Since market deregulation in the mid-1990s, the UK's dairy farmers have often spent more money producing milk than they could earn from selling it. As supermarkets squeeze margins ever harder, many farmers are leaving the industry
When Tim Dobson stopped dairy farming last year, he closed the doors on a 40-year-old family business. Giving up milking cows was, he says, a difficult decision. "Making the decision to quit dairy farming was harder than actioning it. It took 12 months to make," he says, adding that in the end the decision made itself. "To be a dairy farmer you need a decent amount of capital behind you to get going and keep going. We found that we didn't have sufficient capital. We had made money every year, but it just wasn't enough," says Dobson, who is now farming goats for meat.
According to the National Farmers' Union (NFU), there are currently 13,601 dairy farmers in Britain. That figure has fallen from 14,296 in 2007 and 28,119 in 1997. Every day two dairy farmers leave the industry and this summer the industry hit the headlines again when cooperative Dairy Farmers of Britain collapsed, leaving many farmers without a buyer for large quantities of milk.
"It has just not been sustainable for farmers to produce milk," says Hayley Campbell-Gibbons, chief dairy advisor at the NFU. "We have half the number of farmers we once had. We are at bit of a crunch point now because although prices are higher, so is the cost of production and those that have invested in the last 10 years might not be confident enough to make another investment in order to stay in business. We are at a tipping point."
The 2009 DairyCo Farmer Intentions Survey, produced by the not-for-profit organisation that works on behalf of Britain's dairy farmers, shows that only 18 per cent of dairy farmers are planning to increase production compared with 35 per cent last year. And while almost half British dairy farmers have space for additional cows, they don't have the confidence to expand. Which is not surprising when you consider that 60 per cent have just £25,000 to invest in their business over the next five years.
Lyndon Edwards, chairman of the Royal Association of British Dairy Farmers (RABDF), says the current situation is a crisis. "The vast majority of dairy farmers in Britain are paid below the cost of production," he says. "This is a situation no other business would be in."
According to the NFU, while farmers saw the highest average milk price on record at the end of last year, at 26. 5 pence per litre, it was still not enough to match the cost of production, which stood at 27 pence per litre.
"Milk prices have been unsustainably low for the last 10 years. The UK has one of the lowest prices in Europe. As it is often below the cost of production, farmers are losing money on every litre they produce, which is why so many have gone out of business," says Campbell-Gibbons.
Lancashire farmer Ian Macalpine is still in business after 30 years, but admits it has been difficult. "I have seen a lot of changes over the years. It has always been a struggle and though there have been different phases I have never known it to get better. It has progressively been getting harder and harder," he says. "We have been hit by the supermarkets over the last 10 years. They have increased margins on their products and farmers have got little."
But it was not always like this. Prior to 1994, all milk was bought and sold by the Milk Marketing Board. Everybody got a stable price, which meant few people made any money and nobody lost money. When the board was disbanded, dairy farmers faced a more competitive market and some, having got used to the guaranteed price arrangement, couldn't cope with the fluctuations.
"Deregulation obviously changed a lot in terms of how milk is dealt with in the marketplace. Farmers as potential resellers have been exposed to downward pressures in the supply chain. In the UK for the last 10 years, they have been exposed to farm milk prices probably about five per cent below what they'd get in Europe," explains John Allen, managing partner of farming specialists Kite Consulting. "That might not seem much, but five per cent is a large proportion of your profit and ability to reinvest."
With around 70 per cent of all food bought through supermarkets, the power and dominance of the large chains has dictated margins down the line. Edwards says the relationship between farmers and supermarkets is now very strained. "Some farmers have contracts for liquid milk with Waitrose or Tesco or Asda that are on the cost of production, so there are no profits, but at least there is a guarantee of covering production costs. But a lot are paid 25 per cent below that, and so some are getting out and production is falling." He says the annual milk produced is over a billion litres less than it used to be.
But the NFU's Campbell-Gibbons believes relations between farmers and retailers are improving. She points out that most of the supermarkets have set up dedicated pools of farmers who supply them and offer stable contracts. "The contracts vary, but it means retailers are taking responsibility for their farmers and dairy farmers are getting closer to the consumer and producing to the standard and requirements they want," she says. Farmers on these supermarket contracts are getting the best prices in the industry, but for those not on them, the insecurity makes it hard to run a business. In some contracts prices can change from one day to the next and any fall in prices can be backdated. "We are asking farmers to commit to a fragile industry and you can see why they might not have the confidence to invest," says Campbell-Gibbons.
Although pricing continues to be the number one worry for UK dairy farmers, it is far from their only concern. Legislation and illnesses such as bovine TB, which affects 30,000 dairy cows every year, make it harder.
Legislation can often mean farmers investing in new equipment. A current example is the so-called nitrate vulnerable zones (NVZ) legislation, coming from the EU. This requires farmers to address the amount of nitrate and the risk of nitrate leaking from soil and from cattle manure and slurries into water courses. Essentially this means farmers have to invest in costly new storage tanks. Macalpine has recently installed new slurry stores, which will end up costing almost £100,000. "You just have to soak up the cost because if you don't do it you will not be allowed to farm," he says.
RABDF's Edwards is worried that having invested a lot of money in raising standards, buyers will still go for cheap overseas products. "Animal welfare standards in the UK are very high and we are also trying to reduce carbon emissions. These are the right things to do, but they add extra cost. If the retailers go and buy milk cheaper abroad, that is blatant disregard for what they are saying publicly." He cites the pig farming industry as an example. British farmers improved production standards and British pork quality went up. But retailers responded by buying cheaper bacon from Denmark produced to lower standards. "I am worried that we don't go down the same road in the dairy industry, saying we need to raise standards and then, having done all that, seeing retailers still not buying here because it is too expensive," he says.
While all fresh milk sold in supermarkets is British and farm-assured-produced to standards set by sector representatives-the fall in production means it is necessary to import milk for some manufactured products. "Core milk requirements in the UK is 12.95 billion litres and production this year is predicted to be 12.2 billion litres, so if the predictions are correct we will have a deficit of 750 million litres and that will have to come from somewhere," says Campbell-Gibbons.
While supermarkets have come a long way on how they deal with farmers with respect to liquid milk, it is a different story for many other dairy products. "The retailers and processors need to get together and say 'do we want to have British products in the future or not?' and if they do, they have got to pay a sustainable price for it," says Edwards. "Quite a few are already doing that on liquid milk but it doesn't follow through on products such as cheese and butter. This year the amount of imported cheese in Britain will increase by 100 per cent."
Campbell-Gibbons agrees: "We are at a real risk of seeing our supply base contract for milk, cheese and other manufactured products start to shrink. It will have to be replaced by foreign imports and once it is gone, we will not get it back," she warns.
Macalpine admits that he has considered giving up his cows more than once. "But dairy farming is something I have always done, ever since I left school. We have built up a business and I have spent a lot of money on our farm. You just don't like to see it go," he explains. But he can understand why so many leave. "Many farmers spent a lot of money in the 1970s and 1980s, encouraged by the government and their grand schemes. EU grants encouraged people to produce more and they put up new buildings and parlours. These now need replacing and you wonder whether it is really worth re-investing," he says.
The NFU wants an ombudsman to regulate retailer behaviour. "Some retailers are doing some good things, but that doesn't cover the whole industry. There are a lot of murky areas," says Campbell-Gibbons. The RABDF, too, would like some sort of supervision. "We have called for a 'Mister Milk' for some time; a regulator is probably too strong a word for what we would like to see, but we need something like that or else we will find ourselves in a situation where we are importing more and more," says Edwards.
But the farmers don't seem to think a regulator is the right answer. "I worry about getting a regulator in because at the moment the majority of milk producers are producing a commodity. Once there is a regulator it becomes a utility and then you are told how much you can have for your milk," says Macalpine. "I have a good relationship with my processor and I can negotiate my price. I am a strong advocate of market forces but I can see there is room for looking at some of the margins."
Former dairy farmer Dobson doesn't believe it is the answer, either: "I can't see a regulator would achieve what you'd hope they'd achieve," he says. "Supermarkets are only very successful businesses doing what they do well. They are in a market, just like we are." Dobson thinks dairy farmers just need to learn to market their product better. "They have a milk cheque that turns up in the bank pretty much without fail once a month. They are guaranteed to sell what they can produce and I think they need to get a little bit cannier," he says.
Campbell-Gibbons believes long-term prospects for British dairy farmers are positive, but expects the short-term future to be tough. "Global demand for food is growing and we think by 2050 the population will require double the amount of dairy products it currently does. It is easy to be very doom and gloom, but in terms of long-term prospects, there are already signs that people want more dairy around the world and at home people are more interested in British food. We need to make sure we are there producing what people want."
She also believes the type of farm in Britain will change. "In the future we will see fewer small family farms producing less than half a million litres. Farms in the future will be fewer and bigger and will produce in excess of two million litres."
This year's DairyCo survey shows that while many farmers are giving up, some are looking to the long term and of those 80 per cent believe that their farms will still be running in 10 years.
Macalpine also chooses to be positive. "I think it will be hard for a while and a lot more people will probably go out of dairying in this country. Farmers are quite resilient and we probably do stay in the industry longer than we should. Although there are a lot of farmers leaving at the moment, we should probably have fewer farmers than we do," he says. "But of course, people sit and wait and think that things will get better."
