Monday, January 12, 2015

Dairy farmers deserve a minimum milk price

The noted think-tank, The Adam Smith, makes this comment about milk prices: 
"Of course, the real background to this is that, as has been happening for the past couple of centuries as farming techniques improve, milk has been getting cheaper and cheaper to produce. And as has been happening over that time the higher cost producers have been pushed out of the market by the lower cost ones. This is, after all, the universe’s way of telling you to go do something else, when the price of what you produce is lower than the cost of producing it. That’s what is devastating farming, we’re in general becoming more efficient at it.
And the supermarkets are, through their subsidy, restricting this process which is the very opposite of devastation, isn’t it?"
The article also says this:
"Retailers insist they are funding the cost of the price reduction from their own profits, rather than paying farmers less. Many supermarkets have guaranteed the price farms receive will stay above the cost of production."

The Adam Smith writers say they are confused, and they are not alone. 

Here's a major problem to start with - supermarkets talk in pints; farmers talk and get paid per litre. There are more than two pints to the litre! The farmer is getting paid 20p/litre today and the supermarket sells at 22p/pint. The supermarket is therefore selling at more than double the price paid to the farmer. They call their 20p markup a ‘loss leader’, yet this is the total earned by the farmer who has to finance land, buildings, labour, machinery, fuel and power, vets and medicines, plus finance the cow within the 20p earned. 
The dairy processor has the job of collecting the bulk milk from the farm tank, pasteurise, bottle, and deliver to the supermarket – which puts the bottles on the shelves. The store orders when stocks are low and expects a near instant delivery, so little goes to waste. The dairy has to balance supplies with markets, diverting milk to processing into butter, cheese and powder. It’s clear the actual costs carried by the farmer outweigh those of the other players.
Milk is not a price sensitive product. People don’t double their purchase if the price is reduced, nor do they reduce it if the price increases. Supermarkets use it as a loss leader 
1. because shoppers remember the price 
2. because the structure of the market that consists of a handful of competing processors, allows them to do it. The MMB arrangement was fairer to farmers as they had a voice in pricing. It was brought in in 1933 after much the same issue – dairies paying below production costs – and more sheninigins besides.
1. industry agreement or even legislation which provides a minimum farm gate price that’s works like the minimum wage. 
2. Supermarkets being shamed into using milk as a loss leader. 
3. Dairies reducing supplies to supermarkets so stores are empty.
The EU Commission might well see this as a prosecutable offence - as infringing their rules of commercial competition. The industry needs to engage some smart lawyers who write the clauses so this won't happen. 

How I wish Meurig Raymond (NFU President) could provide a similar explanation.