Saturday, January 18, 2014

Milk after quotas

Peter Lauritzen is chief executive of Arla Foods, the UK arm of the Danish-Swedish co-operative dating back to 1880. Arla now has 3,800 UK farmers as members, out of a total 13,500, and their UK business buys more than 25% of the milk produced in the UK. 

An article in the Times (Jan 18, 2014), says that Mr Lauritzen anticipates a torrent of milk being produced after the quota regime ends next year, and a consequent 'price war' driving farm gate prices, and farmers profits lower. Practical Farm Ideas has published similar forecasts for more than two years,
and has been advising dairy farmers to plan for this future. While not alone in this prediction, few organisations involved in the industry have come up with plans or ideas for farmers who see their businesses becoming hit by these events.

Jim Paice, the MP who was the former farming minister until the autumn Cabinet reshuffle, and who subsequently has become, among other things, Chairman of Milk Link - the co-operative which competes with Arla - launched a scathing attack on the company over its negotiations with Asda for cheese, which Paice declared as unfair and a price at less than the cost of production. 

The reply from Arla's UK chief executive looks at the global position of the company, Lauritzen saying "We have the opportunity of using the whole Arla Amba organisations for UK products. We realise we will get more milk when quotas end, and have to find markets. That is why we are investing heavily in China and the Middle East, Africa and Russia. That is the advantage for farmers of being part of a bigger company."

Will this international stance be enough to support the smaller farmer who is unable to expand production? 

There are still many dairy farmers in the 50 - 100 cow bracket, and these suffer from collection surcharges and price penalties. While Lauritzen says there are three fundamental rules for the milk co-op:
1. You pay the same price
2. The co-op membership is one farmer, one vote
3. They have to take the milk produced by each member
there can be strain on the business in doing so. As Jim Paice points out, Arla's 2012 accounts show pre-tax profits of just £8.3 million on a turnover of £1.7 billion. Costs associated with the new Arla dairy in Aylesbury will have had a significant effect on trading results but now, with the plant running, the returns may well start to accrue, just in time for the anticipated wave of post-quota milk. The Aylesbury dairy is the largest in Europe, and is situated for the very best logistics for shipping to the huge market in S-E England as well as for overseas. 

Will all this be sufficient to save the small family dairy farm, or will the genre disappear? For many years we have promoted the formation of local farm co-ops which are built up with the practical amalgamation of individual farms. Each member retains full ownership of their land and holding, but contributes financially and physically in a modern scale set-up. Attractive to the younger generation, the business is able to accept partners with differing quantities of land and varying skills. The product can be sold to national companies such as Arla, but can also be used to make a brand of products which provide considerable added value to the product.

Dairy farmers who consider their scale to be marginal need to talk to their milk buyers, and milk buyers themselves need to be alive to the situation which is likely to develop in the market between 2015 and 2020. 

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