Is Farmers for Action’s plan to abandon supermarket milk and play the global commodities markets a smart move, ask Richard Ford and Julia Glotz

“For the past 10 years, dairy farmers have been price takers, not price makers. We want to change that.”

That was how Farmers for Action’s David Handley last week described his group’s plans to build a factory to process liquid milk into milk powder.

The move, he argued, would free British farmers from the shackles of the supermarkets and their rock-bottom milk prices and enable them to hunt for better returns on the global commodities markets.

Dabbling in commodities certainly sounds appealing. Over the past two years, the price of skimmed milk powder has risen from £1,500 per tonne to £2,500 per tonne.

The price of liquid milk, on the other hand, has remained largely static at around the £250 mark in the UK.

And with British dairy farmers struggling to cope with rocketing feed prices, few will blame them for being tempted to try their luck on the global markets.

In fact, one industry executive says FFA should be applauded for attempting to come up with an innovative solution to the problem of low milk prices. “You’ve got to welcome more positive engagement,” he says. “They’re still trying to blockade the industry, but they’re doing it in a different way this time.”

But is there a really solid business case for building a new milk drying plant in the UK? And what impact would such a factory have on the long-term health of the British dairy industry?

Nick Peksa at commodity analyst Mintec believes a move into powders could be a “positive” step for British farmers provided they do their homework.

The EU’s intervention regime, under which the EU guarantees to buy dairy products at a guaranteed minimum price, would provide some security to farmers because they could always sell to the EU as a last resort, thus preventing a complete wipe-out on the global markets, he argues.

“Based on the EU’s current SMP intervention price (£1,500/tonne), and the current price for SMP on the world markets (nearly £2,500/tonne) combined with the potential to sell off any milk-related fat products in the forms of cream or butter farmers would have a reasonable safety cushion to work within, knowing the minimum and potential maximum price they can receive for their milk,” he says.

But Peksa warns that a successful move into powder would depend on farmers making firm forward-looking arrangements with buyers at fixed prices rather than hoping to take full advantage when prices soar. “The risk lies in being greedy,” he says.

Don’t bank on intervention
Other experts see even more fundamental dangers. John Giles at Promar International warns that banking on EU intervention doesn’t amount to a long-term strategy. The EU is already moving away from market intervention and will be buying less and less dairy in the future, he says.

“The intervention regime will provide nothing more than short-term respite. Ultimately, looking to sell into intervention could be a highly risky strategy.”

Then there’s the question of who would pay for the facility and how. The NFU’s Hayley Campbell-Gibbons estimates it would cost about £100m if it were on the same scale as Westbury, the UK’s biggest dairy powder factory.

David Herdman, chairman of Dairy Crest Direct, agrees. “It’s a lovely idea, but to get farmers to commit to paying, for example, one pence per litre to help build it would be a big ask,” he says, adding that the 4,000 or so dairy farmers on dedicated supermarket milk contracts wouldn’t want to contribute, while “those at the bottom of the pile aren’t able to afford it”.

In any event, the grass abroad is by no means greener, says Giles. Commodity markets are ultimately about price and British farmers would have to compete against some very long-established and highly competitive dairy powder players from New Zealand, Australia and the US, he points out. “UK farmers are not low-cost producers,” he adds. “It’s all very well being able to compete when prices are $5,000/tonne; the issue is being competitive when the price is $1,500/tonne.”

Campbell-Gibbons believes that the level of investment required for the UK to really get active on commodity markets is prohibitive to Britain being a serious player. “With milk production still on a long-term declining trend, it’s not sensible to invest in extra capacity and with farmers’ money presumably unless we know the milk will be there to service it,” she says.

If FFA is serious about going down the milk powder route, it would do well to study Westbury very carefully. Westbury was originally set up by farmers’ co-op United Milk, which went into receivership on 19 August 2003. An OFT document on the sale of Westbury reveals why: “Entry into ‘sink’ processing, ie the production of SMP, butter and cream, is difficult as the failure of United Milk demonstrates, since these processors need to acquire cheaper supplies of raw milk in order to remain viable.”

In fact, the very existence of Westbury (now owned by Arla Foods, First Milk and Milk Link) in the UK should be enough to make FFA think twice about building another factory, argues Campbell-Gibbons. “Even if commodities were high in value, the quantities of milk that would be available to be processed over and above Westbury’s current capacity would be too low to get a return that covered the cost of the investment, let alone break a profit.”

There’s also a sense of déjà vu about the plan, according to Giles. “Back in 2007/2008, when SMP prices were going up, we heard farmers say ‘we’ll show these bloody supermarkets, we don’t need them anymore’, but prices came down again and they’ll come down again this time,” he says.

Risk of sucking in imports
Meanwhile, domestic liquid milk prices appear to be rising again. Dairy Crest granted its liquid milk farmers another 1.1 ppl price increase this week. It’s all grist to the mill for the sceptics.

Removing milk from the British milk supply chain and essentially trying to ‘short’ the market to move prices up would undoubtedly have a negative impact on the British dairy industry, believes one source.

“I would suggest that there is a risk that all that would happen is that it’ll just suck in imports.”

Handley himself admits it will not all be plain sailing, but he claims building a second major drying facility in the UK makes good sense in the long term. “Yes, there will be ups and downs, but, as the drying plant at Westbury shows, with the right people in charge, it can be a positive move for British dairy farmers.”

From milk to powder - Milk powder is produced in three steps: (1) skimming, (2) condensing and (3) drying
- It takes 10,610 litres of skimmed milk to produce one tonne of skimmed milk powder, and 8,000 litres of whole milk to produce one tonne of whole milk powder
- The EU’s biggest producers of SMP are Germany, France, Ireland, the UK and the Netherlands, while the WMP market is led by France, Germany, Netherlands, Belgium and Denmark
- Westbury Dairies is currently the UK’s biggest milk powder producer. It has capacity to process up to 2.2 million litres of milk a day, and produce up to 70,000 tonnes of SMP and 40,000 tonnes of butter each year