New Pricing Formula Proposed For UK Dairy Sector

UK - A group of influential dairy farmers, brought together by National Farmers' Union (NFU) Scotland, has launched a proposal it believes could fundamentally improve the UK milk market.
calendar icon 21 April 2011
clock icon 5 minute read

The proposal is based on a new, transparent and market-related pricing formula, to be incorporated as a baseline into producer contracts. If adopted, it would break the cycle of market failure in the dairy supply chain and allow all producers, irrespective of their supply relationship, to move forward with improved confidence and greater certainty.

Crucially, NFUS believes that the initiative can deliver for everyone involved in milk and dairy products, from farmers to processors, retailers and ultimately consumers.

The move reflects the momentum behind current EU proposals for stronger milk contracts with transparent pricing mechanisms. It will also address some of the dysfunction seen in the grocery market, as highlighted by recent Competition Commission investigations and will galvanise milk producers who are hungry for improvements to current milk supply arrangements.

Several months of work have gone into drafting the proposals and today’s launch marks the beginning of a widespread discussion to be held with producers across the UK and key players in the supply chain. Nation-wide farmers’ meetings will be held in Scotland in the week beginning May 2.

NFUS Chief Executive James Withers, who launched the proposal at a producer representative summit organised by NFU England & Wales in Stoneleigh, said: “The principle behind this new formula, and new initiative, is to move the whole milk debate beyond the same rhetoric and action that has dominated dairy politics for more than a decade. We want to drive forward a constructive solution, which could move the whole industry on from analysing the problem, to focussing on trying to fix it.

“This proposal has been developed by a group which represents every major milk supply arrangement in Scotland, from supplying co-ops, to major processors, to direct supply arrangements with retailers. It has been developed by producers, for producers.

“We believe we are at a crossroads moment for the GB dairy sector. Producer numbers are falling, confidence is low and frustration with existing supply arrangements is high. There is an overwhelming appetite for change and we believe this should galvanise every single dairy farmer who is tired of the status quo.”

NFUS Vice President Allan Bowie said: “With valuable assistance from industry partners – in particular DairyCo - a great deal of research and analysis of historic data has been used to investigate potential pricing formulas. The objective was to devise a transparent pricing mechanism, which reflects real market indicators, and uses figures that are transparent and independently verifiable.

“The result of this work was that a price formula based on the existing market indicators of Actual Milk Price Equivalent (AMPE) and Milk for Cheese Value Equivalent (MCVE), in a 20 per cent to 80 per cent split, was identified as the correct choice. The producer working group believes that this is a fair and reasonable starting point to set a platform for the market. This platform will obviously move up and down, but driven by market fundamentals. Crucially these are the same fundamentals that affect our counterparts elsewhere in Europe.

“At a European level, the High Level Group for Dairy has come forward with a number of objectives and proposals, which outline the need for stronger contracts, transparency and clear pricing mechanisms. Our belief is that this new, transparent pricing mechanism mirrors these European objectives and by developing our proposals now, we have a chance to ensure the UK dairy industry is prepared.

“Of course, this formula is not a complete solution in its own right. We still need the effective implementation of a supermarket adjudicator and continue to lobby within Europe to effect the changes proposed just now. This formula is, however, a new critical tool in the box as we attempt to move towards a long-term strategy for a sustainable dairy industry.”

NFUS Milk Committee Chairman is Kenny Campbell, a dairy producer from Dumfriesshire and a member of the group that developed the proposal. He said: “To be clear, this formula does not mean a guaranteed smooth ride in terms of the farm gate price received by dairy producers. It will not protect anyone from market realities. Some months will be better than others. However, the critical element to this initiative is that the price produced by the formula will represent the true value of the product, reflecting a supply and demand dynamic that UK milk prices have failed to recognise over the last decade.

“This is, however, a wider debate than just sustainability at the farmgate; it is about sustainability of the whole chain to secure ongoing product choice and innovation for consumers. In order to compete, the UK dairy chain needs to motivate producers to produce milk and producers and processors to innovate and exploit new market opportunities. It is our hope that this transparent formula will allow all producers and processors along the dairy chain to do just that.

“A minority of dairy producers already have contracts with pricing mechanisms included.

These can track both market prices and costs of production and can easily fit around what we are proposing. Our initiative is about building a basic level of transparent, market-related pricing into every contract so that these worthy principles apply to all, not the select few.

“NFU Scotland will be kick starting a series of meetings within the next fortnight which are open to all dairy producers and their families in Scotland. I would encourage all those involved in dairy production to attend, as while we have completed significant behind-the-scenes work and initiated this proposal, the real work to effect change begins now.

“There are no two ways about it; we need buy-in from all farmers on the ground and an open-mind and constructive mindset from the supply chain, if we are to turn this proposal into a success for the entire UK dairy industry. However, the opportunity of securing a more sustainable dairy supply chain in the UK is within our grasp.”

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