Analysis: Consultant charts where now for UK dairy?

Andersons partner and farm business consultant Mike Houghton has travelled and studied to identify how our dairy sector might develop following the UK’s decision to leave the EU.

His report for the Trehane Trust Fellowship Scheme Identifying a Strategy for the UK Dairy Industry Post Referendum focuses mainly on the UK’s domestic market while acknowledging exports will always provide a niche opportunity.

See also: Crediton Dairy introduces two-year fixed contract

What are the main challenges and issues for UK dairy?

Uncertainty perhaps the most unnerving element, making planning difficult.

Commodity production farmers remain price takers. Over time, the real value of a commodity tends to reduce year on year so the challenge is how to produce a commodity (milk) profitably, in an economic climate where supply and demand is finely balanced.

Volatility huge milk price variations over short economic cycles (35p/litre in November 2013 to 19p/litre in June 2016).

Productivity not simply a matter of driving costs down but understanding customers’ needs and knowing what you can supply profitably and being prepared to adapt.

Sometimes improvements come through not changing but and doing things better by training, practice and experience.

Profitability volatility makes consistent profitability very challenging – at farmer and processor level, margins are squeezed while retailer margins have grown.

Dairy farm profitability is determined mainly by the system of milk production and the milk contract, with about 80% of UK producers on all year round/level supply contracts, which are the most difficult to operate, hence the understanding of total cost of production needs to improve – see ‘Andersons’ Friesian Farm model’, below.

Food prices Government is almost certain to want to keep food cheap, as this helps low inflation, so trade liberalisation is perhaps the most likely Brexit outcome – agriculture might be sacrificed to secure other industries, resulting in increased competition and price pressure.

Support worth 1.5-2p/litre to producers, this is likely to change and reduce, probably conditional on delivering public benefit and environmental improvement. 

Share of support for lowland farmers will probably likely to reduce and any other support will almost certainly focus on improving productivity, research and development, risk management and the promotion of British food.

Leadership Dairy industry needs strong, united leadership, which recognises change is inevitable and adapts accordingly.

Brexit trade agreements outcomes vary, with unilateral liberalisation disadvantaging all sectors, while status quo or World Trade Organization as a default would be relatively positive for dairy.

Skills and labour availability a general issue but intensified by Brexit.

Regulation, welfare and the environment UK has high standards, climate and soil related issues are likely to increase, while feed-sourcing issues could develop further based on environmental credentials, for example, palm oil and soya derivatives.

© Mode/REX/Shutterstock

What should a dairy strategy for the UK post-referendum include?

It should promote better understanding of production economics.

For example, achieving an average yield from forage of 3,000 litres a cow would save the industry £60m-£70m/year. Education about true costs of production, benchmarking, returns on capital and microeconomics needs to be improved.

Fully costed dairy monitor farms would help in this and should be established for all systems of milk production – AHDB’s arable monitors are a good example.

Agricultural colleges, instead of investing in their own productive capacity, should partner with local top-performing farms across a range of production systems and produce monthly costings for students to work with.

Compulsory engagement with the Farm Business Survey should be considered.

Supply and demand strategies should be discussed nationally and worldwide, to see if ways can be found to react more quickly to oversupply.

At present, the industry appears to react to reducing milk prices by producing more milk (at least in the short-term).

Supply and demand economics will not change and so the whole industry must work together to develop/control supply, otherwise excess supply will determine the number of farmers who can survive.

An organisation of milk-exporting countries might be worth exploring, to consolidate and improve the speed and availability of supply prediction data from around the world.

This would not be to control supply, but raise awareness of the likely balance of supply and demand.

More development of A and B pricing models, with greater collaboration and transparency between producers and processors.

This might allow both parties to build successful economic models around the “A” price and fully understand the risks and rewards around business growth at the “B” price.

Quality, not quantity; value, not volume these should be the focus for the dairy industry. Demand for milk solids is likely to be a key requirement from milk processors.

Risk management tools need to be developed to help smooth volatility, particularly for heavily invested businesses, who have taken a long-term dairy investment decision and while viable at 26-28p/litre, would not survive for long (through no fault of their own) at sub-20p/litre.

Some processors and independents are developing such tools, but banks and government might also assist in this area. The Rabobank/Glanbia Milk Flex loan principle is an example but is not available in the UK – why?

The US margin-protection program might be a model worth exploring – producers pay an insurance premium to guarantee a margin and all producers are protected against margins dropping below a certain level.

The US government underwrites the scheme and while it is not thought likely, the UK government would contribute to anywhere near the same extent, it would have an interest in promoting such stability and in the income that premiums would offer.  

Futures could be widely used, providing this is sensible and transparent. Yew Tree Dairies in Lancashire has pioneered an open and transparent futures system that really does allow their suppliers to manage risk.

Glanbia has recently announced a world first – a five-year guaranteed milk price of 28p/litre. When reviewing historic volatility, this looks attractive.

High animal welfare and food hygiene standards across the dairy food chain are the industry’s greatest virtue, they are much underplayed – consumers should be constantly reassured of this.

Consumer education the dairy industry needs to redouble its efforts here and linking back to the farmer is probably key. Clear and fair labelling, especially around country of origin is critical. The success of Morrisons “Milk for Farmers” has the potential to be replicated across the industry.

A dairy (or British food) loyalty card should be considered, linked to food-chain transparency.

Technology must be embraced and brought to the industry more quickly, especially to improve efficiency and productivity.

Changes likely in the next 10 years could well be extraordinary and almost beyond our comprehension today. In the meantime, internet and rural broadband need to improve, together with simple apps for data collection, stock management and so on.

Health half of UK adults have a chronic illness, which could be addressed through diet and exercise, potentially adding value to food and saving the NHS millions each year.

UK agriculture should lead the way in delivering a quality food solution that addresses the nation’s chronic illnesses.

New technology will offer improvements in many areas. For example, nanotechnology could bring the self-cleaning parlour, while spare parts could be created with 3D printing and battery technology could mean diesel-free farms.

Better food chain management there is scope for improved supply prediction, better and cheaper haulage arrangements such as lorry convoys and heavier loads travelling at restricted times, developing a “value, not volume” approach, improved labelling, incentives for processors, manufacturers and consumers to buy home-produced food.

Changes in food retailing such as the growth of online interests will also bring a new dynamic.