The real cost of a pint of milk

Supermarket price wars mean that milk is getting cheaper. That’s good news for consumers, but not for Britain’s embattled dairy farmers, says Simon Wilson.

What's happened?

The grim plight of Britain's dairy farmers has been thrust back into the spotlight after the country's biggest dairy co-operative, First Milk, was forced to suspend payment to around 1,200 of its suppliers.

First Milk, which is 100% owned by its members, said that heavy losses at the start of the financial year meant it needed greater capital contributions from its farmers in order to stabilise its business, and said that its returns had fallen 50% over the past 12 months a "year of volatility that has never been seen before".

At the same time, the National Farmers' Union (NFU) warned that most farmers are being paid less for their milk than it costs them to produce, and that the supermarket price war is "crippling" the UK industry.

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Aren't dairy farmers always in crisis?

There's certainly been a long-run decline in dairy farming in the UK as more and more farmers find it uneconomic to produce milk. Over the past decade alone, the number of farmers has fallen by almost half. Last month saw the number of dairy farms in the UK slip below 10,000 for the first time.

But even by the super-tough standards of dairy farming, things have turned extra grim over the past year. According to NFU dairy board chairman Rob Harrison, "being a dairy farmer at the moment is like being a boxer on the ropes and taking body blow after body blow. There's only so much you can take before throwing in the towel."

What's made life so rough?

A double whammy of blows from global market forces (a supply glut and unexpectedly weak demand) and a supermarket price war here at home. Milk in its fresh liquid form is not a product that travels well: some 80% of all milk produced in the UK is consumed domestically.

Nevertheless, the price received by British farmers is still heavily determined by the global market, due to the complex supply chains involved in the processing and marketing of milk-related products.

The past year has seen exceptionally good milk-producing weather in every major producing country. That benign scenario has followed several boom years that have led to higher levels of production. This created a surplus that has been exacerbated in the EU by Russia's ban on imports (cheese, for example) in retaliation for sanctions over Ukraine, and by unexpectedly weak demand in Asia.

And the supermarkets?

As part of their cut-throat battle, several supermarkets sell milk at unsustainably low prices and demand ever-lower prices from their suppliers. Asda, Aldi, Lidl and Iceland have recently been selling four pints of milk at around 89p (39p per litre). Average store prices have fallen 10% to 34p per pint since 2010.

Research by trade magazine The Grocer shows that milk is now cheaper litre for litre than bottled water. No doubt that reflects the success of water bottlers in branding their products, whereas milk remains overwhelmingly commoditised. But given the intensive and long-term investment involved in cattle farming, it's a worrying sign of how grim things have got for dairy farmers.

Are they still making a profit?

According to the NFU, the average cost of producing milk is currently 28p per litre, whereas some farmers are getting just 20p per litre over 10p less than most were getting just a year ago and the lowest since 2007. Not much sign of a profit there, then.

Some supermarkets have introduced a model where farmers are paid a price directly linked to the cost of production. Tesco gets its milk from a group of about 600 British farmers, paying at least the cost of production and using an independent consultancy to review prices every six months (the current rate is 32p).

Sainsbury's uses a similar system for its 300 farmers and currently pays them 31.6p. M&S, the Co-op and Waitrose all operate a related model. But only a minority of dairy farmers are fortunate enough to benefit.

Any sign of better times ahead?

Quite the opposite. Global milk production in 2015 will continue to exceed the long-term rate, according to Rabobank, a Dutch financial services group specialising in agribusiness. Meanwhile, the EU is due to end 31 years of restraining milk production (through its policy of milk quotas) at the end of March creating a completely free market in milk.

Britain has never faced levies for overproduction, unlike our main competitors in the EU market Germany, Ireland and Denmark. Without EU quotas in place, those countries are all but certain to increase production, and prices are likely to fall further.

In coming months, we can therefore expect ever louder cries of anguish from the farming industry, and ever greater pressure on the government to increase regulators' powers to intervene in the market.

'Free range' milk could save the day

After decades of disappointing performance, it is the organicproducers who are suddenly "sitting pretty with assured,niche markets", such as Yeo Valley, which pays nearly 40pper litre for a premium product, says Charles Clover in TheSunday Times. But "should we not have rather more nichesin our market"?

For example, a premium for "free-range"milk from cows that graze in fields, rather than get fed silageall year round under cover at new mega-dairies. After all, UKconsumers are not so impoverished that they should "acceptthe future of our countryside being sold as a loss leader in asupermarket price war".

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.