Milk Drinking Bolstered by Retail Price Cuts of 5p Per Litre

A dip into Dairyco’s data on the milk market shows that fresh milk volumes have grown by 2.5% in the year to June 2011, but the retail price paid per litre has dropped by 8% , due to the milk price war waged by supermarkets. So far, so not newsworthy.

What is surprising is just how long the price war has been going on. This is far from an occasional tactical practice to encourage people through the supermarket door. In the 12 months to June 2010 the average price per litre of milk was 66p. The average price in the 12 months to June 2011 was 61p.

And even though in the last few weeks some major retailers have put the price back up, ASDA still remains at the lower level, Tesco is selling its Creamfield whole milk at 44p a litre, and Morrisons have just announced that their 1% fat milk is on promotion at 50p for four pints.

All claim that promotional prices have not affected what they pay to farmers, but look at it another way. The fact that supermarkets can reduce prices by so much and for so long shows just how much they were making from fresh milk in the first place. Indeed Dairyco analysis tells us that for every litre of milk sold in 2008/2009 retailers took 18.8p, processors 20.4p, and farmers 25.8p. In the following year, retailers took 22.4p, processors 18.9p, and farmers 23.8p.  

The price reduction has badly hurt sales of organic milk. In the 12 months to June 2011 volumes dropped by 7% as the retail price of organic stayed at 81p per litre, a 33% premium to conventional milk.

Sales of filtered milk,( Cravendale being the best known brand), have now levelled out at 338 million litres, possibly due to a price rise of 2p to 78p, a 28% premium to standard.

Award for best performance goes to the low fat sector, defined as milk containing 1% or .75% fat. Sales grew to 362 million litres,an increase of 24%.

And the one area defying a generally price conscious consumer response is Jersey and Guernsey which maintained its, admittedly tiny, sales level, despite costing nearly £1 per litre.

Farmgate Milk Prices - the Elephant in the Milking Parlour

So once again farmgate milk prices have been cut, farmers are saying they cannot go on, protests have taken place about the unfairness of it all, and a Dairy Summit will be held in Scotland in three weeks time with representatives from across the supply chain seeing what can be done.

And there’s the rub. What can be done? Have we not been at this square before?

It’s interesting to read the various analyses about why prices are so low. Many blame the power of the retailers, most call for the supply chain to work together in a more sustainable fashion, some say the answer is better supply contracts, some have recognised that insufficient investment has been made in the industry generally.

The one thing no one speaks about, yet looms large like the proverbial elephant, is that there are too many dairy processors in the UK. This means that many are too small to work effectively in a market where good returns to shareholders, including farmer shareholders, depend increasingly on investment in low cost technology, added value brands, and a bit of clout when it comes to selling products into the market place. As the Oxford University Milk Chain Supply Project reported baldly last year - “The more processors there are the more options the supermarkets have and the lower the price the supermarkets negotiate.”

Which leads on to the seeming refusal of UK dairy cooperatives to recognise that individually they, and their farmer shareholders, face a difficult future. No one speaks about the drain on profits caused by having three cooperatives each turning over just £600m, yet each with big overheads. The cost of their 3 chairmen, 3 chief executives, 3 financial directors and 21 non executive directors alone is over £3million, according to company reports. Put the three businesses together and the huge savings generated could be invested in developing higher value brands, lower costs of production, and a more productive dialogue with major customers. The result would be better profits, which would translate into the improved returns that farmers are crying out for.

What is especially frustrating is that other cooperative companies have seen the issues, understood the benefits and overcome the obstacles. Friesland have just completed their merger with Campina, to build a company with a turnover of 9.5bn euros. In 2007 Sodiaal of France led the merger of 7 cooperative entities into 1, and has a turnover of 2bn euros. Why are UK cooperatives so blinkered that they cannot act too?

The odd thing is that the one area where farmers do have influence is through their coops. They own them for heaven’s sake. So the final question has to be - what is stopping the farmers themselves from putting pressure on their cooperative boards?

Dairy Products Market 2008

Here’s a look at the Dairy Products market in 2008, courtesy of the Grocer. All data is for the 12 months to end October, and supplied by Nielsen market research.

It was a year when huge jumps in food prices collided with credit-crunched consumers reining in spending. Unsurprisingly there were changes in how people shopped for dairy products, but not perhaps as many as might be imagined.

Consumers bought roughly the same volume of products, despite dairy price inflation of 13.4%. There was some trading down to own label, notably in the butters and spreads sector, but by and large the big well advertised and promoted brands held on to their positions with the weaker ones struggling. There was a turning away from products sold as functional or fortified, with the exception of Danone Activia with its promise of a revved up digestive system. And Organic slipped back but is not yet in freefall.

Butters and Spreads
Total value sales were up by 17% to £1.1bn, with own label growing almost twice as fast, up 31%
Total volume sales were down by 1.1%, but own label grew by 4.3%.
A couple of grocery trade spokespeople commented that spreadable butters are growing fast because they combine convenience with a natural and healthy product. By contrast fortified spreads are losing sales because consumers are confused about why they should buy them, and they are more expensive.
Perhaps echoing the natural message, Lurpak butter is the number one brand for the second year running, beating Flora.
This is a sector where organic is struggling with Yeo Valley’s value sales up by only 6% in a market where inflation was 13%, meaning that volume sales must have been well down.

Cheese
Total value sales grew by 11.5% to £2.2bn. Own label grew slightly faster, up 11.8%
Its good to see that Cathedral City, is still the biggest brand in the market, owned by Dairy Crest, and British of course.

And a cheer for Wyke Farms which grew by 30% and is now the eighth biggest cheese brand. Here’s hoping that it is making money, and continues to show that it is possible to compete with multinational companies.

Yogurts
Total value sales were up by 7.7% to £1.9bn, and volumes grew by 1%. This is one category where own label is not growing as fast as branded products.
According to the Waitrose buyer consumers are flocking to Natural and Greek yogurts because they are seen as healthier.
Organic yogurt Rachel’s Dairy bucked the organic downturn and grew by 14%, but Yeo Valley clocked up a 1% growth.

Yogurt Drinks
This market is struggling. Value sales despite inflation were down 2.6%, and volume sales down by 8.3%.
The buyer for Booth’s supermarkets reckons that this is a market where consumers are cutting back because of price.

Fresh Milk (Additional data from DairyCo)
The total fresh milk market grew by 14.1% in value to £3.2bn, and 0.6% in volume. People are still purchasing as much fresh milk as they ever did.
Filtered milk, led by Cravendale continued to grow, up by 29%, but the modified milk market is fast disappearing, down by 35%, and is another example of consumers resisting a natural product which has been tampered with.
The Organic milk market was stable and Yeo Valley grew by 46%. There is anecdotal evidence that mothers like to buy organic milk for young children, even though it costs more than standard.
Wiseman’s “The One” milk did well growing by 48%.

NB

The one thing to bear in mind when looking at these numbers is that they are for the 12 months ending October 2008, about when recession truly started to bite. A look at data for the last quarter of 2008 may show some differences.