Big supermarkets, little farmers: the UK story

In the wake of the milk price war here in Australia, this story about the influence of supermarkets in the UK (click the underlined link) is a little unnerving. How can we prevent this happening here? Victorian farmers are less vulnerable to predatory tactics by big retailers for two reasons:

1. Much of our milk is exported; and

2. Victorian processing is dominated by a powerful 100% farmer-owned co-operative.

Having said that, we do share some concerns regarding the profitability of milk pricing.

Dairy Australia’s Australian Dairy Industry In Focus 2010 report says:

“At an average of approximately US$29 per 100kg of milk last year, Australian dairy farmers generally receive among the lowest prices compared to many major producing countries and so must operate highly cost-efficient production systems.  This is regularly borne out by international comparisons; where Australian farms consistently have costs of production in the lower cost category of all farms in such surveys. The fact that around half of Australia’s milk production has been exported over the last decade reflects this high level of competitiveness.

However, this has become increasingly difficult in recent years. Farm cost structures have increased in response to the need to adapt to drier conditions where rain fed pastures are regularly contributing a lower proportion of the total feed base available to the herd. Consequently, Australia’s share of international trade has trended lower as local milk production has contracted over the past decade.” (p. 10)

Why do farmers accept low milk prices?

During the recent publicity surrounding the milk price wars, I noticed a lot of comments following newspaper stories asking why dairy farmers continued to supply milk if it wasn’t financially rewarding. Simple question, complex answer.

Then yesterday, I went to a dairy farmer forum where respected farm consultant John Mulvany said, “A milk price of $5.00 to $5.50 per kilogram of milk solids is required for the foundation business of the industry (owner-operator farms) to receive an adequate return on the assets plus capital growth. This assumes ‘best practice’ management in the top 25 per cent.”

Also, that: “A large corporate investor will require a milk price of $5.50 to $6.00 per kilogram of milk solids to generate a return to shareholders in addition to growth.”

Then he presented a table that showed milk prices had only reached $5.00 per kilogram of milk solids twice since 1994/95.

If we accept John’s numbers, they raise two really important questions: why do dairy farmers keep going and why should family-run farms accept lower profits than corporate investors would? John’s always said that dairy farmers are optimistic by nature and I guess that’s part of the answer. But, if you can make a better return on the share market without working seven days per week, why wouldn’t you?

Every farmer will have a different answer to this question but I think it’s because we’re pretty much locked in, whether that’s emotionally or financially or a bit of both.

The financial ties that bind us are debt and the cost of exiting (and re-entering) milk production. Unlike broadacre farmers, we cannot readily shift our production focus in line with commodity price movements. We have a herd of cows that cannot be replaced overnight or “redeployed” and costly infrastructure that must be used to service debt. Nor can we readily wind back production. Cows must be well fed, no matter what, and that costs a lot of money. So when milk prices fall below profitable levels, we don’t withdraw supply immediately – instead, we draw on the buffer that equity in our land provides. Sadly, that’s just not good enough for many farmers and we are seeing a slow but constant attrition in farm and cow numbers as the decades roll on.

The emotional ties are harder to explain. After my father died, my accountant’s advice was to sell and invest the money elsewhere. “You’ve got other skills. Why work so hard when you could buy a nice little property out of town and be comfortable?” he reasoned. Sound advice but I wanted desperately to farm because, as corny as it sounds, I love the land, the animals, the life skills it will teach my children and the wind in my face. Something no corporate investor would value.