The Dairymen: Views from the Top

What’s the relationship between processors, retailers and farmers like, and how could it be further improved?

Jim Begg (JB): The relationships remain fiercely competitive. Retailers, of course, operate under their own pressures and are often driven into acting as the social conscience of the dairy industry - just paying enough to keep the supply base going. Then every so often things spill over the edge and the result is public protest like we saw at the end of July. The solution is the end of cheap food policies, which are totally destructive for growth, confidence and the vibrancy of rural communities. That is a hard sell in tough economic times for consumers.

Peter Kendall (PK): There are some milk purchasers that have chosen to build strong working relationships with suppliers, offering greater accountability and balanced contracts that provide more certainty. Unfortunately, they are in the minority and until many of the larger processors start owning up to their collective failure to become more competitive, we will continue to see a tolerable relationship at best. We have seen some really positive developments with some retailers, and through the #sosdairy campaign we held up Tesco, Sainsbury’s, M&S and Waitrose as examples of how it could be done. But all retailers could do more in terms of cheese and other dairy products.

Kate Allum (KA): Farmers want more influence. They are prepared to take risks. They are happy to share the downsides as long as they get their share of the upsides.

Jim Paice (JP): I have been impressed by the engagement and commitment the industry has shown in driving forward negotiations on the code of practice. Obviously, the recent price cuts had the potential to shake that, but they might also have been the catalyst to move negotiations on. I remain committed to helping the industry secure a final deal.



What do you wish others in the supply chain understood better about your needs and priorities?

PK: Retailers must learn dairy farming - like all agricultural sectors - is a long-term business. It requires confidence and a fair return to allow for investment in infrastructure, efficiency and production for the future. Long-term relationships based on clear, transparent pricing mechanisms are needed.

Andrew Opie (AO): Retailers are not the only buyers of milk. We accept our responsibility to reward and invest in farmers, but this ignores the other UK food companies who are big milk buyers, the public sector plus the influence of global trade on prices.

Peter Lauritzen (PL): Retailers understand and support our UK growth strategy and we conduct regular on-farm workshops with our farmers to give them a chance to learn more about our business. But people in the UK forget that Arla is the farmers. We only exist as an organisation to serve the interests of farmers.

JP: To emphasise to farmers that the government does not necessarily always have the magic bullet. Legislation should be the last resort and only if it is the best solution to all the problems, not just some. I would like farmers to understand the power of collaboration, and they need look no further than successful co-operatives to see the results.

“The lucky farmers are those in retailers’ dedicated chains, but that can only ever be a fraction of farmers”

What industry issue is causing you the biggest headache at the moment?

PL: How to navigate through an increasingly volatile global dairy market, where there are swings of circa 50% in the returns for dairy products. Not only that, but consumer confidence and disposable income are at their lowest they have been for many years, while farmers are enduring some of the toughest conditions they have ever experienced. There are no easy answers, but the supply chain needs to be able to withstand these movements.

JP: Many dairy farmers have faced farmgate price cuts of between 3ppl and 4ppl in a relatively short space of time. For any business that is extremely difficult, but especially for British dairy farming, which has had a long period of being on the margins and is in need of investment and modernisation. There’s something wrong here, and I want to help fix it.

AO: The biggest headache is a lack of understanding of the dairy market, the factors that influence farmers’ milk price and the role of retailers. We have spent a long time explaining to journalists that less than half the milk produced ends up in cartons or bottles on our shelves, that much of production is susceptible to global prices, and that retailers are paying the highest prices in the market.

PK: I can sum this up in three simple words: dysfunctional supply chain. The greatest issue in the British dairy industry is not volatile markets, weak processors, low milk prices or unfair contracts, it’s a combination of them all, which culminates in the ultimate failure of the supply chain to return a fair and equitable distribution of margin for all.

Neil Burchell (NB): Being a major importer from southern Europe, the fate of the euro and particularly the situation in Greece is uppermost in our minds. The economic downturn has resulted in less milk being available, which has a knock-on effect on dairies’ ability to build as much stock for peak summer demand.



What do the last 12 months tells us about which pricing models deliver the best for farmers, processors and retailers?

AO: Dedicated and secure supply chains, working with and rewarding farmers. The lucky farmers are those in retailers’ dedicated chains, but that can only ever be a fraction of farmers.

PK: Cost of production models run by the likes of Tesco and Sainsbury’s show where the price of milk needs to be. However, such prices appear to be creating an artificial ceiling in the mind of British milk processors, who have routinely failed to pass on the true market value of milk.

JP: It is easy to say that cost-of-production price mechanisms provide the best outcome for farmers, but it is only the minority who are part of these pools that get that higher income. Retailers with aligned pools have benefited from great PR including support from angry farmers. We must not forget the majority of dairy farmers are outside those arrangements.

What risk, if any, does the Groceries Code Adjudicator pose to dedicated retailer pools and wider industry relationships?

JP: Given farmers’ support for dedicated retailer pools, I can’t see the GCA having an impact on them. The adjudicator is more likely to affect other instances where retailers are not paying sufficient attention to the impacts down the supply chain for other milk or dairy products that come from non-aligned farmers.

AO: I don’t see any relevance to the GCA, whose role is clearly defined as overseeing the operation of GSCOP, which only covers direct relationships between suppliers and retailers. Although dedicated pools have been created, the direct contractual relationship for GSCOP purposes is between the processor and the retailer.



2012 has been a busy year for consolidation. What are the most significant changes for the industry and is further consolidation needed?

PL: We are awaiting a decision from the regulatory authorities regarding our proposed merger with Milk Link. This, along with Müller’s acquisition of Wiseman, make 2012 a very significant year for the industry. Our merger means Milk Link members will become part-owners of one of Europe’s leading dairy co-operatives with equivalent membership rights and liabilities. I have no doubt there is more consolidation to come and that the industry can accommodate this.

KA: I think the most significant change is that Müller from Germany and Arla from Denmark have seen value in the British dairy industry. On one side it’s a positive that international players see that value, but on the other side I know there is disappointment among many GB farmers that they now have reduced options if they want to access value and control their own destiny.

JP: The best deals for me are those that plug the gaps in our own productivity and bring new revenue that can secure the long-term future of British milk supply. It would be natural for a developed market to see further consolidation and there are always opportunities particularly in the products sector. There has been a great deal of consolidation in the liquids sector already but it clearly isn’t generating the right environment for sustainable dairying in the UK.

JB: I don’t think for one minute that the consolidation process has finished, either in factories or farms. Both are indicators of increasing competitiveness, not of a dysfunctional market.



The Make Mine Milk campaign is coming to an end. Would you support a similar campaign in the future, and would you be willing to put up money for it?

JB: The campaign has been excellent. It has added an extra 1.3% to our liquid milk market. It’s just a great pity retailers are almost giving the product away in the shops. In terms of going forward, I think that generic campaigns across our range of products are necessary to underpin consumers’ faith and loyalty to the category. I wish DairyCo felt the same.

PK: The argument surrounding the generic marketing of milk has rumbled on for some time. European funding comes to an end and so with it a perceivable step back in terms of commitment from some of our largest milk purchasers and sellers. This is a question for those companies who actively market milk. Its success is primarily felt by them.

PL: The campaign has been successful and has achieved its objectives. However, the key future need is for more value to be added to the milk category. Arla’s future investment will be focused on growing the added-value milk sector. Cravendale will be central to this agenda and it will also involve new products and brands.

JP: There are state aid considerations attached to direct government support of a national campaign. Make Mine Milk was part-funded by EU monies and I would encourage the industry to look again at such opportunities if funding is still available. But like all sectors of the economy, the industry must be able to stand on its own two feet so it would make sense for all the actors in the dairy supply chain - farmers, dairies, and retailers - to work together on marketing

 

“Generic campaigns are necessary to underpin consumers’ faith in the category. I wish DairyCo felt the same”

What kinds of dairy products will we be seeing more of in the next decade and why?

NB: Smaller pack sizes to hold down shelf prices and at the same time reduce calorific intake. More free-from lines as people continue to become increasingly aware of or concerned about their diets and health.

PK: I would like to think dairy sport nutrition drinks that take advantage of the isotonic and natural protein qualities of milk. However, any branding or added value to liquid milk would be beneficial.

JB: Variations around yoghurts. Innovative product ranges and clever marketing have seen huge growth in other parts of the world, particularly the US.

KA: Sports nutrition and functional food products with whey protein as a key ingredient. The UK market has more than doubled in the past five years, with similar growth predicted for the next five years.

What’s the most innovative dairy product you’ve come across in the past year?

NB: Rachel’s Strawberry and Cream yoghurt - not a new concept but a fantastic execution!

PL: Having spent many years in dairy ingredients, I like to see milk being used in innovative ways through milk powders and other technologies. There is a whole host of exciting products in China and the Far East - for example, they use dairy powders to offer low-cost health drinks.

JB: There is an increasing number of reduced fat cheeses around. Taste and composition are excellent. I think it’s going to be increasingly important for companies to have good reduced-fat options in their portfolio of products.

PK: New to me was a café latte extra shot from Emmi, which I understand uses Swiss milk. Wish it had been British.



Finally, what’s the biggest missed opportunity in UK dairy from the past decade? What do you wish you’d done differently?

JP: Getting rid of the Milk Marketing Board more quickly and thus moving processors more quickly towards true competitiveness would have made a big difference to where we are today. There was no driver for efficiency at farm or processor level nor innovation in processed products, so our processors were 20 years behind the Continent - a gap we’re now beginning to claw back.

NB: We should have been quicker to act on the rapidly growing success and popularity of Halloumi cheese - the sector continues to grow by about 30% per year. We should have driven broader retail distribution and accelerated the introduction of flavours and light versions.

PL: When we launched Lactofree milk, we knew that it was going to be a success, but we didn’t predict just how successful it would be. If we could turn back the clock, perhaps we should have been faster to market with other products in the range.

JB: Getting the consumer message right on large-scale farms. We got that wrong, and we’re going to need these big units in the future - within a portfolio of all farm sizes and production systems, of course.