Has the “innovative” Milk&More contract failed to stand the test of time thanks to high levels of cost inflation? Richard Ford and Julia Glotz report
It was hardly the anniversary Dairy Crest had hoped for.
Little more than 12 months ago, the company was the toast of the farming community when it launched a special two-year fixed-term contract for farmers supplying liquid milk for its Milk&More doorstep delivery service.
Farming organisations such as the NFU had long been calling for farmers to get greater security through longer-term contracts, and Milk&More seemed to perfectly capture the mood for greater stability.
Fast forward a year, and that innovative Milk&More contract has become a throbbing PR headache for Dairy Crest. So what are the wider prospects now of longer-term contracts in dairy?
The contract was thrust into the spotlight last week after Dairy Crest published a statement on the Milk&More website informing customers it was putting the doorstep price of a pint up by 3p. That followed a previous increase of 3p last September a total increase of 10.56ppl.
Dairy Crest justified the latest rise by suggesting it had recently had to increase the price it paid to farmers, without spelling out exactly how much of the rise was down to milk becoming more expensive and how much was down to other input costs such as diesel going up.
The Milk&More farmers were unimpressed. Questions were quickly raised over Dairy Crest's claim to be paying a "fair" price when, because of the fixed-price contract they are on, Milk&More farmers had seen only a marginal increase in their milk price despite soaring commodity costs.
As one industry source starkly put it: "Trust with farmers and consumers has been breached and it will take some time for the company to recover this lost ground." Meanwhile, commentators started dubbing the contract 'milk¬muchmore'.
"The contract was seen as very innovative when we launched it but hasn't stood the test of time because of the high levels of inflation," says Dairy Crest's Arthur Reeves. "In times of high inflation, a long-term fixed contract just doesn't work."
The contract may continue to give farmers much-needed security but they claim there is ample room for improvement. Mansel Raymond of the NFU dairy board, for example, would like to see greater flexibility in terms of how much volume farmers have to put in an option Dairy Crest itself is considering. "There should be a minimum figure and the choice [over the rest] is up to the producer," Raymond argues.
Others believe the contract should be linked to the retail price of milk. "There needs to be some linkage between the price the farmers receive and the price the consumer pays," says one farmer.
With commodity volatility set to stay, less strict versions of long-term contracts, which allow for greater flexibility when input costs rise, could be the future.
Last month, Glanbia Dairy Ingredients launched an updated version of a three-year contract it originally launched in December. It allows farmers to name the percentage of their milk they supply to Glanbia through the contract as long as they commit to a minimum of 10%.
Although it is not tied to the price at which Glanbia sells the milk on, the revised scheme introduced a price-tracker mechanism that tracks on-farm input costs.
Farmers will receive a minimum 28ppl backdated to January this year until January 2014. The price will rise if input costs go up.
Dairy Crest is now likely to have to revise its approach when its Milk&More deal runs out in February. Many farmers hope this revision will include more clarity in its consumer communications.
The Milk&More contract
- Launched March 2010
- Two-year contract term
- Farmers receive a fixed price over the contract term, unless the market price for liquid milk (based on a basket of non-aligned milk prices) moves by more than 2 pence per litre in either direction
- The 2ppl threshold was crossed for the first time this month, triggered by DC, Arla and Wiseman putting up their standard milk prices; Milk&More farmers receive 0.46ppl more as a result
NB: Between The Grocer going to press on Thursday and this story being published on Saturday, Dairy Crest announced a 1ppl bonus - payable for the six-month period between April and September this year - for farmers on the Milk&More contract.
The bonus was "in recognition of the unprecedented level of on-farm cost inflation", Dairy Crest said in a statement.
It was hardly the anniversary Dairy Crest had hoped for.
Little more than 12 months ago, the company was the toast of the farming community when it launched a special two-year fixed-term contract for farmers supplying liquid milk for its Milk&More doorstep delivery service.
Farming organisations such as the NFU had long been calling for farmers to get greater security through longer-term contracts, and Milk&More seemed to perfectly capture the mood for greater stability.
Fast forward a year, and that innovative Milk&More contract has become a throbbing PR headache for Dairy Crest. So what are the wider prospects now of longer-term contracts in dairy?
The contract was thrust into the spotlight last week after Dairy Crest published a statement on the Milk&More website informing customers it was putting the doorstep price of a pint up by 3p. That followed a previous increase of 3p last September a total increase of 10.56ppl.
Dairy Crest justified the latest rise by suggesting it had recently had to increase the price it paid to farmers, without spelling out exactly how much of the rise was down to milk becoming more expensive and how much was down to other input costs such as diesel going up.
The Milk&More farmers were unimpressed. Questions were quickly raised over Dairy Crest's claim to be paying a "fair" price when, because of the fixed-price contract they are on, Milk&More farmers had seen only a marginal increase in their milk price despite soaring commodity costs.
As one industry source starkly put it: "Trust with farmers and consumers has been breached and it will take some time for the company to recover this lost ground." Meanwhile, commentators started dubbing the contract 'milk¬muchmore'.
"The contract was seen as very innovative when we launched it but hasn't stood the test of time because of the high levels of inflation," says Dairy Crest's Arthur Reeves. "In times of high inflation, a long-term fixed contract just doesn't work."
The contract may continue to give farmers much-needed security but they claim there is ample room for improvement. Mansel Raymond of the NFU dairy board, for example, would like to see greater flexibility in terms of how much volume farmers have to put in an option Dairy Crest itself is considering. "There should be a minimum figure and the choice [over the rest] is up to the producer," Raymond argues.
Others believe the contract should be linked to the retail price of milk. "There needs to be some linkage between the price the farmers receive and the price the consumer pays," says one farmer.
With commodity volatility set to stay, less strict versions of long-term contracts, which allow for greater flexibility when input costs rise, could be the future.
Last month, Glanbia Dairy Ingredients launched an updated version of a three-year contract it originally launched in December. It allows farmers to name the percentage of their milk they supply to Glanbia through the contract as long as they commit to a minimum of 10%.
Although it is not tied to the price at which Glanbia sells the milk on, the revised scheme introduced a price-tracker mechanism that tracks on-farm input costs.
Farmers will receive a minimum 28ppl backdated to January this year until January 2014. The price will rise if input costs go up.
Dairy Crest is now likely to have to revise its approach when its Milk&More deal runs out in February. Many farmers hope this revision will include more clarity in its consumer communications.
The Milk&More contract
- Launched March 2010
- Two-year contract term
- Farmers receive a fixed price over the contract term, unless the market price for liquid milk (based on a basket of non-aligned milk prices) moves by more than 2 pence per litre in either direction
- The 2ppl threshold was crossed for the first time this month, triggered by DC, Arla and Wiseman putting up their standard milk prices; Milk&More farmers receive 0.46ppl more as a result
NB: Between The Grocer going to press on Thursday and this story being published on Saturday, Dairy Crest announced a 1ppl bonus - payable for the six-month period between April and September this year - for farmers on the Milk&More contract.
The bonus was "in recognition of the unprecedented level of on-farm cost inflation", Dairy Crest said in a statement.
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