Whole supply chain must work together post-quotas

Published 26 August 14

quota

At this year’s Livestock Event, senior analyst with AHDB/DairyCo Patty Clayton presented the predictions for the UK market. Here are some of her observations.

The good turnout at both seminars indicated the strength of interest farmers have in the future of the dairy industry.

Producers want to know what will be required of them in the future and appear ready to rise to the challenge put forward in the recently launched ‘Leading the Way’ dairy industry’s sustainable growth plan.

DairyCo’s latest Farmer Intentions Survey (FIS) reflected this attitude, showing that:

  • Longer term confidence in the future of UK dairy farming was at its highest level for three years, exceeding the previous high point seen in 2012. More than half (58%) of dairy farmers interviewed were optimistic about dairy farming in the UK over the next five years
  • Intentions were, on average, to increase production by 5% over the next two years
  • More than two-thirds (68%) had made capital investments in the past five years but felt they needed future profits to enable further investment.

Within the UK market, there is a strong indication – based on growth drivers for liquid versus manufactured products – that any growth in milk production will mean a shift in the proportion heading into manufacturing. This means milk buyers will be looking for milk to suit their production requirements to remain competitive.

A question that remains unanswered is where that investment is going to be: butter, cheese and a wider variety of dairy value-added products (for example, yogurts, desserts); commodity products (mainly bulk cream, milk powders); or ingredients (infant milk formula, whey proteins)?

At the moment, there is no sure way to anticipate the future and we can only make some educated guesses based on where demand is growing and where businesses see they have a competitive advantage. Some of this is reflected in the areas individual businesses are currently developing:

  • Dairy Crest/First Milk have recently invested in high valued ingredients (infant milk formula, whey proteins, exports) to make best use of milk
  • Yew Tree has been producing powders to reduce balancing risk
  • Muller Wiseman Dairies has been focusing on butter production to take more control over margins/supplementary income, and private label yogurts.

Whatever markets the processors end up developing, the abolition of quotas next spring means the UK industry as a whole will be subject to increased exposure to competition for its dairy products – both at home from imports and abroad in export markets.

This means the sector has to work together to develop markets. With the likely scenario that additional milk produced from UK farms will be directed towards manufacturing, the whole supply chain will need to be efficient to compete in relevant markets. This means losses along the entirety of the chain must be minimised and the milk produced ‘fit for purpose’.

For buyers to be competitive, they will need to maximise the value from the milk they buy and ensure they minimise their cost base. Farmers will need to do the same – maximise the value of the milk they sell and minimise their cost base. For this to work for the benefit of both parties, the components of milk which return the most value (and this will relate to the final product) need to be priced correctly to provide dairy farmers with clear signals as to the components they need to concentrate on.

Done properly, farmers who are on the right contract for their milk and who are maximising their milk price will automatically be providing buyers with a product that can generate profit, whatever the future holds.

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