News focus: Farmers give milk buyers a creaming

10 September 2012

13 September 2012 | Adam Leach

Adam Leach looks at the action taken by dairy farmers and how they are redressing the long-term balance of power with big buyers.

Milk buyers have long been seen as having the upper hand in the supply chain, with farmers seemingly powerless to dictate terms to the companies that have exclusive, high-volume contracts. Recently, however, farmers have been fighting to change this.

In July, dairy farmers across the UK decided to take a stand. Faced with planned cuts of up to two pence per litre (2ppl), they started to protest. Tractors parked outside supermarket forecourts and farmers complained to the media about unfair pricing. The issue ballooned when the then MP responsible for farming – Jim Paice, who is no longer in post – admitted he didn’t know how much a pint of milk cost.

The companies involved tried to stand their ground, but as the pressure got more intense, they started to retreat. Scottish co-operative First Milk announced it was cancelling its 1.7ppl cut. Dairy Crest was not far behind, but fell short of cancelling its 1.65ppl cut, opting instead to postpone it. Next, Arla shelved its 2ppl cut.

The NFU, which represents British farming, then turned its attention to Robert Wiseman Dairies, now owned by Müller, which had been at the centre of the campaign from the start.

The dairy giant was the last to cancel its plan to cut the amount it paid farmers.

It had little option. The campaign had caught the public eye and in the case of Robert Wiseman Dairies was threatening to impact on product sales. Consumers were called on to boycott the company’s products, such as Müller yoghurts. Supermarket customers were also beginning to be affected, not least by the tractors parked outside their stores. It vowed to “demonstrate” the required support for the dairy supply chain.

Kate Allum, chief executive at First Milk, said dairy farmers made it clear they were rejecting the existing model where the price was dictated to them, in favour of working together to gain “an equal seat at the negotiating table”.

CIPS CEO David Noble says the strength of a supply chain is not just about cost. “Getting the best from your suppliers is crucial for business but it doesn’t always mean securing the lowest price.

“Companies that have a two-way, honest relationship with their suppliers will get the best value.”

Planning ahead

Now that the price cuts have been postponed – and in some cases cancelled – the Dairy Coalition, which is made up of dairy farmers from across the UK, have agreed a 10-point point plan that covers how it sees the supply chain operating in future. In a strong statement, which followed the agreement of the plan, Mansel Raymond, NFU dairy board chairman, said: “The dairy market has failed. Market highs have not been passed down to the farm gate. We need to see all milk buyers developing their own appropriate and transparent milk procurement and pricing models that are equitable for all parties and cover farmers’ production costs.”

To achieve this, they have vowed to take a number of steps (see box right), including naming and shaming buyers who engage in bad practice. They also set out a roadmap to help producers rebalance negotiating power and plan to provide farmers with up-to-date market information so they know if buyers are unfairly squeezing them.

The purpose of the plan and the actions that underpin it is to bring about permanent change in the relationship, rather than a temporary freeze on price cuts. And already buyers are starting to respond, with new pricing models and contract formats that help farmers.

Robert Wiseman Dairies is developing a new way of calculating what it pays suppliers. The ‘Wisemilk’ initiative will be worked on in collaboration with four farmer representatives from the Wiseman Milk Partnership (farmers who are contracted to sell their milk to the company). Pete Nicholson, milk procurement director at the company, said: “We cannot ignore the ups and downs of a market, but we have to strengthen the basis of the partnership we have with dairy farmers who supply us.”

Arla Foods has gone further and committed to increasing what it pays farmers for milk. The company, which owns the Cravendale brand, has taken a number of measures. It has worked with its customers to increase its standard price to 29.5ppl, which enables it to pay suppliers more. All suppliers on the Arla Foods Milk Partnership (AFMP) will share the average premium price paid by particular supermarkets. Arla also plans to launch a study into the costs of milk production to help farmers increase operational efficiency. It is developing a range of new contract models to provide greater flexibility to farmers.

Ash Amirahmadi, head of milk procurement at Arla, said: “The coalition has been successful in raising public awareness of the plight of farmers in a way we couldn’t. It is our duty to take over the baton and deliver a price and sustainable sourcing strategy that restores confidence and takes a major step in moving the AFMP towards the co-operative model of Arla Foods amba, where all farmers benefit equally from the returns from our customers.”

Endorsing the move, Peter Kendall, NFU president, said: “On behalf of the dairy coalition, we laid down the important challenge to milk buyers to reverse milk price cuts and find a better way of doing business with farmers. Arla has responded to this challenge in a transparent and meaningful way.”

The moves by Robert Wiseman Dairies and Arla are backed up by similar initiatives in the sector. Dairy Crest has committed to giving farmers more notice on price changes to enable them to plan ahead, while also commissioning an independent review into how it calculates its prices. The First Milk co-operative recently met with farmers from across Scotland to discuss how best to move forward.

It is too early to be able to see whether the campaign will usher in a new era of collaboration between buyers and farmers, but with tangible changes underway it is fair to say there will be a substantial impact. With the 10-point plan promising a whistleblower line so farmers can shame buyers deemed to be engaging in bad or exploitative practices, procurement professionals in the sector should exercise a degree of caution. As should those whose businesses count the general public among their customers.

Dairy coalition 10-point plan

● Expose those whose damaging behaviour undermines the liquid milk market.

● Work with milk buyer farmer representatives to protect farmers’ interests.

● Set out a road map to capture the maximum opportunity for producer organisations to rebalance negotiating power.

● Work to finalise the Code of Good Practice for Dairy Contracts.

● Develop a process to monitor and report on the implementation of the Code of Good Practice for Dairy Contracts.

● Encourage all milk buyers to develop their own appropriate and transparent milk procurement and pricing models.

● Expose bad practice or non-compliance with the Code of Good Practice and irresponsible behaviour in the milk market by developing a whistleblower mechanism for farmers.

● Campaign to promote British cheese and other dairy products.

● Work with DairyCo so farmers can utilise relevant market information.

● Prepare an ambitious strategy for the UK dairy industry’s future without EU milk quotas.

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