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The true cost of milk

The true cost of milk

The British dairy industry is in deep trouble: most of our dairy farmers lose money every time they milk their cows

How much is a pint of milk?

The old trick question for politicians has been easy to answer for a few years now: about 50p. But that masks the real riddle – and torment – facing the British dairy industry, which isn’t so much about how much milk costs in the shops, but how much it costs farmers to produce, and how much they can sell it for on the wholesale market, the so-called "farm gate" price. For years now, British farmers have been able to produce milk from their cows for about 30p per litre (about 17p a pint). The problem is that after a series of dramatic price falls last year, they can only sell it for around 27p – in some parts of the UK for just 20p. Thus the livelihood of thousands of dairy farmers is simply uneconomic. According to Rob Harrison of the National Farmers Union (NFU), many are "really staring at the precipice now".

Are the supermarkets to blame?

Not directly. Only a minority of dairy farmers – about three in ten – have what’s called an "aligned" contract, under which they sell their milk, through a middleman, to a supermarket retailer such as Tesco or Sainsbury’s, at an agreed price. The rest typically have contracts to supply the great "milk pools" of Dairy Crest, Arla, Müller Wiseman and First Milk, the four international dairy processors that dominate the UK market. Though often meant to last a year, the contracts are subject to sudden fluctuations arising from volatility on global commodity markets, fluctuations which last year hit British farmers especially hard.

What happened last year?

Prices slumped when New Zealand upped production by 18% and when Russia, retaliating to EU trade sanctions, banned the importing of EU milk. Cut off from their main market and desperate to compete in others, dairy farmers in the Baltic states slashed prices to 16p – about half what supermarkets like Tesco have been paying their suppliers. To make things worse, Brussels announced the abolition of the EU milk quota system introduced in 1984. This had discouraged efficient dairy farmers in Denmark Germany, Poland and the Baltics from expanding supply, by penalising any EU member state that exceeded its allotted milk quota. The growing glut in global milk supplies hasn’t just affected the price of milk. About half of the 13 billion litres produced in the UK each year is skimmed off, processed and sold at a premium as cheese, fromage frais, yoghurt, butter and milk powder. And the prices of all of these have been falling, too.

So is it all global forces then?

The British high street isn’t helping either. Since last spring, the supermarkets have been in a price war, with milk often at the forefront, as a "loss leader" to entice customers. Two years ago, a four-pint (2.2 litre) carton of milk typically cost £1.60. Now even Waitrose sells it for £1, with Asda and Lidl taking the price as low as 89p (just 40p a litre). Supermarkets insist they are the ones taking the hit – their "aligned" milk contracts still typically offer farmers the best prices, but the danger is that milk is being cheapened in the eyes of the public. "If you keep cutting the price of something until it’s seen as a throwaway product," says David Handley, of the lobby group Farmers For Action, "there is only one thing that is ultimately going to happen to those who produce it."

What are the farmers demanding?

Many want the Government to step in and protect an industry vital to the rural economy. Twenty years ago, shortly after the Milk Marketing Board had been abolished (see box), there were 35,000 dairy farmers in the UK: last December, the number fell below 10,000 for the first time. The NFU warns of a further "mass exodus" if milk prices stay this low, and of an inexorable rise in the UK’s dairy deficit (we already import £1.3bn-worth of dairy products). Some MPs recommend that the industry watchdog, the Groceries Code Adjudicator, be given "greater clout" and be allowed to impose heavy fines on dairy producers and supermarkets for unfair practices. But others insist that the real requirement is for British dairy farmers to adapt and modernise their operations.

How are they supposed to adapt?

By taking aim at production costs – that 30p per litre. Despite global competition and great changes in our milk consumption (we drink 21% less milk per head than we did in 1995), British dairy farming is still largely a small-scale, family-run affair, lacking the economies of scale that help drive costs down. The average herd size is 125 cows: only 10% of the nation’s 1.8 million cows belong to herds of 500 or more; only a tiny handful to big, indoor dairies. Farmers like Fraser Jones, who is opening a purpose-built "zero-grazing" dairy for 1,000 cows in the Welsh Marches, are convinced that adopting such practices is the only way to survive. "Things have to move on, you know?" he told The Guardian. "Populations are growing, land is shrinking. People want cheap food. Farmers have to produce more from less." Each of Jones’s cows will produce an astonishing 11,500 litres of milk per year, compared to an industry average closer to 8,000.

What’s wrong with that?

The potential harm that new intensive forms of dairy farming pose to the animals and the countryside. When two dairy entrepreneurs, Peter Willes and David Barnes, sought in 2011 to build the UK’s first US-style "mega-dairy", housing 8,100 cows in Lincolnshire, the council feared that such intensive agriculture could pollute the water table. The project was shelved. Indeed, many argue that the sight of green fields, dotted with black and white cows, is an aspect of British life – and animal welfare – we need to preserve. Yet with farmers exposed to the volatility of global commodity prices; with a brutally competitive supermarket sector; and with consumers being able to buy milk for less than the price of bottled water, the status quo can’t hold.

How small farmers stayed in business

One of the reasons that Britain still has so many small dairy farmers is that for 60 years they were protected by the Milk Marketing Board. Set up in 1933 when many producers were on the verge of bankruptcy, the MMB pooled all the milk and guaranteed a minimum price to farmers. It endured almost constant criticism, but it provided farmers with a regular service, and a regular cheque. It also ran popular ad campaigns – with slogans such as "milk has gotta lotta bottle" – and developed products such as Lymeswold cheese.

When this relic of the command economy was abolished in 1994, it was largely unmourned by the National Farmers Union; many farmers were pleased that, for the first time in more than half a century, they were able to choose their own buyer. The board’s abolition certainly stimulated competition, and the manufacture of niche dairy products. But according to the Farmers Guardian, the farm gate price fell by 28% in real terms between 1994 and 2010. "With no MMB as the counterbalance, in 2000 our farm’s milk began a price drop of 40% in 18 months," recalled Anthony Bradley, a former farmer from the Yorkshire Dales. £50,000 per annum "effectively walked off" the family farm. "That was the end for us as dairy farmers."

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