Ensuring a fair return for all

Would you pay more for your milk if you knew it would ensure that the farmers producing it were not doing so at a loss?

In August 2015 photographs of cows in UK supermarkets brought the plight of British dairy farmers to the attention of the UK public. Farmers felt compelled to do so as plummeting milk prices meant that many were farming at a loss. This is a supply chain issue, as the price that we pay for milk is affected by a number of factors.

1. Balancing demand and supply. It takes around 3 years to rear a dairy cow to the point of milk production so there is a long lead time on major changes in demand and supply. However, weather has a major impact on the amount of milk produced. When demand exceeds supply, the market price goes up. When supply exceed demand it goes down. However, we don’t see these changes on the supermarket shelf they are absorbed in the supply chain.

2. Polarised nature of milk contracts. If you are a farmer in close proximity to a processing plant that has a long term dairy development group type of contract, you are paid on a production cost plus basis. This means you are guaranteed a fair return for your milk. These type of contracts cover around 20% milk production. Other contracts are not so equitable and leave farmers exposed to variations in the market price of milk that have no relation to their production costs. It can be the difference between one farmer being paid 16p/litre whilst another with the same production costs is paid 32p/litre.

3. Milk as a loss leader. Milk is a staple of the UK diet. Like bananas there has been fierce competition to have the lowest price for milk on the supermarket shelf. This is often independent of what it actually costs to produce. The supermarkets can balance the lower margin from milk against the increase in sales from other products. The milk processors and farmers cannot.

Talking point

The milk crisis in the summer of 2015 inspired Ruth Leary and myself to write an article for The Conversation on ‘How Low Milk Prices Unearth Supply Chain Dirty Secrets’.

• What are the supply chain decisions that you make?
• Do they ensure a fair return for all along the chain?
• Could you change your decisions to ensure a fairer return to all along the chain?