 

The Commission’s representative Jens Munch was questioned by me over what recognition the Commission gave to the increasingly active and vocal cross EU milk producer’s organisation – The European Milk Board (EMB). He commented that the Commission is prepared to listen to every group which has an opinion, for example on the Commission’s quota policy, following which it will judge the arguments. The EMB wants quotas to stay at the moment – because it sees the effect that uncontrolled rising production has on prices – and has certainly stepped up its campaign to retain the system,. More than 25,000 dairy farmers took to the streets outside Government buildings demanding “flexible supply control for fair milk prices” in what was called “The Milk Action Day”. In the UK only Scotland played a part in the Action Day, with 80 proud producers meeting 30 parliamentarians and a posse of journalists and camera crews. Following this all eyes will now focus on Scotland’s Milk Summit, scheduled for 27th May. Full marks to Dairy Farmers of Scotland for the active roll it has played in highlighting the milk price falls and trying to help find a solution. Milk prices across the EU have plummeted to levels that will eventually kill off a lot of farmers even if some stick in only because they do not feel they are able to do another job. At present the Commission is unwilling to re-open the quota debate; however, it has confirmed that next year it will produce a report to confirm whether recent quota increases have “disturbed” dairy markets.

 

Reference was made by the conference chairman to the revolting peasants (EMB farmers) in Europe, and the demonstrations that are currently going on. Would The Commission take notice?, he asked. To which Mr Munch commented that “the average EU milk price is still above the average seen in 2006?”.  Oh dear, if that is an insight into how the Commission thinks then, to borrow Apollo 13’s James Lovell’s famous phrase: “Houston, we have a problem”. Clearly there are no brains engaged at International Rescue HQ.

 

For more details of EMB look at www.europeanmilkboard.org.  I have to conclude that 25,000 farmers coming together under one European organisation sends me the signal that their own politicians and organisations are failing these grass roots farmers.

 

Finally, may I conclude with some unashamedly self-interest related publicity: I can announce (cue fanfare) that from 1st July (until further notice) all over 48 month cattle collected under The National Fallen Stock Scheme will receive a 35% Government contribution deducted at source. Coupled with the likelihood that there will be a collector and renderer price war in a number of areas these elements will reduce fallen stock collection prices. Throw into the pot the fact the annual membership for NFSCo has been scrapped, and I feel NFSCo can claim to be “doing its bit” to deliver cost effective solutions. But I would say that wouldn’t I?

 

Since the move from the RPA to us we’ve slashed costs dramatically. All I can say is bring on MP’s expenses next! I’d have a field day with them.

 

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584”                

 

IP May 2009 DF

 

Has de-regulation been a success for you?

 

Shephard. Redwood. Steven and Dare. Haskins, Davidson, Smith. McMichael- Phillips. Ross. Clarke. Young. Howie. They could be the names of a football team but they aren’t: any ideas?  Well all of them, and more, were the central figures in the dairy industry 15 years ago in the run-up to deregulation. Some names are long forgotten, if not forgiven by some. Only one still plays an active, but behind the scenes role.

 

For posterity and for those without good memories Gillian Shephard headed-up MAFF (gone), John Redwood was the Secretary of State for Wales (gone); Bob Steven and Andrew Dare were the top two at Milk Marque (gone), while Chris Haskins, Neil Davidson and Richard Smith were the most vociferous opponents to Milk Marque in the then Northern Foods camp (gone). Jim McMichael-Phillips was the leader of the Dairy Trade Federation (gone), which later became the Dairy Industry Federation (gone), and then the Dairy Industry Association Ltd (gone). John Ross was head of milk supplies at Nestle (gone from direct UK milk sourcing), while Roger Clarke did the same role at MD Foods (gone) while Colin Young did it at Avonmore (gone.) Scottish readers will have no difficulty in remembering Neil Howie as chairman of Scottish Milk (gone). And we haven’t even started to mention Waterford Dairies, Express Foods and Unigate MD – all, er, gone. 14 organisations mentioned, 14 gone – and there will be a lot more too: I’ve just picked the main flagship ones. Of the 11 individuals, 10 have gone. Only Andrew Dare still plays a part in the industry as a Wiseman non-exec director.

 

How 15 years can change an industry!

 

The party which started then was sure to stop at some time, as was the music. Initially there was euphoria for farmers – when prices went through the roof – followed by disaster as the “screwed processors” got their own back. Since then there have been hard times, very hard times, and, yes, some good times too – but not for long enough.

 

There have been successes and failures; inspired leadership and false Prophets; things to be proud of and things to be ashamed of: notably farmers being led like lambs to the slaughter by their co-op, having been told their investment was “for them” while actually it became investment for the benefit of the executives. Deregulation brought winners, losers, and crooks. But did it bring a better industry?

 

Let’s take a look at the bottom line figures, though. To do that I have studied an analysis by Steven Bradley (www.milkprices.com), who has spent most of the years since deregulation analysing milk prices and producing league tables. These are a thorn in the side for those who constantly flounder in the bottom quarter, and even more so for those who find themselves in the relegation zone. So, at the risk of upsetting any loyal supporter (or, for DFB, its suicide bombers who would sacrifice themselves for the cause of talking-up the co-op), here are Steven’s figures based on the total returns a producer would have received on a standard 1 million/litre contract for six of our biggest mainland milk purchasers / processors.

 

 

 

RWD (Eng)

First Milk

DFOB

Milk Link

Arla Foods

Dairy Crest

 

1995-96

 

£ 256,300

£ 243,400

£ 247,800

£ 247,800

£ 257,600

£ 257,000

 

1996-97

 

£ 260,300

£ 244,700

£ 242,200

£ 242,200

£ 257,900

£ 252,000

 

1997-98

 

£ 222,900

£ 209,800

£ 206,800

£ 206,800

£ 215,500

£ 210,100

 

1998-99

 

£ 201,800

£ 191,000

£ 181,900

£ 181,900

£ 195,600

£ 203,200

 

1999-00

 

£ 190,200

£ 178,000

£ 164,100

£ 164,100

£ 184,300

£ 187,700

 

2000-01

 

£ 177,600

£ 173,100

£ 166,600

£ 170,500

£ 171,500

£ 175,400

 

2001-02

 

£ 204,700

£ 195,400

£ 196,100

£ 191,000

£ 203,800

£ 200,500

 

2002-03

 

£ 182,600

£ 167,200

£ 169,300

£ 164,500

£ 183,800

£ 177,400

 

2003-04

 

£ 199,500

£ 182,000

£ 179,800

£ 175,600

£ 194,900

£ 190,400

 

2004-05

 

£ 200,100

£ 173,900

£ 174,100

£ 174,200

£ 195,400

£ 190,200

 

2005-06

 

£ 202,000

£ 175,700

£ 170,900

£ 170,700

£ 194,200

£ 191,500

 

2006-07

 

£ 188,300

£ 166,900

£ 167,000

£ 164,000

£ 182,100

£ 182,600

 

2007-08

 

£ 228,900

£ 212,800

£ 209,400

£ 214,800

£ 224,900

£ 221,700

 

2008-09

 

£ 262,600

£ 248,600

£ 240,000

£ 250,700

£ 260,500

£ 260,200

 

 

 

 

 

 

 

 

 

 

14yr total

 

£ 2,977,800

£ 2,762,500

£ 2,716,000

£ 2,718,800

£ 2,922,000

£ 2,899,900

 

                       

(Note: These figures include milk prices on standard litre terms, allow for the “Milk Marque” factor, include paid and promised “dividends” [Milk Link 2009, estimated], and include interest payments and capital retentions. But they do not include the value of accrued capital contributions or the “capital value” a farmer has in a business as a result of the contributions, where relevant. This will obviously differ significantly between the companies involved, varying from DFB’s very questionable values, through Arla’s currently turbulent valuation, to First Milk’s and Milk Link’s hopefully growing valuations.)

 

Steven’s figures do make interesting reading, but whether this tells you which, if any, milk buyers have done, or are doing, the “right job” is also for you to decide and debate.  The table does not tell you who is securing the best returns from the market place; who has a profitable and secure business, or not, and who is the best buyer to be with going forward. Another way to look at the figures, for those wanting to be mischievous, could be that  the direct milk buyers have paid too much for their milk over the years, and that they have done a better job in delivering better milk prices than the NFU and others have given them credit for, compared to the co-ops. That, as we know, has been as a result of political infighting, and the fact that Wiseman, Arla and Dairy Crest were all pretty much established businesses 15 years ago, while all of the three co-ops had to start from scratch.

 

Going forward it will be interesting to see whether the gap between the highest and lowest total milk price returns will widen or narrow. One thing the figures do highlight is that in the year ended 31st March 2009, if you ignore the figures from DFB (which is now 5ppl adrift of the others), the other five milk buyers are paying out within a much tighter band. This is a sign, maybe, that as the good, new businesses mature the gap between the established one closes.

 

And what of the future? My initial deregulation analysis cited nine milk buyers – all now gone. The reality is that in less than five years these six processers will be reduced, perhaps to three or even two. Who knows what will happen. Will the leader of the pack still be Tesco? Will Tesco even be one of the processors?

 

And as we enter year 16 how much further forward are we? Have we a better industry? I know my views, but let me know yours first. I guess “yes . . . and no” will be the summary.

 

Fundamentally it is clear dairy farmers are still price takers, and still voting with their feet about what they think of their position in the industry. This is generating the not unsurprising result that national production continues to head South.

There’s still plenty of work to do to get the industry right, therefore.

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584                

 

IP April 2009 DF

 

Another milk year arrives! Will we miss the last one? Well I’ll let you answer that. Production in the year to 31st March 2009 will comfortably be below 13 billion litres, at around 12.8 billion and representing around a 3% drop on the previous year. It will be the lowest production since the early 1970’s.

 

I’m in celebratory mode, however! Not over volumes, though, over quotas! Happy Birthday milk quotas! Did anyone clock the fact that they are 25 years old? No, I thought not. During those 25 years UK producers have paid a wholesale super levy of £235 million. You have hit quota in 15 of those years but have missed it in the last five consecutive years, with a headline super levy rate of -31.43ppl! Although scrapping quotas is on the EU’s agenda there are a growing number of people who believe they need to continue, mainly because production has to be capped.

 

The farmer representative body European Milk Board (EMB) is one such organization. It recently stated “The Commission’s approach to liberalise the European milk market is doomed to fail right from the start.” It is demanding a re-think on the phasing out of quotas and suspension of all increases.  The reason is simple – the decision to increase quotas and abolish quotas in 2015 was made during a time of booming dairy commodity prices with the desire for a “soft landing”.  We are now heading for a very hard landing.

 

Dairy UK’s Jim Begg is talking of the ending of milk quotas as “releasing the brake on the European dairy industry”, which will “herald a new era”. He believes that “quotas actually stop the EU dairy industry growing”.  The EMB wants production to be adjusted annually according to real market needs and not political aspirations or economic analysis.  In response to comments from the likes of Mr Begg and the politicians charged with making (or wrecking) the dairy policy, EMB points out that proposals and justifications for scrapping quotas usually come from people who have a vested interest in purchasing milk as cheaply as possible. 25 years on, and the debate still isn’t settled either way, even if a decision over their future has been.

 

What of the prospects for the new milk year, though? Mm. . . not good, I would say.

 

After some initial hiccups and some skepticism (from me and others) it seems that Tesco has certainly come up with a contract and model which is unique throughout the world, and it is certainly encouraging its core contract producers to expand production without limits. By the time you read this we will know the outcome of its latest pricing round, and unless it has gone completely against what the rumour mill is indicating it does appear to be giving its farmers the positive signals on which to base a long term future in dairying. Tesco isn’t perfect, of course, and not all elements are controversy-free (Promar figures, Freshnlo) but the goal now is to persuade Sainsburys, ASDA, Morrisons and others to follow the Tesco model.

 

But beware focusing too much attention on the big four while ignoring the discounters like Aldi, Lidl, Netto and Iceland! They have fallen under the radar and are currently causing chaos in the market by price cutting and putting massive pressure on suppliers. They should go easy in my opinion if they want security of supply: instead of noisy protests and resignations many dairy farmers are leaving quietly, encouraged by the boom in cull cow and beef values. Unhappy, fed-up farmers who lack confidence are slipping away quietly because they have reached tipping point.  The early 2009 cuts were, by and large, viewed as being a big dose of medicine, but if more is dished out in April and May farmers will shun it and allow their dairy businesses to die. UK production will head even further south. It’s time to fix the leak in the roof, but the sun is not shining. Only retailers can put in mechanisms, contracts and prices which will insulate dairy farmers from volatility and instability and, in so doing, protect their supply base. British producers can compete with any European dairy farmer given the right incentive, milk price and contract. The British processing sector (with a bit of culling and rationalization) is also equally equipped to compete.

 

Despite the trumpeting, mainly by UK processors, of how positive the UK dairy industry’s future looks, farmer confidence is low and farmers are not convinced they will receive a sensible reward for their efforts and a payback for any long term investment. Will UK production and its industry shrink to 10 billion litres or less, focused mainly on the fresh market?  It’s certainly a real possibility, but if it does it will be extremely painful for all involved.

 

At last year’s Dairy Event, Arla’s Jonathan Ovens said that it would be Spring 2010 before UK milk production stabilizes. That’s not so far away now, and production is still falling. The seriousness of the 2009 milk price reductions will not become apparent to processors until Winter 2009/2010. How many farmers, for example, will decide not to make silage this summer, and will simply graze out the summer months and send their cows to market at the end? We will only see when September’s or October’s production figures are out.

 

Never mind, though, say some! The farmer’s share of the bottle is the same as it was, or better, so that’s all right then! I don’t think so! Talk of the share of the bottle received by farmers is very misleading in this economic environment, and those promoting the idea should wake up, look to the real world and assess the whole picture. We have to ditch the idea that the UK milk battle is shared out according to some perceived percentages. With 30% of all liquid milk sold in 2008 in the UK having been on promotion, and an indeterminate volume of cheese sold the same way, there is no point in our economists trying to justify this worthless argument. If ASDA and Tesco sell two litres of “Value” milk for 87p what is the point in working out what is the farmer’s share? It still won’t be enough for anyone to make a profit. And this Value milk is a real and growing problem - with both ASDA and Tesco now claiming their Value ranges currently stand at 7% of volume, and growing weekly.

 

Finally, some Single Farm Payment trading news. This market has been very active this year, and still offers tremendous value to buyers. The only trading remaining between now and the 15th May 2009 claim deadline relates to Naked Acres, which are making between £40-£50/acre in England.  There has also been some silly talk of the SFPs ending in 2012.  In my opinion SFPs will continue beyond 2012, and I fail to comprehend DEFRA’s extreme view that it should end.

Frankly there is more chance of all 27 member states seeing the entire CAP re-nationalised or milk quotas seeing their 50th birthday!

 

Comments, as ever,  to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

IP March 2009 DF

 

My heart was pounding against my Kevlar lined waistcoat as I crawled the final few yards to the door. The smoke bomb had covered my trail, and crouching low, I glanced quickly inside. Silently, slowly, and constantly looking around for snipers or anti Potter booby traps I clawed my way inside. “Welcome to Stourton”, said the nice lady behind the desk.

 

The thought of me entering Arla’s HQ during the reign of David Naish, Tim Smith or Peter “can my name be mentioned without him fulminating?” Walker would have been unthinkable [ful·mi·nate: 1. To issue a thunderous verbal attack or denunciation: 2. To explode or detonate] Which, apparently, he did.  But this month saw me not only allowed in but positively welcomed by Arla’s equivalent of The Cheeky Girls (aka Hanne Sondergaard and Nicola “no longer prickly Nicola” Hedge) to a no holds barred tour of its amazing factory, twinned with a frank and open discussion about Arla and the UK dairy industry with Peter Lauritzen, CEO of Arla in the UK. What a change in attitude from the bad old days! They even let me out.

 

At a UK level the firm’s ambition is clear – to be the No.1 dairy processor, and on what I saw and heard I stand by what I said in last month’s article: Arla will be here for the long term. Current capacity at Stourton is an impressive 450 million litres, and it is certainly a factory set well for the future with an ambitious investment programme in new dairy products and a policy that will “ruthlessly and relentlessly eliminate waste.” Current staffing for Arla in the UK totals 3,200, and with 1,400 supplying farmers this is a clear indication of the number of jobs each dairy farm creates. Arla UK represents around one third of the global Arla branded milk processing, and the firm is involved in more than 100 markets worldwide. It’s global goal is to emphasise  the naturalness of its dairy products and to bring consumers Closer to Nature, and I have no doubt that its management will succeed in doing that. The site, the management, the company’s ethos and determination to succeed are impressive indeed.

 

How anyone can compete with that I do not know. Oh, er, actually I do – by having equally excellent and modern factories (Wiseman) or through a similar diversified brand programme (Dairy Crest). If we  exclude Milk Link and First Milk (as they don’t really do what Arla does) we come to, er, Dairy Farmers of Britain. Sorry, but compared to both Arla and Wiseman, DFB’s liquid plants (let’s exclude cheese here) are just not in the same league.

 

What we have here, to mix my metaphors is the chickens coming home to roost and the foxes in the DFB pen, causing havoc. In my opinion it’s time for DFB to contact a specialist who can come in for a couple of months and cut the best deals he or she can to satisfy the bank and pass the remaining  members into safe hands. Or perhaps that’s what PWC (Price Waterhouse Coopers) are working on.  Maybe by the time this article is published someone – that person - will already have been appointed. But who? Well here are a few names that have crossed my radar in recent days – Neil Davidson, Chris Bird, Barry Nichols, and even magic Malcolm Smith! What are the odds on him I wonder? Whoever it is that person needs to be a very broad-shouldered, hard-headed industry figure, but also someone who the members can trust and believe will lead them to a better, more secure future. 

 

DFB is rumored to be receiving bids for some of its remaining processing plants  for well below book value, so it will be a huge challenge for a business which is no longer farmer owned but back owned to clear the bank debt, let alone repay a little to members for their capital contributions.

 

No doubt DFB people will rubbish this. But remember the claptrap it put out following my October 2007 analysis of their position, when an unknown Alistair Clark of Farmington Business Services Limited, Cheltenham, wrote a letter to this publication with a heading stating that “Potter has got it wrong on interpretation of DFB figures” claiming DFB “farmer members should be very pleased with the growth of their £49million investment” and claiming DFB was worth in excess of £100million”? A hum; ‘nuff said.

Having put the official for sale board up DFB’s bankers now realise the harsh reality of what DFB senior management can achieve and by the time you read this article I pray parts of the co-op have been successfully sold and the money banked. Deals will need to be concluded by mid March in my opinion, as DFB’s engine is coughing on an uphill road and there’s minimal fuel in its tank. 

 

Ok onto other matters, the NFU used its Conference to unveil its latest corporate logo. If you haven’t seen it yet it resembles a rainbow. My first impression was that it reminded me of the 1970’s TV series Rainbow, and I wondered whether Bungle and Zippy were going to make their way onto centre stage in front of it. At a cost of £60,000 to £70,000 I am in the wrong business!  I now understand the logo is supposed to represent “from the earth to the sky” but I am sorry, NFU, as much as I, and others, will jest at the cost and look of the logo (a primary school competition could have produced one at a fraction of the cost) I do feel that once again you have missed the opportunity to completely re-brand the organization.

 

I know some of you may think I am like a stuck record on this  subject - having first raised it in the early 90’s -but the word “union” is old fashioned and conjures up the wrong image. Don’t agree? OK, ask yourself what you think of The Mineworkers Union, or the Transport and General Workers Union. Do they conjure up positive vibes?

 

Finally, thanks to all those who wrote in in support of Dairy Co., after my little value for money quip about it and the 7th Heaven lap dancing club in Glasgow. And yes, I do agree that hosting the next Board meeting  there to allow for direct comparison is a terrific idea. Apparently some of the females within DairyCo were a little disgruntled over last month’s reference, but not I doubt, as much as the wife of the farmer involved when she read the article and cross checked the credit card statement. 

 

The next venture for DairyCo, according to Tim Bennett, is evidently “an ongoing analysis of the performance  of milk processors - both plc and co-op. The chairman has also said that “they would be able to advise producers who to sell their milk to”.  Blimey. Controverial this one! They’ll be about as welcome in some quarters as I would have been at Arla in the bad old days!

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

 

IP February 2009 DF

 

The new dairy market realities were decisively delivered to farmers early in 2009, as ex-farm gate milk price cuts rained in. First to buckle was the liquid market.

 

Arla’s press release gave no facts and figures – leaving it exposed to NFU flack, which it had no hesitation in dishing out. Wisemans, meanwhile, were up-front with their calculation. This is what they said:

 

As a yard stick, cream equates to 5% of the volume of milk purchased, but the problem for liquid operations is that less than 25% of it is sold to retail customers, the rest is sold in bulk. Between July and September 2007 the cream price averaged £1400/tonne, but by December 2008 it had dropped 43% to £800/tonne. This reduction translates to a 3.2ppl equivalent on every litre of milk. Wisemans implemented their first price drop in 30 months, with its 2.2p cut, passing back 69% of the reduction and absorbing 32% itself.

If no further movements take place until 1st April the 2ppl cut by Arla on the 5th January equates to a whopping 2.9ppl cut on the 1st February on a like for like basis, so while the 2.2ppl Wisemans cut and the 1.75ppl cut  from Dairy Crest on 1st February make the headlines Arla have pocket an additional 26 days worth of cheaper milk. The NFU’s claim that the Wisemans cut is the largest is thus not, strictly accurate.

 

Conscious that I’m now sounding like Wiseman’s PR man I’ll move on, making a mental note that I owe them a kicking sometime.

 

All eyes now turn to Tesco and its 1st April contracted price. As much as I have questioned whether Tesco will stick with the deal I am reliably informed that it is “rock solid and safe”, especially while the Frenchman Alain Guilpain captains Tesco’s dairy ship. However it will be interesting to see how Tesco and Promar maneuver, and I would like to know how many times Tesco top brass have questioned Guilpain on how they ended up with such a vice like grip on the UK dairy industry, and paying a hefty premium compared to other retailers.

 

The new Tesco price is, of course, based on a mathematical calculation derived from a pre-agreed formula with the all-important guarantee that Tesco will not pay a price below the cost of production. On today’s costings (and from those who claim to understand the Tesco formula pricing) it would appear a 1ppl fall in costs is likely unless costs rise again soon -  which they are doing as I pen this article. However, for Tesco (or rather Promar) to find a 1.5ppl price reduction, let alone 2ppl to match the other non-Tesco farmers, will be near on impossible, and, if suggested, will cause a riot. So if, on 1st April, Tesco also faces that 3.2ppl equivalent price drop on cream will it take 1.2ppl off the farm gate price and stomach the other 2ppl? Remember other retailers are already buying their milk cheaper - ASDA only pays 1ppl above the Arla standard price, for example. Will others step up to the plate and increase what they pay? My money is firmly on one or more of the other big gun retailers stepping forward and increasing its premium, but only if we ask for it. Let’s hope all the effort put into creating some stability in 2007 is not thrown away overnight.  Let’s also hope for more contracts to mirror the Tesco model, although in this economic climate it may indeed remain just a hope. If you’re still to be convinced about the pressures in the marketplace here’s a story that will put you right. It relates to a six month bulk milk contract, which recently came up for renewal. The existing English processor was paying a top end price to its farmers and delivering and transporting the milk for 30.5p/litre. At renewal it was expected the final price would be “a shade” lower. But with an offer from a rival at 24.5p it represented a whopping 20% reduction. It should come as no surprise that the winner of the contract was United Dairy Farmers from Northern Ireland (whose farmer price for December was 17ppl). However  note my informants claim this milk will come from one of the mainland co-ops and will not directly be milk shipped over from the Province avoiding the 3ppl transport charge.

 

As I commented at this year’s SEMEX Conference it will be a bumpy 2009, with processors and farmers both feeling the pain. My money is on consolidation with a stream of forced and voluntary mergers, acquistions and rationalization and fingers crossed for no complete failures despite cracks appearing in one or two businesses!  These deals could involve almost any processor, plc or co-op but my money at the moment is on Arla being a significant predator.

 

January marks the start of a new era in milk price volatility and one in which events in China will be crucial. It’s melamine scandal, which killed six babies and made more than 300,000 Chinese ill, has resulted in two of the men involved being sentenced to death. The scandal has severely damaged China’s image, agriculture and food industry, and has seen more than half of its milk powder requirements switch to imported. Chinas 2009 imported powder requirements are predicted to reach 100,000 tonnes, which is twice the exports of the mighty New Zealand to China in 2007.

 

Now I turn to milk quotas, and the future of the European 27’s dairy industry. Most trade associations, particularly here, are convinced quotas must and will end on the 1st April 2015. In April 2008 the Commission increased quotas by 2%, and ten months later the market is “spiraling out of control”. In November a further 6% increase over the next five years were approved by the Commission. This decision was made during a time of booming dairy commodity prices. Today the majority of European dairy farmers do not want additional quota. Now, because of collapsing markets, the Commission has been forced to intervene to inject some stability by re-introducing export refunds - clearly a move in contradiction to its other decisions, and showing the “experts” have lost control and sight of the supply and demand balance.  The truth is the EU cannot compete on the world dairy market and if the Commission took no action it could see a collapse of milk market that has been stable for 25 years. It certainly does not appear we are in for anything like a soft landing.

 

Here in the UK, all of this has had an effect on the quota market. Just when we thought prices of 0.15ppl to 0.2ppl were the norm there is a sudden change. Quota sellers are few and far between and 0.3ppl has become the norm. Why are some buyers suddenly so keen? Well, almost to a man they feel at £3000 for 1 m litres it’s worth a punt, with many believing they could still stay, or that there could be some form of sweetener or compensation when quotas are eventually ended.

 

Finally, to the conference again, and the REALLY big talking point on the second day. Dairy Co’s chairman, Tim Bennett, claimed the industry was “precariously poised” and extolled the benefits of farmers paying their levy, which averages £430 per dairy farmer.

That same evening several farmers decided to go into Glasgow and were “forced” (so we were told) to go into the 7th Heaven Lap Dancing Club. One farmer apparently racked up a bill of  - yes - almost £430, begging the obvious question as to which was the better value for money! Answers to ianpotter@ipaquotas.co.uk or fax 01335 324584!

 

 

IP December 2008 DF

 

Back in early November 2007 my weekly bulletin led with a story entitled “New High Court Rock Show promoted by Arla”. This confirmed that Arla had commenced legal proceedings for £2million damages from dairy farmers David Barnes and Peter Willes for allegedly breaking its milk contract.

 

The basic facts are as follows: a not very happy David Barnes served notice to leave Arla in March. In June 2007 he learned he had not been selected to be a Tesco supplier, despite other neighbouring farms being offered a Tesco contract. On the 18th June Barnes took action, sold his dairy to Peter Willes, and became the farm’s contractor. Willes – who was never under contract to Arla – immediately sold the milk to Meadow Foods from 20th June, who then sold it back to Arla for close to 35p/litre. Arla was furious; informed its lawyers and issued a press release informing the world that war had been declared.

 

One year later (during which, remember, it dropped all of its major customers and most of the rest of the industry in the biggest OFT pile of poo possible, and saw the inquiry it instigated into the Scottish middle ground market against Wiseman and five other dairies binned by the same organisation) Arla has yet again ended up with egg on its face following a week long High Court hearing.

 

Its case rested on the fact that it believed the new owner of the unit is contractually obliged to continue to deliver milk to Arla, and since it had lost the milk it was entitled to claim for losses. The claim failed, with the judge commenting that “the contract allowed Arla to pay significantly less for milk to suppliers (dairy farmers) subject to the terms of the contract than they would have to pay on the spot market.”

 

But that wasn’t the end. Barnes and Willes not only succeeded in defending the £2million claim but Barnes also succeeded with a counter claim for £53,425 plus interest (total £65,000) based – get this  -  on “under payment for supplies of milk between November 2006 and April 2007”. This claim revolved around bonus payments and deductions on somatic cell counts .  The Court  decided  that the milk tests were not “valid tests"  because the samples taken by Arla were not representative of all the milk collected. This is reason enough for all of you to study this judgement . The consequences of this judgement for milk buyers and farmers will be significant, I think.

 

The whole saga is a real life David and Goliath story, which, if it hadn’t caused so much pain and stress on the parties involved might even be funny. Certainly the ridiculous joint (non) statement issued by both parties was. Hilarious, in fact! For David Barnes to comment that “I would encourage any dairy farmer who is thinking about selling his business to communicate closely with their milk buyer as early as possible” is, frankly, a joke  and i guess is   linked to  some  gagging order. That’s because when Barnes sold his farm he told me he had left two messages for Arla’s then head of milk purchasing Peter Walker to contact him, both of which Walker ignored (as he often did). Barnes then left a third message stating that Arla needn’t bother to collect the following day’s 50,000 litres, nor the rest of the farm’s 18m litre annual total. This message, however, did elicit a response! So, what Barnes really means to say is this: “I would encourage any dairy farmer who is not happy with the way his milk buyer treats him to try to communicate with the buyer and if he is arrogant and disrespectful enough consult your lawyer and make a similar move to the one I made.”

 

I have studied the judgement of Sir Edward Evans-Lombe, and I feel it is such a landmark case that I will shortly post it on my website (www.ipaquotas.co.uk) under the heading of “Arla v Barnes & Co.” Look out for it.

 

In the judgement,  paragraph  29(13) is worth studying if only for moral reasons. It states that “Ian Cameron of Arla telephoned Peter Willes on the 19th June, and continued to offer premium prices for the volume of milk that I would be producing and tried to persuade me to renege on my agreement with Meadow Foods”. How honourable.

 

The bully boy tactics of Arla, against its farmers, which is referred to by the judge as the largest dairy co-op in Europe AND IS FARMER owned   is astonishing. How did Peter Walker, a retired old has-been, persuade Arla to take this case so far, given it was advised at the outset that its chances of success was around 25%?  Was it bad advice, pig-headedness or simply the arrogance of those involved? Anyway, I estimate that based on costings I had for a case drawn against the RPA a year ago, plus the counter claim, Arla will be faced with a bill of at least £500,000. How that, and the humiliation, must hurt! In the words of one Potter friendly Arla employee from the Leeds office: “You can’t get from one end of the corridor to another for all the toys and dummies which have been thrown out of the pram!”

 

Now First Milk. I, plus some proper journalists, were invited to its AGM Dinner & Conference in Haverfordwest in early November, where 420 or so farmers turned out - the largest gathering of dairy farmers at any dinner. TB was a hot topic, with the admission by Elin Jones that the Welsh Assembly hadn’t helped itself by paying average cattle compensation values as opposed to the tables. A wildlife control programme would be announced in early 2009, she said. Talk of milk prices weren’t far away either. There weren’t any flowers bought for the conference, and there was no flowery talk in the presentations either. There was plenty of openness and honesty, especially from CE Peter Humphries and Chairman Richard Greenhalgh, no matter that the message, with world prices being what they are, was pretty sobering. Humphries set the scene that the co-op would be moving milk out of cheese into liquid, and said that its cheese business would concentrate on its brands. He also said the ingredients market would remain depressed in 2009. But he, and Richard Greenhalgh, were upbeat, declaring that “it was part of First Milk’s strategy to be able to sit round the table with retailers with cheese and liquid to sell”, and that it was well placed to cope with the changes in the industry. At the AGM the ousting of Richard Davies saw the only First Milk English farmer board member gone, leaving three Welsh and three Scottish.

 

Now DFB.  Happily it has carried out some surgery and I am pleased to report Rob Knight claims he did the honourable thing and walked away with significantly less of a payoff than he was contractually entitled to. He has therefore left with some respect. So what happens now?  I hope very soon DFB will do a deal for part or all of the business. But whoever takes it on it has to be the right deal for its business and, for a co-op, its members. 

Finally, Merry Christmas and here’s wishing for a happy, prosperous and turmoil free 2009. Let’s hope there will be a dramatic upturn in world dairy commodity prices and UK milk prices will hold firm.  The last thing we want for Christmas is lower milk prices!

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

IP November 2008 DF

 

I initially wrote this article before leaving the office to watch England win their World Cup qualifying game in Belarus. Not long after England popped in the goals, so an unprecedented barrage of emails and telephone calls pop into my office from DFB members following its announcement that it had insufficient cash to pay interest on its Members Investment Accounts and Members Capital Accounts. 

 

This is nothing short of a disaster, but also it’s vindication for critics like myself who have frequently questioned aspects of the business and called the Co op to account over the last few years, and who have been lambasted by DFB storm troopers for doing so. For all involved in DFB, though I would have wanted nothing more than to have been proven wrong. Alas, though, clearly I haven’t been.

 

On the 4th September DFB continued to seduce members - especially those thinking of resigning - that soon they would receive their first interest payment on capital invested of 7.5%, and worth an estimated total of £1.8m and a shade under 0.3ppl. The DFB faithful would, for the first time, see some of their hard earned cash returned. Then, on 15 October, came the bombshell in the form of a dreadfully worded notice from chairman Rob Knight saying the interest would not be paid. 

 

Clearly DFB do not have the funds and its bankers have tightened up on it, refusing to advance more funds.  The board were looking down both barrels of a gun.  One barrel said “pay the £1.8m but to do so cut the milk price (at a time when others around them have achieved ex-farm gate price increases)” and the second said “abandon the interest payment and temporarily maintain the standard litre milk price”. 

 

Rob Knight’s spin in announcing that the bad news was connected with the current global economic crisis is just bunkum - typifying the sort of clap-trap he and his team have spoon-fed to members via their weekly Gospel of Good News. More relevant, surely, is the admission that DFB’s management has gambled by paying members additional money before it obtained the necessary amount from customers. Customers who have paid-up, remember, on the basis DFB members need the money.  How do you think they feel knowing that none of the increase has been or will be passed back to dairy farmers?

 

The more commercially savvy DFB Council members have known all along the money was never there, and was offered only to keep DFB on a par with its compatriots e.g. Milk Link who are expected to pay at least £4m (worth 0.4ppl) to members for the second consecutive year, and First Milk having paid £1.85m. 

 

What then, is the way out of the situation? Well member confidence is now desperate, and as with the banks, it is the crisis of confidence which has the potential to do the most damage. Northern Rock’s difficult business position didn’t bring it down, remember, it was the queues of people wanting their money out that did the damage. The same will be true for DFB – its members wanting out.

 

If I was a member these would be the questions I would ask, therefore, and the actions I’d like to see taken.

 

Firstly, clearly, heads have to roll, and DFB needs to get those who have failed them out. The current management team and Board at DFB has failed its members and there is almost a zero chance of farmers seeing a milk price increase, and a temporary maintenance of the current milk price is the best they can hope for.  Knight has to go first, and should end his career as honourably as possible. By that I mean WITHOUT a payoff. Just like the failed former bank bosses he should waive his right, and leave with at least some respect.

 

If there’s no chairman for a while, then, well – things can’t get much worse, surely (hopefully). Maybe more than one head needs to roll, but aside from Knight, these do not need to be as a knee jerk reaction to make members feel better, but as part of a recovery master plan, where someone capable takes the helm of the DFB ship. 

Secondly, after that Knight goes a new Knight needs to arrive: a White Knight to facilitate DFB’s take over. That’s undoubtedly the best outcome for its farmers who have in excess of £73m invested. But a merger with who? It will be a real challenge to broker now.

 

Third, DFB needs to issue an immediate financial update, to show whether this year will be a break even year for DFB, which has been promised by their management. If it is on course, that will take some pressure off and boost confidence. If it isn’t – then, well, we may as well have all of the bad news now, instead of a bit now, and a bit more later.

Fourthly the remaining Board must immediately dish out all the bad news medicine to members in one hit at the same time as it confirms its plan to get out of the mess which must be a bank approved plan.

 

Finally, DFB should fix the hole in its business roof while the sun is shining and there is at least some stability in the UK market. More volatile times are around the corner.  The DFB Board had the opportunity to do it 12 months ago but shied away from it.  It now has to fix the roof pretty quickly, and time is not on its side.  It’s not quite rock bottom for the business but the position is very, very fragile. But DFB must not be allowed to fail because if it does every dairy farmer in the UK will catch a cold.

 

In the interests of balance I feel compelled to comment on First Milk’s results, which were released shortly after I wrote the last article.  There is no argument that, despite the unknown cost of the failed merger with Milk Link, First Milk is starting to deliver reasonable results.  Its member debt is only 33% of its total debt the remainder coming from the banks on which it has to pay commercial rates.  This compares to DFB, which has at least 61% of debt coming from members and former members

 

I could pore through the numbers, but there’s not enough space here. I will highlight one area which had a good thrashing by other commentators, however - the issue of director’s payments, and chief executive Peter Humphrey’s £395k salary, (up from £262k in 2007) and chairman Richard Greenhalgh’s  £108,333 remuneration (£85k in 2007).  My take on this is that if they are the right people to do the job these payments are certainly not excessive. In any case the total paid to the top three personnel at First Milk compare very favourably with DFB’s, and to a certain extent Milk Link’s former chief executive Barry Nicholls, who received pension contributions of £782k.

 

The bottom line is this: do First Milk’s members feel it is achieving its aims?  I think and hope the answer will be yes, but I’ll have to wait to see what the verdict is at next month’s agm conference!

 

Finally, the results of my Dairy UK Conference soapbox straw poll: “Dairy in the Dragon’s Den – would the result be positive?”  Well according to delegates at the Dairy Event conference - who were predominantly processors - almost 2/3rds of the votes said the entrepreneurs would certainly NOT be falling over themselves to invest in the UK dairy industry.  If the conference had been full of farmers that figure could have been 100%. Sadly until the investment case improves UK milk production will continue to decline.

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

IP October 2008 DF

 

What did you find to talk about at The Dairy Event? You shouldn’t have been short of subjects! To me it was dominated by five key topics, namely (1) Dairy UK’s execution of its independent chairman, The Rt. Hon. David Curry MP, (2) the lack of confidence to invest among farmers, (3) imported milk (4) the unwillingness of Tesco contracted farmers to sign up to the Promar costings scheme, and (5) what a desperate shame it is that quota prices are so low. (Editors note: Are we sure about that?)

 

First, Dairy UK. Four years ago Dairy UK came to being after a difficult birth. Sir Don Curry, the founder chairman, had difficulty in setting up the cross industry trade association, so it’s little wonder he feels his work has been undone by the same industry leaders he tried so hard to bring together. A coup of up to four board directors (two plc and two co-ops) ousted the chairman and installed one of their own - Dairy Crest’s boss Mark Allen. They banked on the fact that David Curry, being an MP of a party which is almost certain to be in power within 18 months, would leave quietly without a fuss. Instead, though, he was outraged to receive a visit on holiday in Bordeaux from the axe-wielding Allen, and to be dispatched to the Dairy UK scrap heap without receiving a simple answer to a simple question: “Why?”. There is still no satisfactory public answer, just the suggestion that “he was too pro dairy farmers”. Curry subsequently committed his thoughts on paper to the board of Dairy UK, leaving no doubt as to his annoyance.

 

Several people in addition to David Curry were unhappy with the move and how it was made, including Sir Don Curry, The NFU of England and Wales and other respected MP’s like Jim Paice, MP, plus several others. The current strapline from Dairy UK is “Proud of Dairy”. The way David Curry was handled means we can’t currently be “Proud of Dairy UK”, alas.

 

The NFU duly took its well publicised decision to withdraw participation from Dairy UK and its Farmer Forum, which selects two members to sit on the board of Dairy UK. That was Gwyn Jones and a bloke called Roger Evans, who, like me, also fancies himself as a bit of a writer apparently.

 

Who replaces Gwyn, and how much representation farmers get remains to be seen. Clearly, the big processors have a vice-like grip on the Dairy UK board, and some claim that is the case with the Farmer Forum too. If you take out the NFUs, by and large the others involved in the Forum have other hats to wear - paid by those same processors. The anti FF view is that “their appetite to tackle difficult issues on behalf of farmers is limited”. Translated, that means they don’t put their arses on the line for farmers. If this is the case (I don’t know - perhaps Roger would like to comment?) and farmer influence within Dairy UK is not worth the paper it is written on let’s not pretend differently! So perhaps that is how life will be in the future: DairyCo supplying farmers with economic and technical knowledge, the various NFU’s representing farmers and tackling tough issues on their behalf, and Dairy UK representing processors.

 

Mark Allen declared that “the departure of the NFU changes nothing for Dairy UK and it is business as usual.” That may be how he sees it, and how Dairy UK likes to portray it, but the farmer perception is that this was handled badly and that the appointment of a processor means Dairy UK is once again an organisation representing processors. Taking-on this role certainly carries risks for Dairy Crest, because if Mark Allen is seen to be anti-farmer and pro-processor he risks a revolt by Dairy Crest’s farmers. And it can hardly afford to lose more direct suppliers.

 

Now confidence and milk supplies. Well, we don’t need to say much about confidence and milk supplies, save to say there isn’t much of the former, and hence not much of the latter.

 

Making-up the shortfall are imports from Northern Ireland, but the milk is Non-Farm Assured. Shock horror! What will the effect of not having one or two of the right ticks in the right boxes mean? Is the milk bright pink as a result?

 

Currently 40 tanker loads a day equivalent to (1million litres) is coming in.  Other milk is coming in from Belgium and France, but the advantage of the Irish milk is it can be sold as “British” (even though Ireland isn’t in Britain). It should not carry the red tractor logo or claim to be NDFAS, milk though. But it’s cheap, costing between 30.5p to 32.5p delivered to factory, and giving an ex-farm gate price in Northern Ireland and Belgium of around 22ppl.  News that just about every man and his buyer, including Wisemans, First Milk and Lactalis (but not Dairy Crest) were importing the milk certainly surprised several producers at the Dairy Event. Let’s hope and pray no importer pushes their luck and brings the industry into disrepute. Oh and please don’t be fooled by the milk buyer who says “we would never import foreign milk” because at least one has approached a milk broker requesting they sell them their farm assured milk, suggesting they make a turn by replacing it with cheaper foreign milk.  Where there’s a will (and profit) there’s a way.

 

Finally, a few lines following my invitation to the official opening of Wisemans’ Bridgwater plant.  It was, quite simply, mind-boggling. On the brink of science fiction, even. It cost £80 million and requires a further £20 million (plus the small matter of an additional 250 million litres/milk) to hit full potential. No retailer can fail to be impressed, and it’s little wonder Wiseman has won new liquid contracts because comparing the plant to some of its competitor’s ones is like comparing Chelsea to Burton Albion FC.  The Burton faithful turn up each time they have a cup match hoping for an upset. Occasionally they get one, but deep down they know they’re so uncompetitive in comparison that 99 times out of 100 they will be beaten before they’ve kicked the ball.

 

Following my weekly newsletter jottings on my Wiseman visit the nice PR chaps and chapesses from Arla contacted me, inviting me to visit their “new Arla” factory and HQ at Leeds. With any luck the “new regime” will let me out as well. The old one wouldn’t have done.

 

Finally I was invited to do a 5 minute soapbox at the Dairy UK Conference, where delegates were asked to vote on my topic “Dairying in the Dragon’s Den – would the result be positive?” Did delegates think that four of the UK’s most successful entrepreneurs would fall over themselves to invest in the UK dairy industry, I asked. Well, what would you say? Email me, and I’ll tell you the results next month!

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

 

IP September 2008 DF

 

From hero to zero, and below, in less than 18 months. That’s where Tesco finds itself right now having slashed milk prices by 31% in a bid to recapture lost sales. Its move to cut prices from £1.44 for two litres of its branded milk to 99p for two litres of the Fresh’n’Lo brand caused a price cutting disease epidemic to sweep the UK in less than three days.

 

Most of you reading this article will hate Tesco with a passion. But you have to ask whether it has caused a problem, or is attempting to fix a problem. I think it’s the latter, unfortunately. The fact is discount chains like Iceland, Aldi and others have been taking customers from Tesco at an alarming rate because of the credit crunch, attracted by on lines like “value milk”. The Fresh’n’Lo deal is undoubtedly a clever move by Tesco, because it can claim it is not discounting its own label semi skimmed.  However, don’t buy into the idea Fresh ‘n Lo is not in this case a Tesco brand when, in England and Wales, it is only sold in Tesco stores!

 

What has happened is not entirely unpredictable, though. At the same time as the credit crunch we have an aggressive Wisemans’ with a new factory to fill, and a brand of milk - namely localchoice - which Tesco seems to favour, and which Wiseman does not want to see grow at all. Tesco could do what it did because of our industry’s liquid milk overcapacity, and the fierce competition between milk buyers to pinch business.

 

Understandably farmers are concerned, and there are already people questioning Tesco’s commitment to its “sustainable” dairy group. But what are the unintended consequences of the move? After all if Tesco sneezes we all catch a cold. Or, as one eminent philosopher commented: “Whether the elephants make love or go to war, everything below gets trampled under foot.” And Tesco is the biggest elephant on the plain.

 

Clearly Tesco balancing suppliers and core contract producers (both Wiseman and Arla) and Dairy Farmers of Britain localchoice suppliers are on the front line.

 

Tesco can easily continue to pay a premium price for its “sustainable suppliers” but if it continues to place two litres of Fresh’n’Lo at 99p beside two litres of Tesco branded milk at £1.44 it is obvious which one will sell.  This could not only reduce volumes of the Tesco balancers contracts to zero, but could even result in Tesco putting a quota on how much milk its core suppliers receive full payment for. For those supplying Tesco via Wiseman, the balancers and perhaps core producers will simply see their milk diverted into Fresh’n’Lo, thus subsidising the promotion indirectly.  And to think consumers will select localchoice in favour of 99p milk is simply naive. On this basis that brand is dead, especially as the new deal promotion will run until 1st August 2009.

 

First Milk is also in a tricky position.  Does it sell milk to Wisemans to help fulfil Fresh’n’Lo demand, thus helping to undercut core suppliers? It insists there will be no discounted deals, and claims to be pushing for a 3ppl across the board increase similar to the one achieved with ASDA on cheese. Two things are certain - First Milk won’t risk wrecking the excellent work it has done with ASDA, and that store will not settle for paying a 3p premium if it feels the money is being used to subsidise cheap milk for Tesco.

 

There seems little doubt fringe competitors in the middle ground like Medina and Freshways will struggle to match Tesco and others. With 51% of the UK’s milk production currently going into liquid milk the 45p offer projected through for a year across all liquid milk has removed up to £1.54 billion out of the chain. Of which Tesco, account for  £225 million. Perhaps it is a little sensational to annualise the two litres for 99p across all liquid milk but it does serve to empahise how big the numbers are to our industry

 

So, for the Tesco balancers, it is decision time. You have jumped through all the Tesco hoops i.e. you cannot export your calves (if it were possible), you carry out locomotion scoring on your herd, subscribe to the Promar costings (if you are daft enough to do so) and attend the compulsory two day annual Tesco Milkenburg Rally for annual brain-washing, which is a cost to your business for questionable benefit.  Perhaps the time is right to explore other options, with no hurdles.

 

If Wisemans, Dairy Crest, Arla and the co-ops were smart they would immediately take the lead and declare ex-farm gate milk price increases before Tesco sits down with its sustainable dairy group. If they could do.

 

Certainly if Tesco is genuine about working closely with producers and does not expect them to contribute to the price war it should be transparent and openly declare the Promar cost of production figures, and work to generate a price increase for farmers. Kite is clearly stating farmer costs have gone up another 3ppl on last year, so come on Tesco / Promar, what is your assessment? Promar is in a mighty difficult position, I think. Last year Kite and Promar were neck-a neck on cost rises. If the two firms are markedly out now then farmers will think Promar is being lent on by Tesco to minimise cost price rises. The pressure is definitely on for Promar to come out with 3ppl as well, and for Tesco to pay-up accordingly.

 

I can’t help feeling that the smattering of trust the likes of Tesco have scrambled together with dairy farmers in the past 18 months is on the wane, and this autumn could signal the first cracks in retailer dedicated pools, particularly Tesco’s. Confidence is fragile, trust is in an even worse position, and any bad news or lack of action to raise ex-farm gate milk prices will cause more to exit quickly.  Processors and retailers have been warned.

 

Now DFOB, who will love Tesco’s move as it leaves me with minimal space to comment on its year end results, which are another year of record losses of some £7.5 million. On top of that there is the loss of 136 million litres.  Turnover was almost static at £562 million despite a 47% (8ppl) increase in the price it has paid farmers for its milk, and this should comfortably have added £60 million to turnover. In the old adage of turnover is vanity, profit is sanity, DFOB has failed to achieve either.

 

During the year total debt rose by 15% from £103.7million to £119.8million, and the interest payments to the bank and the members equate to the losses. DFOB’s Chairman commented that the Co-Op has added value via processing, yet it is DFOB’s brokerage which has made the money - turning in £2.49 million profit.

 

It’s difficult to envisage how the same team who have delivered two consecutive years of losses can deliver a break even year followed by substantial profits. The management say they definitely will this year. I hope they succeed, for next year they will truly be judged.

 

Finally, the Dairy Farmer webinar. The Editor would put me on the naughty step if I failed to mention its success. Excellent, it was. Here are a couple of observations from me:

 

Out of 500 people who registered for the event, as opposed to the 325 of them who viewed it, I couldn’t help notice that not one retailer or middle ground chain had bothered to register, and more importantly no-one from DFOB or from Milk Link. Compare this to Arla, Dairy Crest, Wiseman and Dairy UK all of whom were represented at senior management level.

 

Tesco added spice with its last minute price cutting fireworks, and Promar’s reaction was also interesting. Several web viewers picked up on Promar’s Derek Gardner’s comments defending Tesco’s move because they are the UK dairy industry’s biggest customer.  Me too. But, Mr Gardner, dairy farmers are also concerned at the leverage Tesco hold over Promar, now they are your biggest customer. As I said, a difficult position to be in.

 

Finally, I hope Dairy Event visitors will call in for a chat at my stand on 6th Street.  If you log onto the site www.dairyevent.co.uk you will see our stand features on the home page with a farmer wiping tears from his eyes having left my stand at the 2006 event having spoken to my head of sales, Joanne. She’d probably told him what his quota was worth!

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

IP August 2008 DF

 

It can be a strain topping the industry’s popularity charts, as I have done for the last two decades. (Surely “propping-up”, not “topping”? Ed.) Occasionally, though, my outspoken comments on milk prices and production do land me in volcanically hot water with processors, retailers and other key players at times. The ones I have this month certainly will.

 

By the time you read this article England, for the first time in history, will have fewer than 10,000 dairy farmers and by the end of 2009 this looks set to be down to around 9,000.

 

Currently processors and retailers seem “mildly concerned” over future milk production, but at current prices they have convinced themselves that in late autumn/early winter farmers will push hard for milk. I couldn’t disagree more! I don’t think milk production will do anything more than continue to drop like a stone unless farmers become confident that reasonable, profitable milk prices will be paid in the long term. And that isn’t on the horizon! Even if a sufficiently high price movement comes along now, the earliest production would start to increase in earnest is probably late 2009, and I am not convinced even that will happen. TB will take out more than 200 million litres year on year, for starters.

 

Some buyers are trying everything to convince farmers otherwise, however, and that it’s economic to produce more now. Dairy Farmers of Britain is offering members what it calls a “generous seasonality bonus that lifts our 25.5ppl standard price to between 33ppl and 37.5ppl for all the extra litres produced from this September to December”. The news comes with tips from Tesco’s best pals at Promar that “most members should be able to profit from feeding extra concentrates this autumn”. Really? While such headlines may light-up the eyes of desperate farmers, what they need is the standard litre price lifting, not extra sweets and short term winter warmers. I only hope for DFB the encouragement for farmers to produce extra milk is in December proves to be financially sound, and not financial suicide, and that the buyers don’t misinterpret the price and think all farmers are getting over 33ppl fopr all of their milk. Interestingly, I think First Milk has rejected such a bonus policy because of the risks that it will undermine its efforts to get across the board price rises.

 

Remember, milk volume increases will do little to increase prices. If volumes go up the retailers will think that the current price is more than satisfactory! Won’t they? The less milk you produce the more you should receive per litre. So don’t follow the lead of the Dutch, Germans, French and Italians and think a higher milk price means you should hit the accelerator and produce more milk. Only when the milk price gets above 30p, or perhaps even above 32p, will I change my mind on that. And please don’t hold me to the milk price – it’s not an absolute figure I’m talking about. The price should go up or down according to the milk price:feed price ratio, of course.

 

The retailers only have themselves to blame, really. This analogy sums up the position and viewpoint from the farm gate: If, from the age of seven, you were bullied by someone who continued to bully you through primary school and secondary school, you would fear that person for ever. You leave school at 18, go to the pub and, lo and behold, meet him there. Now, though, he wants to be your best mate, but not once does he reflect or apologise for what he did to you over the last decade.  Would you trust him and believe he had changed his ways?  I don’t think so. But that’s the relationship between most dairy farmers and processors, retailers and even some co-ops.

 

On top of that mistrust is the fact that most dairy farmers are more alert to the real market value of milk than ever before, and are prepared to jump ship if their buyer doesn’t come up with the goods. They know that there are liquid milk purchasers who are banking on imported cheese bringing down their price, to re-instate their liquid premium, rather than them being prepared to put-up their price to do so. But the fact is cheese processors like Milk Link and Lactalis are paying their producers the going rate. Consequently liquid suppliers, including Tesco, are quitting to supply cheese processors, or smaller suppliers like Medina and Freshways.  Others farmers have simply had a gut-full of accepting what they are given, and are simply seeing their time out in the sector, or are making the most of good cull and stock prices to go now.

 

Processors and retailers had better stop worrying about this winters’ production and write it off because the damage is done, They should focus on what can be achieved to stabilise production in 2009, and act sooner rather than later.

 

Now TB. Firstly I’d like to comment on Hilary Benn’s decision on badgers. As I see it TB is set to become more rampant across the countryside, and more badgers are bound to become infected, and suffer slow, lingering and painful deaths as a result of the disease. Now, of course, it isn’t a criminal offence to put a suffering animal out of its misery, or else every farmer in the country would have been locked up by now over myxomatosis. From a PR point of view the badger huggers can’t argue about culling a sick badger either. Most farmers with badgers on their land have also become pretty adept at spotting badgers which are infected and suffering, of course. So, as I see it there will be more TB, more sick badgers, and more badgers put out of their misery. And Benn’s decision was actually welcomed by The Badger Trust and those who like badgers. Incredible!

 

Although pages have been written on the NFU’s decision to withdraw from negotiations with Government over cost and responsibility sharing I have to throw my Two pennies worth in. Whichever member of staff within DEFRA conjured-up the phrase “cost and responsibility sharing” should be knighted. That person has succeeded in fooling all of you – the correct phrase is “cost and responsibility transfer”. That’s because all of the costs for animal disease and fallen stock disposal will be shifted to us, the farmers. If a politician, Hilary Benn can duck out of taking a tough line on the reservoir of TB in wildlife then I agree with the NFU that it’s time the politics was completely taken out of our animal health policy. In making his decision Hilary Benn has thrown all the goodwill built up over several years out of the window. How things progress from here is anyone’s guess, however. 

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

 

IP July 2008 DF

 

Supermarkets – don’t we just love them! Just as everyone thought Morrisons showed more care for creepy crawlies and other environmental niceties than it did for UK dairy farmers came the news it will be paying an extra 1ppl for milk. Eureka! Having held out a year longer than the other retailers, Morrisons has finally joined ASDA, Sainsbury’s and Tesco in paying a premium for liquid milk from Dairy Crest and Arla.  However, I estimate it has pocketed an estimated £4m from its procrastination!

 

The Morrisons deal is simple and means it pays an additional £3.7m to Dairy Crest and Arla, to be shared out among their non-dedicated ASDA, Tesco and Sainsbury’s producers. This dilutes the 1ppl to 0.3ppl for each litre, payable from June 1. On the plus side it eliminates the huge cost incurred in setting up and managing a dedicated supply group.  But what benefit does the payment deliver to Morrisons?  I’m not sure, and I’m a bit worried about “side effects” too.

 

That’s because I think it benefits, and subsidises, smaller retail milk buyers. After all, when Arla and Dairy Crest go to negotiate a much needed milk price increase with these smaller retailers, and they justify their increase, these retailers are likely to tell them to knock off 0.3ppl which the producers have received via the Morrisons deal. I’ve been told one is going to use that ploy anyway!

 

Alternatively, Dairy Crest and Arla could decide to use part of the Morrisons money to subsidise discounts and deals, particularly in the aggressive middle ground. Customers of Dairy Crest and Arla must be sitting back laughing at the deal. It does take 0.3ppl worth of pressure off them from paying an increased price.

 

Perhaps of more concern is that Morrisons could pull the plug on the 1ppl at any time without being held to account or having its supplies affected. That’s perhaps the most serious issue, and one which farmers involved with Tesco, ASDA or Sainsbury’s do not face.

 

Now Tesco. In January, it proudly bragged that as a result of a “ground-breaking” calf scheme the 930 farmers supplying it would no longer export calves and “instead they will be used to supply British beef and veal to shoppers”.  Tesco suppliers thought it was just the ticket.

 

But the grand plan has all gone pear-shaped, for a number of reasons -  not least because it seems to have been ill-conceived to begin with; was introduced in a rush; and for reasons that do not stand up to scrutiny. It also didn’t really have the full blessing of farmers.

 

Tesco claimed that welfare standards for calves in Holland did not match British standards, which is why it banned exports. But from inside the Tesco camp I am reliably informed that the retailer did not visit any European veal units to compare standards during 2007, and the statement was made purely on hearsay and perception. Frankly I find it unbelievable that Tesco has been allowed to get away with such a statement un-challenged when it sells so much Dutch and Danish bacon. Are we to believe that the Dutch have different welfare standards for veal calves to those of pigs?  I think not. If Dutch welfare standards aren’t good enough for our calves, then their pigs shouldn’t be good enough for us either!

 

Tesco says it has made it easier for its producers’ calves to enter the food chain. But this is not borne out by the evidence. It has merely replaced the export of around 45,000 bull calves with, in many cases, a bullet or a one way trip to the hunt kennels. Neither of these are what the farmers signed up to. Tesco is a million miles away from its claim it will use all dairy bull calves to supply British beef and veal to shoppers.

 

The scheme is not “increasing farm incomes” and neither is is “a commercial alternative to exporting” as claimed by Tesco. It didn’t take long for the penny to drop that farmers were receiving £25 for calves worth £55 for export, for example. Some people question Tesco’s real reason for introducing the ban as well.  Was it to “do the right thing” and to be seen to be responding to consumer pressure on exports, or was it because retaining more calves in the UK would exert downward pressure on UK beef and lamb prices, as fewer animals are exported.

 

Clearly the move has not been universally popular, and a number of farmers have already found ways around its export ban. Some say Tesco is in breach of contract. Doubtful. But contracts are coming into the equation - one myth circulating is that Tesco has cancelled a producer’s contract in Wiltshire because it had evidence he had exported calves.  That’s not true, but such stories do serve as a warning.

 

Practically, the scheme has also faced difficulties. Collections lapsed, calves passed the 42-day TB testing limit, and numerous farmers had to reach for the gun and shoot healthy six week old calves. 

 

Nor is there any guaranteed price for the calves or to the finisher for the beef. In true Tesco style it has no risk or exposure, but succeeded in bagging the PR brownie points.  One farmer put pen to paper to me and summed up the thoughts of many on the Tesco contract: “We feel we have been cheated by Tesco, which is still advertising the wonders of the scheme”.

 

Tesco’s requirement that its contracted farmers also do costings, via Promar, is also controversial.  The bottom line is that if you don’t join Promar costings you’ll be given some nasty-tasting medicine to take – most likely in the form of a lower price. Clearly Tesco’s long term aim is for its group to buy fuel, finance, feed and other inputs at ever lower prices, and for those to be taken account of in the cost tracker. Thankfully it won’t need to approach me for bulk quota savings!

 

Now costs. They’ve continued to go up since the First Milk/Promar cost of production report earlier in the year. The idea of the report was to help ratchet-up milk prices, but for First Milk’s co-op members it now has to be accompanied by a milk price increase. Farmers are more than concerned that it is the only one of the three co-ops not to raise producer prices this spring – so far.  More cost of production increases, with no producer price increase, will cause even more conflict. Hopefully by the time this article is out its price will have gone up.

 

Finally, the show season is in full swing. I’ll be going to the two Dairy Events and The Royal Welsh Show, which really is in a league of its own, but I’ll also be paying a private visit to The Black Isle Show, the National Sheep Dog Trials near Ashbourne and The Royal Show as well. Will The Royal have bounced back from a dreadful year last year?  It has to, or else this year will be the last!

 

Comments to ianpotter@ipaquotas.co.uk or fax 01335 324584

 

 

IP June 2008 DF

 

We’re supposed to be a golden age of dairying.  Well, if we are, then it’s a fool’s golden age! Farmers, processors, even Tesco are all reported to be jittery about dairying’s prospects. 

 

This year’s DairyCo survey into farmer intentions exposed one particular thing - nerves. Dropping the ex-farm gate milk price is not an option or producers will quit. OK, so the survey has been criticised for focussing too much on the negatives by asking questions such as “what would you do if your milk price fell by 2p, 4p and 8p?  Be that as it may, the mood is not for price rises, but for cuts.  So well done to DairyCo, I say.

 

Processors, too, aren’t exactly in clover. It’s more nerves. The white knights of the industry, Wisemans, issued a profits warning  and has seen a third wiped off its share price (£124 million) in less than four months! Now a profits warning could be expected to precede a price drop to claw back much needed extra readies, but on this occasion Wisemans accompanied the warning with a price increase of 0.5ppl.  On hearing that other companies claimed that in only paying that Wiseman had capped the May price, at a time when they (the others) were seeking greater increases. Oh yeah? Why didn’t they go first then!

 

First Milk will, I suspect (hope) have received significantly more than the 0.5ppl paid to Wisemans direct suppliers, with the intention that First Milk’s farmers also receive 0.5ppl.  All eyes are now focussed on First Milk. Their much-lauded Promar report built up member expectations - now it’s time to deliver.

 

But is the increase enough to keep famers happy, especially for Wisemans, which now needs to ramp-up processing at the new Bridgwater plant? That is not proving easy. They are “worried but not quite panicking”, I’ve been told.  Like other major plc’s they have resignations in from farmers, who are being wooed by cheese buyers like Lactalis, and other liquid firms like Freshways. Others claim they are unhappy at Wisemans request to sign a new contract, especially the leaving terms, which makes it harder for farmers to jump ship.

 

That brings me on to another ship – HMS DFB. They are busy trying to improve communications by issuing a weekly bulletin to members, with gems of “useful information” about the firm. Clearly, though, it’s only the good news that is deemed worthy.

 

Left out entirely recently was their interim results to 30 September 2007 - they were quietly posted on their website without fanfare or reference at all in the weekly Gospel Of Good News. That says something, doesn’t it? The posting predictably lacks detail, and if members study the text carefully they, like me, could be shaking their heads at certain points.  The bit which made me smile most was the chairman’s comment that “they have paid members an additional 8p since June 2007 (whilst commenting on the results to 30 September 2007) when almost 3p of this 8p was paid after this date, and as late as December 2007!

 

The figures show a decline in turnover, a fall in operating profit from £3.6m to £1.5m (excluding exceptionals), and a worsening balance sheet position as members bridge the funding gap. Real net debt now exceeds £100m and members are owed £52.3m. Blimey. There are lots of questions to ask, and I h