Milking It


I’ve spent a lot of time with milk cows. Milking them isn’t a cheap hobby. A lot of dairy farms have a business model which resembles a hosepipe. You get in quite a lot of money from the milk cheque but then it moves down the hosepipe at speed, and sprays the money out to your suppliers and the bank. Hopefully enough sticks to the sides of the hosepipe for you to live off.

Thanks to the pressures on dairy farms over the last generation (the consumer pays less for milk than they did back in 1996) dairy farms are as a rule pretty efficient. Certainly I’d challenge any other industry to produce at 1996 prices (or government departments to run on their 1996 budget).

At the moment things aren’t looking too bad for dairy farmers. Whilst costs are going up, the price is also moving up. The results from GDT Auctions have been positive. As an aside, for those not in the industry, GDT is ‘Global Dairy Trade’ which allows buyers and sellers to trade milk and milk products globally. As you can see from the graph, prices are back up to levels last seen in 2013. But still in agriculture, that is counted as good news.

But this is starting to create problems for processors. They have a lot of skilled staff. Can they hang on to them? Not so long ago a lot of companies were paying lorry drivers about £550 a week. Now Waitrose is advertising for HGV drivers at over £1000 a week. As an aside, this may be what ‘levelling up’ looks like. The wages for those working in the building trade have also gone up.

So are the dairy processors going to pay higher wages to keep their staff? But they face a dilemma. It’s not just staff. A lot of other costs have gone up. Apparently the four pint plastic containers so popular in supermarkets have gone up by about 2p. At the same time processors are going to face increased energy and fuel costs. Yet they cannot just cut the price they pay farmers for milk, as farmers will just move to supplying better companies.

Or alternatively the farmers might just stop milking altogether. There will soon be no more Basic Payment Scheme. But you can get money for entering environmental schemes. Now I’ve looked at the schemes. Let us assume you are an owner occupier and decide to put your small or even medium sized dairy farm into them. Whilst you could no longer run a dairy herd, it might be possible to get a sum pretty close to what you were getting from Basic Payment. But you’d get out of dairy. You could retire, stay on the farm, take the environmental payments and manage the land by being paid to take sheep over winter, and then take more cattle or sheep through the summer. It would nicely pad out the pension.

For the tenant it doesn’t look as tempting, but if enough owner occupiers do get out, there’s going to be fewer suppliers and the dairy processors might even have to compete for them.

But if dairy processors cannot just cut the price they pay farmers, where are they going to get their money from? Basically that leaves the customers. Now in 1995 government statistics say that the retail price for milk was 36p per pint, which equates to 63.35 ppl. Currently Tesco is selling milk at £0.51 a litre. So just allowing for inflation, the price the consumer should be paying per litre is about £1.20. So obviously there is room here for an increase. But are the retailers ready to put prices up?

They too face a squeeze, not only can they not just import cheap labour to keep their costs down, they cannot import cheap produce either. Firstly there isn’t any cheap produce. As I mentioned, GDT Auctions are global. Secondly, since the Brexit referendum, the pound has been at a more reasonable rate against the euro. This makes our exports cheaper (so lamb and beef have done well this last couple of years, in spite of, or perhaps because of, Brexit) and it makes our imports more expensive. So major retailers cannot even convincingly threaten to import milk to force prices down.

Ratio of the £ to the Euro

I honestly don’t think that the retailers have an option. I suspect they’ll have to start putting the price up, or they might struggle to get supplies. After all, if they try to drive the price down, the companies that process for retail will just fail, and the companies that make cheese and similar that can be sold around the world at world prices, will take the milk instead.

I know that milk is one of the products that supermarkets traditionally try and keep cheap. It’s rumoured to be one of those staples, like bread and baked beans, that everybody knows the price of. But I suspect even the major retailers are going to struggle to hold the price down for much longer.

Jim Webster farms at the bottom end of South Cumbria. Jim was encouraged to collect together into a book some blog posts he’d written because of their insight into Cumbrian farming and rural life (rain, sheep, quad-bikes and dogs) It’s available here.