Milking it

I’ve spent a lot of time with milk cows. Milking them isn’t a cheap hobby. A lot of dairy farms have a business model which resembles a hosepipe. You get in quite a lot of money from the milk cheque but then it moves down the hosepipe at speed, and sprays the money out to your suppliers and the bank. Hopefully enough sticks to the sides of the hosepipe for you to live off.

Thanks to the pressures on dairy farms over the last generation (the consumer pays less for milk than they did back in 1996) dairy farms are as a rule pretty efficient. Certainly I’d challenge any other industry to produce at 1996 prices (or government departments to run on their 1996 budget.)

At the moment things aren’t looking too bad for dairy farmers. Whilst costs are going up, the price is also moving up. The results from GDT Auctions have been positive. As an aside, for those not in the industry, GDT is ‘Global Dairy Trade’ which allows buyers and sellers to trade milk and milk products globally. As you can see from the graph, prices are back up to levels last seen in 2013. But still in agriculture, that is counted as good news.

But this is starting to create problems for processors. They have a lot of skilled staff. Can they hang on to them? Not so long ago a lot of companies were paying lorry drivers about £550 a week. Now Waitrose is advertising for HGV drivers at over £1000 a week. As an aside, this may be what ‘levelling up’ looks like. The wages for those working in the building trade have also gone up.
So are the dairy processors going to pay higher wages to keep their staff? But they face a dilemma. It’s not just staff. A lot of other costs have gone up. Apparently the four pint plastic containers so popular in supermarkets have gone up about 2p. At the same time processors are going to face increased energy and fuel costs. Yet they cannot just cut the price they pay farmers for milk, as farmers will just move to supplying better companies.
Or alternatively the farmers might just stop milking altogether. There will soon be no more Basic Payment Scheme. But you can get money for entering environmental schemes. Now I’ve looked at the schemes. Let us assume you are an owner occupier and decide to put your small or even medium sized dairy farm into them. Whilst you could no longer run a dairy herd, it might be possible to get a sum pretty close to what you were getting from Basic Payment. But you’d get out of dairy. You could retire, stay on the farm, take the environmental payments and manage the land by being paid to take sheep over winter, and then take more cattle or sheep through the summer. It would nicely pad out the pension.

For the tenant it doesn’t look as tempting, but if enough owner occupiers do get out, there’s going to be fewer suppliers and the dairy processors might even have to compete for them.

But if dairy processors cannot just cut the price they pay farmers, where are they going to get their money from? Basically that leaves the customers. Now in 1995 government statistics say that the retail price for milk was 36per pint, which equates to 63.35ppl. Currently Tesco is selling milk at £0.51 a litre. So just allowing for inflation, the price the consumer should be paying per litre is about £1.20. So obviously there is room here for an increase. But are the retailers ready to put prices up?
They too face a squeeze, not only can they not just import cheap labour to keep their costs down, they cannot import cheap produce either. Firstly there isn’t any cheap produce. As I mentioned, GDT Auctions are global. Secondly, since the Brexit referendum, the pound has been at a more reasonable rate against the euro. This makes our exports cheaper (so lamb and beef have done well this last couple of years, in spite of, or perhaps because of, Brexit) and it makes our imports more expensive. So major retailers cannot even convincingly threaten to import milk to force prices down.

ratio of the Pound Sterling to the Euro

I honestly don’t think that the retailers have an option. I suspect they’ll have to start putting the price up, or they might struggle to get supplies. After all, if they try to drive the price down, the companies that process for retail will just fail, and the companies that make cheese and similar that can be sold around the world at world prices, will take the milk instead.

I know that milk is one of the products that supermarkets traditionally try and keep cheap. It’s rumoured to one of those staples, like bread and baked beans that everybody knows the price of. But I suspect even the major retailers are going to struggle to hold the price down for much longer.

♥♥♥♥

There again, what do I know. Talk to the experts.

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27 thoughts on “Milking it

  1. rootsandroutes2012 October 3, 2021 at 4:10 am Reply

    When I was a village shopkeeper, the KVI (known value item) had to be priced competitively. A lot of them were brand names like PG Tips, Nescafe and Pedigree Chum – but milk was also VERY firmly on the list. Get that one wrong, and some of your customers would go elsewhere.

    • jwebster2 October 3, 2021 at 4:44 am Reply

      That was the term I was looking for, KVI. Milk has suffered for a generation for being on that list 😦

  2. rootsandroutes2012 October 3, 2021 at 4:47 am Reply

    More than a generation, I’d say.

    • jwebster2 October 3, 2021 at 5:31 am Reply

      Probably yes, it was 1996 when milk prices started to steadily collapse.

      • rootsandroutes2012 October 3, 2021 at 5:39 am

        I’d expect a dairy farmer to say that the problem with the KVI was that it brought to the attention of retailers what went on in their customers’ heads in any case. Mrs. Bloggs knew how much she expected to pay for a tin of Heinz beans… or a pint of milk, so that was where the retailer sold at tiny margins (or sometimes at a loss), safe in the knowledge that she had no idea what a jar of cinnamon should cost, or a bag of cat litter, or a thousand and one other items. What was lost on KVIs could be made up on those other lines without anyone noticing.

      • jwebster2 October 3, 2021 at 5:54 am

        I remember an article in one of the magazines (might have started off in The Grocer) where a marketing manager was saying that for the producers, the nightmare was ending up on the KVI
        You wanted to be known and looked for, but not quite that well known!

  3. Eddy Winko October 3, 2021 at 5:45 am Reply

    I don’t think there is an industry out there that isn’t feeling inflationary pressure. Even our little soap business has seen a price increase of more than 50% on raw materials.
    Of course its all part of the vegan conspiracy, seeing that the prices of meat will soon be higher than its vegan counterpart and who knows oat based milk may soon be cheaper than the real stuff. At this rate halting global warming should be easy 🙂

    • jwebster2 October 3, 2021 at 5:56 am Reply

      I suspect there is going to be inflation. It’s becoming obvious that an economy isn’t a computer. You cannot just switch it off and switch it back on again and expect it to just boot up as it did last time.
      I’m not sure about the prices of meat v vegan foods. In the UK, a lot of vegan food is grown abroad. They could try home grown alternatives but frankly turnips and sprouts over winter aren’t selling it 🙂

      • rootsandroutes2012 October 3, 2021 at 6:45 am

        We had turnip yesterday. Turnips and/or sprouts are welcome here any time.

      • jwebster2 October 3, 2021 at 6:57 am

        I’m not a fan. I’m one of the people who seems genetically programmed to find sprouts bitter. Turnip mixed with carrot is OK but it seems to lack a unique selling point 🙂
        But if eaten with decent beef they’re acceptable 🙂

      • Eddy Winko October 3, 2021 at 2:14 pm

        When i grew turnips over here for the first time everyone thought it was for cattle. No one would eat them 🙂
        I read that the only reason that Beyond Meat and Impossible Burgers aren’t commonplace in the UK and EU is because them contain GM ingredients. It won’t be long before they fix that then the only money to be made out of cattle will be as curios 🙂

      • jwebster2 October 3, 2021 at 2:37 pm

        Actually I know quite a lot of vegans who cannot eat them because they’re sensitive to mushrooms and many of them a fungus bases 🙂

      • rootsandroutes2012 October 3, 2021 at 3:22 pm

        The first Jew I was ever friendly with also suffered from Coeliac’s Disease. Being a vegan with a fungus intolerance must be almost as inspiring a diet as a Coeliac would get while keeping kosher.

      • jwebster2 October 3, 2021 at 4:45 pm

        The people I know are vegetarians. But they’ve had upsets when eating things like vegan sausage rolls and similar.

      • rootsandroutes2012 October 3, 2021 at 3:18 pm

        As a boy I chopped mangels for the cattle and we ate turnips. The difference isn’t a hill of beans.

      • jwebster2 October 3, 2021 at 4:45 pm

        I suspect it’s mainly semantic. You end up getting into regional dialect arguments about turnips, swedes and mangels 🙂

      • Dan Holdsworth October 4, 2021 at 8:51 am

        If you look at who these noisy vegans actually are, then the picture becomes a lot clearer. They seem to be young adults in the main, and people only seem to stay vegan for a year at the most, before relapsing to an omnivorous diet.

        The thing is, humans in evolutionary time have not been vegan for a very, very long time. As soon as we started developing big brains, meat and especially animal fat was very much on the menu with vegetable matter making up the filler for when meat was not available. A diet where a lot of energy is obtained from animal fat is also not harmful to people, longstanding scientific advice notwithstanding.

        But for a pure vegan a lot of problems occur and do not go away. Certain vitamins are animal-only products and need to be ingested as supplements from transgenic yeasts. Getting enough fat in the diet is problematic, as is getting enough protein. Humans do not do well on a pure vegan diet, and vegan athletes are noticeably weaker than omnivorous ones.

        Thus we have a life cycle for vegans, whereby young twerps convert to the fad, make a lot of noise about it for a while, then quietly slink out of the back door figuratively speaking, and resume being omnivores. Very, very few people sustain a vegan diet for very long, and most ex-vegans are what one might term mostly vegetarian.

        Politicians by nature listen to noisy groups. Vegans are noisy, mostly because they are young converts full of conviction (and still vigorous from previous omnivory) and new to a fad. Ex-vegans generally feel they have failed somehow and are notably quiet.

      • jwebster2 October 5, 2021 at 5:29 am

        Yes, I remember seeing a survey which came to the conclusion that ‘ex-vegans’ outnumbered vegans. 🙂

  4. Stevie Turner October 3, 2021 at 8:48 am Reply

    The price of most goods are going up, but will wages keep pace? Probably not (unless you’re a lorry driver). People will cut back to the bone if necessary, and then the economy as a whole will suffer.

    • jwebster2 October 3, 2021 at 1:43 pm Reply

      I farmed when the overdraught rate was 20% and inflation was high. Because there tends to be a shortage of labour as part of the package (because you cannot use cheap labour to drive wages down) wages did tend to keep up. It was toughest for those on fixed incomes, pensions and similar. But actually with higher interest rates and inflation a lot of companies would be in a lot better position because they’d rapidly fill the gaps in their pension funds.

  5. Cathy Cade October 3, 2021 at 1:36 pm Reply

    I think we just have to accept that everything is going to go up – everywhere. We have a pandemic to pay for.

    • jwebster2 October 3, 2021 at 1:41 pm Reply

      And in many parts of the world our prosperity rested on the cheap labour of others. They’re not willing to work for nothing any more

      • Eddy Winko October 3, 2021 at 2:24 pm

        When I moved to Poland 9 years ago I could employ casual labour for a pound an hour, now its closer to £5 and there isn’t the choice anymore as people have brought skills back to Poland with them and charge higher for them 10,15, 25 pounds per hour is more and more common for people with a trade. Money is much less of an incentive than it used to be.

      • jwebster2 October 3, 2021 at 2:36 pm

        That I can imagine
        In the UK when I was going to meetings in London, the young women serving coffee at the break tended to be Polish
        Five years later, they’d mastered their English, they’d brushed off their qualifications and they were attending the meetings in their own right

  6. Jack Eason October 5, 2021 at 3:37 am Reply

    Reblogged this on Have We Had Help? and commented:
    More from Jim

  7. M T McGuire October 6, 2021 at 9:13 am Reply

    That’s really interesting, as always. To be honest, I can’t see how we can avoid a bit of inflation because driving down costs means driving down labour costs and then the people who do that labour still can’t afford stuff, even though it’s cheaper, so the producers drive the costs down more which means even less people can afford stuff. Up to a point, some travel in the opposite direction would appear, to my untutored eye, to be quite beneficial to us all but I totally get the idea that a lot of it is about perception, ergo, the KVI stuff going up will cause a ruckus but other price rises, hmm … maybe not so much.

    Right now, everything seems to be pretty unrealistic, the poor are getting poorer and the rich fatter, if paying a decent wage to drivers, builders, labourers, factory workers and the like means prices go up, could it be that less people will fall below the breadline? I guess the big kicker is whether or not they have jobs, because we can bet our lives that benefits won’t go up, so people who can’t work will be in trouble. I wouldn’t want to be the person who is paid to try and fix this thing.

    • jwebster2 October 6, 2021 at 2:21 pm Reply

      It is interesting. I suspect Pensions will be OK, pensioners vote and a double lock will stay even if a triple lock doesn’t
      A lot of the working poor poor could be better off with fewer regarded as expendable on zero hours contacts and minimum wage.
      Those who cannot work due to health and mental health problems are going to be vulnerable
      I suspect a lot of those now described as the ‘zoom classes’ might take a hit. A lot of the services they’ve assumed would be cheap might not be any more. Also they might be seen as less vital, especially if they’re working from home and the company can make an argument that ‘you had a pay rise, you no longer have to commute.’
      But yes, interesting times

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