United Kingdom: Milk Prices Take A Step In The Right Direction


The announcement by Tesco to give milk suppliers a base price of 22ppl could be a turning point for all involved if everyone in the supply chain is open and transparent.
Extraordinary things have been taking place in the UK milk supply chain. On 3 April, Tesco made headlines with the almost unbelievable announcement that dedicated suppliers would receive a base price of 22 pence per litre (ppl). Tesco currently buys its milk from processors Wiseman (60%) and Arla (40%), totalling a near 900m litre contract. About 500 Wiseman suppliers and 350 Arla Foods Milk Partnership members will be the beneficiaries of the highestpaying contract on the market.

The 22ppl base price is almost all that is known so far. No details have been announced defining any specific membership requirements, or what adjustments for seasonality and quality would be included in the contract. Tesco has said that the contracts will run for 12 months, with the milk price reviewed every six months to ensure it reflects the true cost of production. The retailer insists the price paid will reflect price movements in key variables such as feed, fertiliser, energy and labour.

As outlined in Philip Moody’s profile on the back page, Tesco is also to sell milk under its new ‘local choice’ brand. This is in line with increasing customer demand for regional produce. Approximately 100m litres will be sourced from 150 small family dairy farms through the co-operative Dairy Farmers of Britain (DFB). Farmers fortunate enough to secure these contracts will receive an impressive 23ppl; almost a 6ppl rise on the current DFB contract. Likewise, the criteria is yet to be set, but is thought to centre on family farms with less than 100 cows.

Supermarket supply groups already exist, with Waitrose, Marks & Spencer and Asda already offering premium liquid milk contracts. In addition, Sainsbury’s has begun a Dairy Development Group, although it is yet to return any real benefits to the farmer. Tesco’s announcement, although lacking in detail so far, overshadows these other deals in what has been a huge PR exercise. So why has Tesco done this?

The supermarket has built an empire on providing cheap food to the nation. Perhaps the continued decline in UK milk production concerned the supermarket. Interestingly, in the same week that Tesco made the announcement, the Milk Development Council released a forecast, based on a farmer survey, that milk production will plummet by 900m litres in the next two years. Did Tesco deliberately make this move just before the competition authorities were about to launch a major attack on the supermarkets alleged milk price fixing? Whatever the reason, the cost of the new scheme is small change for the supermarket. The old practice of milk being sold as a loss-leader is gone. The succession of hard-fought retail initiatives since 2000 has largely seen price rises end up in retailers’ hands. There now seems to be a fat retail margin, some of which is, at last, being passed back down to farmers. It is important to remember that only two weeks before the 22ppl announcement, the retail price was raised by the equivalent of 1.76ppl.

The Tesco deal will need to be studied carefully, but if everyone in the supply chain is open and transparent, it will be a turning point for all involved. The ‘big four’ hold 61.3% of the liquid milk market, with Tesco accounting for a colossal 27.2% share of the total. It is hoped that the other major retailers will follow suit, and that the same kind of process occurs with other dairy products such as cheese, thus pulling the whole milk supply chain towards more sustainable prices. Tesco has said that the new contracts will be in place by the end of the year.

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