It's all over now for Dairy Farmers of Britain. But could its demise lead to a healthier dairy industry in the end, ask Michael Barker and Richard Ford

The question most people were asking about Dairy Farmers of Britain was not if, but when. And last week, as predicted, the £562m farmer-owned co-op, which supplied a tenth of the nation's milk, finally fell into receivership.

Now, with DFB in the hands of PricewaterhouseCoopers, more questions are being asked. How did a company that seemed to have a rosy future not so long ago fail so dramatically? And what will happen to the one billion litres of milk and numerous cheese brands?

As little as a year ago, DFB bosses were confidently predicting the company would make a profit by 2009 or 2010. Despite posting net losses of £3.55m at the time, they insisted the figures were exactly where they expected them to be at that point in time.

DFB spent an estimated £33m on an 'asset revitalisation programme' after it bought the liquid milk business from Associated Co-operative Creameries in 2004, and experts were optimistic it would emulate Milk Link in becoming a successful and profitable co-operative business. However, just as DFB was about to start playing catch-up against its rivals - who, in turn, had further modernised their own facilities - the economy took a turn for the worse.

This had major ramifications for DFB's relationship with one of its key customers, claims a DFB insider. Things started to really deteriorate last autumn for the co-operative after Tesco appeared to switch its attention away from DFB-supplied Localchoice milk to Wiseman's Fresh'n'Lo, he says.

"Last August we were paying an OK milk price and everything looked alright with the debt under control," the DFB source says. "Then came the global crash, Tesco decided to become a big discounter, finances began to get squeezed and that had a knock-on effect."

Fresh'n'Lo was sold on promotion and Tesco was accused by critics of undermining market confidence. Worsening market conditions were also starting to hurt the co-operative's business.

It was these factors that were blamed by DFB when it cancelled a scheduled half-yearly payment on members' accounts last October, thought to equate to £1.75m. It then became the first company to cut its milk price in November and followed this with two further cuts during the winter as it sat at the bottom of the farmgate price table. These only stoked farmer discontent and resulted in an estimated 50% of DFB's 1,800 members handing in their notice in the subsequent seven-month period.

Attempts to restructure the business by splitting it into two distinct divisions and closing dairies in Portsmouth and Fole, Staffordshire, were interpreted as signs DFB was getting ready to sell up. But hopes the restructure would help were delivered a huge blow when The Co-operative Group said it was pulling the plug on DFB's 153-million-litre milk supply contract from August 2009.

A succession of management departures, including commercial director David Potts, non-executive director Philip Moody, non-executive chairman Rob Knight and ultimately chief executive Andrew Cooksey last month, heightened the feeling that DFB was not going to turn its fortunes around.

Industry speculation served to compound this. "People start to think the business is in trouble, customers get spooked, and the perception becomes a reality," says the DFB source.

Supply confidence
With DFB's fate now confirmed, attention has switched to what will happen to its products. On taking the reins at DFB last week, Stephen Oldfield, joint receiver at PwC, immediately identified maintaining the milk supply as his top priority. The problem he faces is managing supplies despite an ever-decreasing pool of farmers who have been freed from their contracts by PwC because DFB failed to pay them for their last month of milk supply.

Although PwC has promised to pay members from now on a rolling contract, it is too little too late for most and still leaves them thousands of pounds out of pocket for their missed May payment.

The vultures have been circling. Hundreds of farmers have already been signed up by OMSCo, First Milk, Dairy Crest, Milk Link and others, and meetings are ongoing as the big companies look to further bolster their farmer roster.

The major retailers will be able to balance supply by taking more from other suppliers, or by buying from the spot market, where prices are currently favourable. Big customers such as Tesco, Spar and Cadbury are therefore unlikely to experience shortages.

Where there could be a problem is with the network of single-store operators and corner shops in certain areas of the north. If nobody buys the Blaydon milk facility in Tyne and Wear, as some fear, those small retailers that relied on the factory may be left scrabbling for longer-term supplies.

PwC is also having trouble selling off the milk assets in other areas of the country. Losing the Co-op Group contract has made the company's liquid milk proposition far less attractive because much of its volumes are now going to the middle ground and doorstep market, according to one analyst.

It was unsurprising, therefore, when the closure of the Lincoln dairy was announced on Tuesday. Sources say neither Robert Wiseman, Arla nor Dairy Crest are likely to come in for the milk factories in Bridgend, Wales, and Blaydon and further closures could well be imminent.

Cheese fares better
In contrast and as expected, PwC has had little difficulty offloading DFB's cheese assets. Milk Link snapped up the Llandyrnog Creamery within two days of the receivership announcement, while Lactalis McLelland bought the Lubborn soft cheese site this week.

So some good news. And despite the fact that UK milk production is at a 40-year low, few industry figures are worried about the long-term supply ramifications of DFB's collapse. The consensus is that many of the co-op's farmers will be picked up by competitors and that these farmers could well achieve a better milk price than they had at DFB.

Only smaller family farmers or those in unfavourable locations, are likely to struggle to find a market. "Inevitably, there will be farmers in particularly remote areas who are not of the size that it would be justifiable to collect milk from," says one supplier.

Although nobody publicly says so, privately there is widespread belief DFB's demise could ultimately be good news. "It'll create certainty," says one supermarket milk supplier. "Some producers will go out of the industry and milk supply will tighten, but it will help the industry in the long term."

In any case, consolidation was long overdue in the dairy sector, many argue. The industry suffers from an overabundance of suppliers and a further reduction is still needed, says Milk Link chief executive Neil Kennedy.

Another supplier adds: "Businesses like this will be exposed in tough economic times, and once the dust settles the UK dairy industry will emerge fitter, leaner and more efficient."