What sound business man would invest circa £2million pounds in an industry that he has no control of? Where he does not know the future sale price of his goods and has only one customer in the eastern counties that he can sell his produce to. And where he has no control over the price of his product.
These challenges are faced by the modern-day Norfolk dairy farmer.
The milk market is second only to the volatility of the crude oil market. This market is in the lap of OPEC (Organisation of the Petroleum Exporting Countries) when it comes to supply and demand. A classic example has only just passed with the cold snap earlier this year. It took 10 days to put an order for heating oil into any supplier and then you would discover the price had jumped from approximately 40p/litre to nearly 60p/litre – an increase of 50%. Milk equally became in very short supply on some shelves, but did we see our price move?!
The other sting in the tail for the person needing heating oil is that delivery time had increased from three days to 10. However, major retailers expected milk delivered the next day to fill the shelves. Failing this there would be a financial penalty from the likes of Mr Tesco! Around £15 million litres of milk were dumped in a 48-hour period during the cold snap, depriving the UK dairy farmer of £5.1 million pounds. This just quietly slips under the radar of unnoticed food waste!
Exiting the market
OPEC has been responsible for manipulating the oil price, while the European Commission and Russia have done this with the milk price. ‘How?’ I hear you ask. Well, here in the UK we are far from self-sufficient in dairy products. In regards to milk supply, probably more than 80%. Two Easters ago the European Union abolished ‘milk quotas’. This was an allocation that every farmer in Europe needed to be able to produce and sell milk to a processor. If an individual farmer wanted to increase its production it had to get more quota by buying or hiring it. We have seen the value of quota go from nothing to £1.30/litre. At this price it doesn’t take too much brain power to realise that, in the past, the average dairy farmer with 120 cows and a million litres of quota could, when quotas were at a high, exit dairy farming and pocket a cool million pounds! Needless to say a lot of dairy farmers did, particularly the farmer with no younger generation to follow in their footsteps.
The milk quota system controlled the output of milk across all European countries, including the UK. The control system was removed and guess what happens? Yes, it became a free for all. Production across Europe increased quickly. In Ireland production increased in excess of 50% within nine months, while Holland was an offender too. In the UK there was little more than a 15% increase, but this all resulted in excess. In the midst of this, Russia decided to place an import ban on all EU dairy produce, butter, cheese, skimmed milk powder or whole milk powder. This fuelled the surplus of dairy products. The prices of any dairy commodities crashed along with the milk price.
Supply and demand
The European commission stock piled some 380,000 tons of milk powder between 12 and 24 months ago. This was an attempt to put a floor in the dropping market and find a use for the milk. Most of this still sits there, with little hope of finding a quick use. Its use by date must be near and the threat of dumping a large volume onto open markets puts great pressure on present and future prices. In my mind there is only one natural way to control price and markets: it is called supply and demand.
In the last two years we have seen the commodity price of milk vary from 17p/litre to 34p/litre. While in the last five years, the number of Norfolk dairy farmers has shrunk from 54 to 15, possibly as a result.
You can find out in the next instalment what this means to me, a Norfolk dairy farmer, and what other problems I face working in the industry.