Milk profits ‘creamed off’

Feb 25 2008 by Sam Wood, The Journal

A MODEL of the British milk supply chain, produced by Oxford University economists, confirms the common belief that supermarkets currently hold the bargaining power.

In the chain – farmer-owned co-operatives, milk processors and the supermarkets – all compete for their share of the profit from the price of each litre of milk on the shelves.

According to the research, co-funded by the Milk Development Council and Defra, the supermarkets’ strong bargaining position is largely due to three key aspects of the industry structure: the competition between milk processors, the purchase of milk under the supermarkets’ own labels, and the supermarkets’ ability to source from outside the domestic market if necessary. The researchers found that supermarkets are able to secure 3.2p per litre or about 64% of the 5p profit margin, and nearly 90% of the total supply chain profits.

The model shows that if there were fewer competing processors, an increased share of the profits would be returned to processors and the farmer-owned co-operatives, with less going to the supermarkets.

It also shows that such a change would have very little impact on the price of milk for customers, but would reduce the amount of profit currently secured by supermarkets.

Huw Thomas, head of market information at the Milk Development Council, said: “The findings prove what farmers have been saying for many years – they just don’t have the bargaining power needed to ensure they can run profitable businesses. The MDC and the NFU have for some years highlighted these imbalances in the supply chain, such as the shortcomings in milk contracts offered by processors to farmers with a non-negotiable price.

“This has led to low levels of investment on British dairy farms which have the potential to be one of the most highly efficient in the world.

“Although the industry is moving forward in some areas, such as the development of dedicated supply chains, this new economic model provides understanding that will help develop a more efficient market place that should result in a better deal for the British dairy farmer.”