Farmers with a supermarket supply contract get top prices and are shielded from market volatility. But what if you’re ‘not in the club’, asks Richard Ford

It's no secret that 2010 was a tough year for dairy producers and processors - a profit warning from processor Robert Wiseman in September and Farmers for Action protests outside Tesco depots in October confirmed as much - but if anything, 2011 is set to be tougher still.

In the first two weeks of the year, both Dairy Crest Direct, the group of 1,350 farmers that supplies Dairy Crest with milk, and Wiseman Milk Partnership, the circa 1,000-strong group that supplies milk to Robert Wiseman, issued formal statements calling for higher prices for their milk in the wake of spiralling on-farm input costs.

The pleas were made in the name of both those who are part of a dedicated supermarket supply group and those who are not. It is the latter, non-aligned farmers, whose futures are in real jeopardy, warn experts.

Aligned dairy farmers "in the club" are shielded to an extent from volatile raw material and daicommodity markets by the top prices they receive for their milk, they point out. Indeed, the best 11 milk prices in DairyCo's milk price league table are all paid through dedicated supermarket contracts.

Retailers are also increasingly willing to listen to group members in tough times. This week, Tesco announced an additional interim payment ahead of its planned price review in March of 0.32ppl for TSDG farmers to help them cope with soaring on-farm costs. Sainsbury's also increased the price it pays by 0.6ppl for the period 1 December 2010 to 30 April this year.

The non-aligned, however, receive no such protection and that makes the outlook for these farmers bleak, says David Swales, market intelligence manager at DairyCo. "Over the past 12 months, non-aligned liquid contracts have been pretty static and these farmers are now getting prices lower than most manufacturing contracts, let alone dedicated supply contracts."

A ball-park DairyCo calculation suggests that there's a difference of roughly 1.9ppl between the price received by the main groups of aligned and non-aligned farmers, which are producing milk at a loss.

The situation is unsustainable, warns WMP. "While Wiseman producers fortunate enough to be part of supermarket supply groups have been cushioned, those who get Wiseman's standard price (24.72ppl) are making a loss on every litre of milk they produce."

Unfortunately, say experts, there is no simple solution. Spreading the retailer-aligned contracts to all farmers rather than just the chosen few is unrealistic, believes Jonathan Ovens, chairman of Arla Foods Milk Partnership, the 1,500-strong group that supplies 90% of Arla Foods' total milk.

The whole reason retailers pay premiums is to safeguard their supply, he argues. What would be the benefit in paying more to those that were not part of their dedicated supply pools?

The key to improving the position of non-aligned farmers, says Ovens, is for processors to add value to their milk. For example, Arla's Cravendale is produced using milk from non-aligned farmers that the co-op is considering paying a premium to in the future.

One dairy expert is confident that non-aligned producers will get higher prices anyway later this year. As farmers reduce milk production because of spiralling costs, there will be a tightening of supply, he predicts, forcing prices up.

Non-aligned producers are far less upbeat, however. Following DCD's and WMP's calls, a statement issued by Steve Dunning, chair of First Milk's Area Representative group, which is not aligned to any retailer, warned that if change did not come "the producers who remain will look to supply the companies that send products to the world market rather than the UK".

With very healthy prices for SMP on global markets, the threat is very real as is the prospect of a supply shortage on home soil. And that raises the spectre of higher prices for the consumer.
Cost increases(winter 09/10 vs winter 10/11)
Feed: Starch energy +£90/tonne Fibres +£70/tonne Protein +£30/tonne Tractor Diesel: +16.5ppl Fertiliser: +£92/tonne Straw: +£15/tonne Source: Andersons