As much as the UK’s big grocers make for popular villains, the milk crisis is not one of their causing – it is a story of supply and demand.

As US advertising campaigns go, Got Milk? was one of the more successful ones. True, its impact on milk consumption nationwide is debatable, but in terms of recognition it achieved almost universal awareness, helped no doubt by the many parodies and spin-offs it encouraged.

With the UK milk crisis in full swing, the question the campaign originally posed to consumers is now a pertinent one for the British dairy industry.

The answer to that question is: yes, we have got milk – we’ve actually got far too much of it. And therein lies the nub of the crisis.

Supply and demand

Milk, like any other commodity, is not immune from the laws of supply and demand – if supply outstrips demand then prices will fall.

That is what is happening at present, thanks to a number of disparate factors. One of these is the fall in demand for milk and milk products from the Far East, most notably China. The impact has been to make more supply available in Western markets.

“All that previously exported milk has helped to create a supply glut back at home”

Neil Saunders, Conlumino

Another disruption is the Russian ban on imports of Western produce, which now looks likely to extend into early 2016.

According to the European Commission, while Russia was a fairly insignificant destination for raw milk, it was a much more important market for milk-related products – accounting for around 34% of EU cheese exports and around 24% of butter exports.

In terms of value, the EU accounted for nearly 81% of all Russian dairy imports.

With nowhere to go, all that previously exported milk has helped to create a supply glut back at home.

Tumbling prices

Alone, these factors would be sufficient to set prices tumbling, but they are joined by another market factor: historically high milk yields across many countries. Part of this is down to the rise of mega-dairy farms in the US and part is down to the scrapping of EU milk quotas earlier this year.

However, it all adds up to the same thing – more of the white stuff at a time when demand is lower.

This dynamic has created a problem for dairy farmers. Price decreases on the global market, quite reasonably, reduce the amount that big processing firms are prepared to pay. That in turn reduces farm gate prices which, in some cases, are now close to or below production costs.

Farmers across the world are affected, but the problem is particularly severe in the UK where the cost of production at many farms is slightly higher because of weaker economies of scale. It is notable that the size of the average dairy herd in the UK is 125.

In the US, thanks to the rise of industrial type producers, the average herd size is now 184 and rising – and indeed, farms with over 2,000 cows now account for well over a quarter of US dairy output.

A bad deal for farmers?

Against this backdrop, UK supermarkets, faced with heavy competition, have been keen to reduce the price of key staples including milk. Some, but not all, of this is linked to the fall in commodity prices.

Indeed, many supermarkets guarantee a minimum price for milk and still pay this even if the shelf-edge price falls below what they pay farmers or if global prices tumble. In other words, many grocers are subsidising the low cost of milk, rather than passing this down the line to farms.

Understandably, dairy farmers have concerns over such moves as they believe it devalues their product.

However, in the light of prevailing market conditions, the deal they are getting is not necessarily a bad one. Nor should they place the blame on supermarkets for pressures elsewhere in the dairy sector. As much as the big grocers make for popular villains, the current crisis is not one of their causing.

“Brutal as it may sound, it isn’t the job of supermarkets to prop up ailing segments of the economy”

Neil Saunders, Conlumino

In an ideal world, what farmers would like is to get more money from supermarkets in order to help them overcome the current financial pressures. Given the competitive state of the grocery market, unless they can persuade consumers to pay a higher price for quality British milk, that’s a battle they will likely lose.

Brutal as it may sound, it isn’t the job of supermarkets to prop up ailing segments of the economy, just as in the past it wasn’t the job of clothing retailers to prop up failing British garment manufactures, or car dealerships to prop up inefficient British automobile makers.

There is, of course, much more romanticism attached to farming than there ever was to factories churning out clothes or car parts. However, romantic notions do not, and should not, make British farming immune to the laws of supply and demand.

  • Neil Saunders is managing director at Conlumino