09:00 - 20 November 2002
 Anthony Gibson: 'Ultimately the potential exists for the problem to
solve itself'

Since last I wrote about milk prices, in early September, I think it
would be fair to say that the situation has gone from worse to bad. The
price to the farmer has improved, but not by nearly as much as milk
producers had expected, needed or deserved.

That is mainly because the impact of the 2p per litre increase in the
supermarket price of milk was oversold. Expectations were raised too
high (often by those who ought to have known better).

The result is that what should have been received as a welcome and
morale-boosting step in the right direction, has instead been greeted as
a kick in the teeth.

Not everyone on the producer side of the industry is convinced that it
was a good move in the first place.

I heard one leading player describe it as "demeaning" that milk
producers should, in effect, have had to rely on charity from their
retailer customers.

Someone else suggested that the supermarkets had had an ulterior motive:
to pre-empt criticism of an abuse of market power in advance of a major
report which the accountants KPMG are producing for the Milk Development
Council. That wouldn't surprise me in the least.

In any case, the deal is already showing signs of fraying at the edges.

Safeway has apparently dropped the price of a four pint container from
£1.04 to 99p. If the price increase cannot be made to stick at the
retail level, how sustainable is it going to be at the producer end of
the chain, especially when it was a political, rather than a
market-driven, decision in the first place?

Conversely, the chances of the £200 per tonne increase in the cheese
price being sustained are looking rather brighter, precisely because it
is in line with market trends.

The market will rule in the end. Which is why I am pretty sceptical
about all of this talk of a return to "formula pricing" - a set scale,
depending on the end use of the milk - as practised in the good old days
of the Milk Marketing Board.

Still, if you can't buck the market, you can buck market manipulation -
or at least you can provided you have got options.

By options, what I mean is having the ability to do something else with
what is a highly perishable commodity, other than selling it onto a
rigged market. And for "options" read "processing capacity". Beggars
can't be choosers; processors can be.

Let us not underestimate the progress which has been made in this

The £80 million which United Milk and Milk Link have invested between
them has increased the collective stake of milk producers in the UK's
processing capacity from five per cent to around 18 per cent.

Even if the worst comes to the worst next spring, and we do see a huge
upsurge in supply coming onto a static and stagnant market, the position
will not be nearly as serious as it was earlier this year.

Every milk producer, no matter where or how he sells his milk, will
benefit from that. It is not the top of the market which determines the
overall return, it is the bottom of it.

It was in no one's interest that Milk Link should have been forced into
exporting milk at 8p per litre last April, just to get it off their
hands. The direct suppliers may have maintained their differentials, but
their prices were dragged down with the rest by the fact that the
co-operatives were reduced to the role of supplicants.

Yet, despite the fact that every dairy farmer will benefit from the
courage and enterprise of Milk Link and United Milk, every dairy farmer
is not contributing to the cost of it.

Instead, the burden is falling on those producers who were already
receiving among the lowest prices in the British dairy industry, and
that seems to me to be unfair.

Of course, there will be direct and exclusive returns to United and Milk
Link members from their investments in processing. Not all of the plant
will be used to mop up milk which would otherwise be surplus to
requirements, even during the spring peak.

But there is, undoubtedly, an element of what is known in the trade as
"balancing capacity" in both investments.

Assuming that the value of the balancing capacity can be calculated,
then I do not see why the burden of providing it should not fall equally
on all milk produces. As a principle, that is simple to expound but, I
suspect, desperately difficult to deliver.

Provision could be made for either individual direct suppliers, or
groups of them, to invest in the plant, but if they can get the benefits
anyway, why should they bother with it at all?

A levy is an obvious possibility, but without statutory backing it would
be wide open to abuse, and I cannot see this Government being interested
in legislation.

Perhaps some form of investment trust might be the answer, but then I
can think of all sorts of objections to that as well. Suggestions on a
postcard, please.

Ultimately, the potential exists for the problem to solve itself.
Because if the strategy of dairy farmers taking control of the
processing of their product succeeds, the value to the dairy companies
of having direct suppliers will diminish, and with it the direct supply
premiums, to the point where co-operative membership will no longer
carry a financial penalty. Everyone will join and every producer will
therefore be contributing.

Despite the fact that is already the situation in many leading
milk-producing countries around the world (Ireland, The Netherlands, New
Zealand), we are a long way away from that in the UK.

In the meantime, all the signs are that dairy farmers (especially in the
far South West) will continue to move towards spring calving, so as to
make the most of the low-cost grazed grass which we can grow so well.
The seasonal pattern of production will move even further out of kilter
with the non-seasonal pattern of demand, and the need for
producer-controlled processing capacity will grow even more acute.

The strategy for the future of dairy farming in this country is obvious,
and it is a strategy to the achievement of which every dairy farmer
ought to be contributing.

Anthony Gibson is the South West Regional Director of the National
Farmers' Union