>>Fresh challenges for the Dairy industry - Jim Begg, director general, DIAL
The dairy industry, although deregulated, is still hugely affected by political intervention. Whereas free markets only have currency fluctuations to worry about, dairying has the Common Agricultural Policy as well. Each new year, therefore, presents a fresh round of challenges.
This year the first priority for most is to find a strategy to cope with the CAP’s reform of the dairy sector. Last year the Brussels bureaucrats did not quite dismantle the EU dairy support regime. However, they grasped it strongly by the neck and squeezed hard. A five-year programme of support price cuts, more emphasis on the environment, and new arrangements for paying subsidies directly to farmers will all kick in this July. This will force the need for more revenue to come from the market rather than from the taxpayer. Brussels left the dairy quota regime, which caps the EU milk supply, in place but most industry planners have factored the demise of quotas into the forward equation in the next 10 years, less if the EU’s books fail to balance.
There is plenty of evidence to suggest that the European dairy processing industry is responding to what will clearly be difficult times ahead. There has been continuing rationalisation of capacity, through mergers, not least in the UK and this is set to continue. This is good, because it simultaneously addresses three issues. First, the need to remove excess capacity which drags down revenue; second, the need to manufacture efficiently and third, the need to maintain a balance of market power along the food chain.
Concerns are surfacing on this final point, fuelled by the interest of the competition authorities in food industry mergers. In the US, it is believed the competition authorities may not permit further concentration among food processors. However, what do you do if the brake is put on processing concentration, but not elsewhere in the supply chain? This is a new worry because many in the industry believe that the most challenging issue in dairying is how to ensure that retail price growth is transmitted down the chain to processors and farmers.
Dairy processors are also facing up to the challenge with a drive to push milk up the value chain. In some European countries, dairies have abandoned butter and skimmed milk powder capacity and are turning to cheese and long-life milk to
balance their supplies to fresh product markets. In the UK, jointly funded projects between dairies and farmers through the Milk Development Council are designed to move milk from commodity to added-value.
Since deregulation in 1994, declining milk prices have largely been a British phenomenon, driven by our strong currency. Now prices are falling across Europe. CAP reform and reduced support are the last things European farmers need.
For a while, it appeared the message of the true impact of CAP reform was falling on deaf ears within the farming community. This has been a concern because the need for farmers to invest in their businesses is paramount. However, the new year messages from farming leaders in the agricultural
press were clear on this point. And on the City pages of the nationals it was gratifying to see a UK agricultural cattle breeding group tipped on the expectation that farmers would increasingly use their services to generate efficiencies on farms.
For both farmers and dairy processors a further vital priority is to maintain the image of dairy as healthy, natural products which fit with modern lifestyles. Most criticisms of milk can be demolished on scientific grounds but they are often well funded by powerful interest groups. The industry must ensure that the defenders of milk are as vocal as the critics.
What we need from the retail sector is continued support for British products while the transition takes place.
The dairy industry, although deregulated, is still hugely affected by political intervention. Whereas free markets only have currency fluctuations to worry about, dairying has the Common Agricultural Policy as well. Each new year, therefore, presents a fresh round of challenges.
This year the first priority for most is to find a strategy to cope with the CAP’s reform of the dairy sector. Last year the Brussels bureaucrats did not quite dismantle the EU dairy support regime. However, they grasped it strongly by the neck and squeezed hard. A five-year programme of support price cuts, more emphasis on the environment, and new arrangements for paying subsidies directly to farmers will all kick in this July. This will force the need for more revenue to come from the market rather than from the taxpayer. Brussels left the dairy quota regime, which caps the EU milk supply, in place but most industry planners have factored the demise of quotas into the forward equation in the next 10 years, less if the EU’s books fail to balance.
There is plenty of evidence to suggest that the European dairy processing industry is responding to what will clearly be difficult times ahead. There has been continuing rationalisation of capacity, through mergers, not least in the UK and this is set to continue. This is good, because it simultaneously addresses three issues. First, the need to remove excess capacity which drags down revenue; second, the need to manufacture efficiently and third, the need to maintain a balance of market power along the food chain.
Concerns are surfacing on this final point, fuelled by the interest of the competition authorities in food industry mergers. In the US, it is believed the competition authorities may not permit further concentration among food processors. However, what do you do if the brake is put on processing concentration, but not elsewhere in the supply chain? This is a new worry because many in the industry believe that the most challenging issue in dairying is how to ensure that retail price growth is transmitted down the chain to processors and farmers.
Dairy processors are also facing up to the challenge with a drive to push milk up the value chain. In some European countries, dairies have abandoned butter and skimmed milk powder capacity and are turning to cheese and long-life milk to
balance their supplies to fresh product markets. In the UK, jointly funded projects between dairies and farmers through the Milk Development Council are designed to move milk from commodity to added-value.
Since deregulation in 1994, declining milk prices have largely been a British phenomenon, driven by our strong currency. Now prices are falling across Europe. CAP reform and reduced support are the last things European farmers need.
For a while, it appeared the message of the true impact of CAP reform was falling on deaf ears within the farming community. This has been a concern because the need for farmers to invest in their businesses is paramount. However, the new year messages from farming leaders in the agricultural
press were clear on this point. And on the City pages of the nationals it was gratifying to see a UK agricultural cattle breeding group tipped on the expectation that farmers would increasingly use their services to generate efficiencies on farms.
For both farmers and dairy processors a further vital priority is to maintain the image of dairy as healthy, natural products which fit with modern lifestyles. Most criticisms of milk can be demolished on scientific grounds but they are often well funded by powerful interest groups. The industry must ensure that the defenders of milk are as vocal as the critics.
What we need from the retail sector is continued support for British products while the transition takes place.
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