Well it's
been such a long time since my last blog but I felt compelled to write
something following an evening watching my home town team, Tranmere
Rovers.
I have
been in discussions recently with dairy farming clients, and non clients, along
with various other industry bodies and commercial organisations, namely NFU,
SNFU, FFA, and Kite.
Many of
these discussions have revolved around using a Cost of Production (COP) model
to determine milk prices. Last week I was invited by Farmers for Action to a meeting
with a middle ground milk processor selling liquid milk. We were discussing COP
models and whether or not they could be introduced across the board.
The
existing COP models are run by large supermarkets who use them to show they
care about their suppliers. Will they ever be anything more than that?
After
watching my team, Tranmere Rovers, (now top of the league after two games!),
beat a Carlisle United team 3:0 I wondered whether or not Carlisle, and
Tranmere, would benefit from a cost of production model too. After all if they
could drive up costs, which were covered by the purchaser, they could sign
Fabregas, Iniesta and anyone else and successfully challenge in the Champions
League!
The only
downside to this master plan would be that instead of paying £22 to watch Carlisle host Tranmere I may well have had to
pay several hundred thousand pounds!
This is
the crux of the problem facing dairy farmers in looking for COP contracts. COP
models remove the need to be competitive on the world stage. What would happen
if you lost your COP contract and ended up selling milk at world prices?
Will
exposure to the market drive farmers to adapt quicker to circumstances. In
previous years when milk prices have fallen to often regarded unsustainable
levels quite a lot of businesses have sustained losses, many of the better ones
however have returned to profitability quicker and with an improved business.
If all
milk was sold on COP models then every purchaser would compete on the same
terms and all would be rosy. Unfortunately we can't control the import of
foreign milk from Ireland or Belgium, never mind butter, cheese and powder from
anywhere else in the world. It seems inconceivable that cheese producers would
buy milk on a COP contract, if they don't then what will stop them selling milk
cheaply into liquid when they don't anticipate returns from cheese?
The
answer surely has to be to make the processors more responsible for their own
profits, I.e. they should buy and sell milk, not just sell it and reduce the
raw material cost when they have done a bad job of selling! The only way that
processors will be forced to address this issue is with fairer contracts with
shorter notice periods. Not notice after a price reduction but three months
notice at any time.
In the
long term this needs to be backed up by more world class processing facilities
that can process more UK milk and open up the potential exports that are so
often talked about.
