Q&A: First Milk’s top farmer on falling milk prices

Farmers in dairy co-op First Milk have seen their prices plunge 9-11p/litre since the spring and there are mutterings about the business’ future. First Milk vice-chairman and Pembrokeshire farmer Nigel Evans sat down with Charlie Taverner.

We hear a lot about First Milk’s new products, such as Team Sky sports drinks or Quark cheese. Last week we heard you were sending Mull of Kintyre cheese to Texas. What’s the strategy behind all this?

The plan is to produce really good nutritious food and add value to every bit of the farmers’ milk we have got. We started as a broker and co-op and now the idea is to be an added-value business.

See also: Business Profile: Kate Allum, chief executive, First Milk

We developed this added-value strategy with products that have less linkage to commodity markets. But, with the best will in the world, those are going to move the price by pennies whereas what we have actually seen is volatility of 10p, possibly 12p/litre. So the strategy is still OK but you have still got to be a very good commodity producer in order to survive those markets.

Our whole thrust was to get 15-20% [of our milk] into added value but we are well under 10% still. It is early days but it is like the old story, when is the best time to plant a tree for shade? Well, 20 years ago. When’s the next best time? It’s now. You’ve got to start somewhere.

First Milk’s partnerships with the likes of Nestlé, Fonterra for whey protein and Adams Foods for hard cheese also stand out. How do these help?

One is the out and out commercial reality of working with these guys and having long-term, sustainable outlets for our volume.

The second part is when you are working with international companies such as Nestlé and Fonterra the kudos draws a lot of people to us. It opens up a lot more opportunities to access the added value.

And, as a farmer, I would rather have 10% of something than 100% of nothing.

Are you working on any pricing tools that will help farmers manage volatility such as we’re seeing now?

We have set up some working groups which involve the executives, farmer directors, farmer representatives and membership. We are a farmer-owned business. It is up to us to set the business where we want it to be. Each of these groups will look at issues like milk quality, how do we accept new members, how do we deal with pricing in the marketplace.

The world is changing. Historically, the way we priced milk in the UK has carried on since Adam was a boy. Is that fit for purpose or not?

Each of the working groups will come up with recommendations which will go back to the board which we will then fully cost out and make decisions.

Why has First Milk cut its farmgate prices harder and faster than other processors since the spring?

The easy answer is the market started falling, we started reacting to it. We were taking a view about where we saw the market going and this involved a gathering of data, speaking to people internationally about what is happening to production around the world. What we could foresee was a deep recession in milk price because volumes were picking up rapidly right around the world.

How do we deal with that? As a farmer-owned business you can try and stay behind it and ameliorate some of the drops. But, if you are constantly paying out a price more than your market is paying you, you are burning cash.

The problem is this market could stay at a whack longer than a business could stay solvent. If you are burning cash, how long before you burn out all the cash? We need to be there for our members and to pick up all their milk and pay for everything.

Was it an easy decision? No, but it is an easier decision than running the business into the ground because you are fearful of taking some flack from members in the short term.

But why are First Milk’s prices consistently low in the league tables?

This is where the issue really becomes grating. We get this thrown at us from time to time. But why do we get the people joining the business if our price is so crap?

We have adopted a strategy in terms of our pricing schedule that is highly reflective of what we pay out. Some other companies don’t do that. They adopt a pricing strategy to influence their position in a milk league table. We could move ourselves up the league table instantly, simply at the stroke of a pen.

There are only so many things you can do when the market is fundamentally in free-fall.
Nigel Evans, First Milk vice-chairman

Would we actually pay out more to our members?

Our ethos is we pay a competitive price and that is what we drive for, a return on capital, and we guarantee to pick your milk up.

How healthy is First Milk as a business? There are a lot of rumours it could go the way of Dairy Farmers of Britain (DFOB) and collapse.

There is a potential for any dairy business in the UK to be the next Dairy Farmers of Britain. If you are asking me, is First Milk a viable trading business that will go forward and be there for the future? Then, yes. Will First Milk look like it is five years from now? Probably not, because we are constantly developing the shape of the business.

We have had a tough set of trading conditions and every company is in the same place. We are dealing with that and fundamentally the business is sound.

How confident are you in the ability of First Milk’s leadership to ride out the current crisis?

I have total confidence in chief executive Kate Allum. She is a natural leader within this industry and collectively it is the board that actually decides on the strategy. But, as the person that leads the business on a day-to-day basis, there is total support for Kate.

Do British farmers have a different mindset to those in other countries when it comes to co-ops? There’s a lot of unhappy Arla members at the moment too.

I do think there is a difference in mindset. The rumour mill is quick to focus on DFOB as a co-op that failed. Nobody actually talks about all the other dairy companies, the private companies, the public companies, that have failed.

A co-op is a membership structure. You run the business first in order to deliver value for its owners. If you start from the premise of being all things to all men, you run a business into the ground. That applies whether it is a public limited company, whether it is a co-op, no matter what it is.

You’ve met about 700 farmer members at meetings in the past few weeks. What’s your message to them in the current crisis?

What are we looking down the road at, is this is going to get tougher before it gets better. We will continue to do what we can to mitigate it, to protect you from the lowest of the lows to the best of our ability.

But there are only so many things you can do when the market is fundamentally in free-fall and there are no support mechanisms there. And it is unprecedented. Nobody in living memory can remember a time when we had an unsupported market.

Analysts keep telling us the long-term prospects are great for dairy. It doesn’t look so rosy now. What needs to change?

I do think there is a good future for dairy but we have to be very clear about what we call a good future. There was a good future for the airplane industry through the 1950s and 1960s and 1970s and you had investors investing huge sums of money. The industry has grown dramatically and the cost to the consumer has come down, yet all the investors have lost their shirts.

We have got to avoid that scenario in dairy. We need to be a bit more savvy about how we extract the value that is there and not let it flow to outsiders, external investors. That needs people to sit down and think and collaborate about how we do that.

So I think definitely there is a need for us to get together. My big issue with this is who actually leads that? Somebody needs to take the leadership position.