On not quite understanding the milk market

\”This meant that the farmers’ guarantee of a fair price was taken away as the powerful supermarkets and dairy trade forced prices down. And that, in a nutshell, is why dairy farming in Britain is in such a state of utter despair.”

Well, sorta. Sorta the big bad supermarkets forcing prices down.

And sorta not really, sorta many more farmers producing.

In the heyday of British dairy farming, there were 28,000 in England and Wales. Today there are just under 11,000.

Doesn\’t look like many more farmers, this is true, but…

Evans’s father had a herd of what his son refers to as “25 happy milkers”.

OK, a generation ago, 25 cows on one farm. Today?

It was an agonising decision: at the end of last year, he hung a “For Sale” sign on his 192-strong herd of Holsteins.

Ah, 8 times as many cows eh?

And modern cows, through breeding and food supplements, do produce more than the cows of a generation ago.

But this supply and demand thing you know? If supply from a unit (which we\’ll call either \”a farm\” or \” a farmer\” here) goes up by a factor of 8 and demand doesn\’t in step with that then the price of the good being produced is likely to fall. And there will be then pressure for the marginal producers to leave the market as profits tumble.

Now I wouldn\’t want to try and have to prove that supermarkets (or the EU, or Johnny Foreigner) has nothing to do with it but casting them as the only cause of this seems very odd indeed.

The prices of farm products have been falling since the Neolithic and the number of farmers has been falling for at least two centuries. Because higher productivity per farm and farmer has been driving up production and thus down prices and profits.

And, of course, it is this greater productivity of farms and farmers that allows the rest of civilisation to happen. If we all had to stand up to our ankles in cowpats to feed the population then there could be no NHS: there wouldn\’t be 1.4 million people not standing up to their ankles in cowpats to staff it.

6 thoughts on “On not quite understanding the milk market”

  1. But thecpopulation has increased in line with the increase in cows, hasn’t it? Also, I’m willing to bet that milk (or milk powder) is used in a lot more things than a generation ago…

  2. Higher productivity per farm and farmer has been driving up production. True. But it brings down the cost of of production. This generally means more profits, or lower prices depending on supply and demand.

    Demand in a free market is what generally changes prices. Too little and prices drop, too much and prices rise. In a free market, the farmers would set the prices according to the what profit they would like to get, adjusting depending on demand. Supply is something that farmers can control, too much and they lose money and don’t make much profit, so they cut back (or some go out of business). Too little and they either ramp up production or more farmers come into the market.

    Superficially it could be seen that the over supply is causing farmers to go out of business until prices recover to a level which allows the remaining farmers to make money.

    What has happened is that the supermarkets are using their power in the market to demand lower prices and thus narrowing the profit margins of farmers.

    If everything was going according to plan, then everyone would get relatively equal levels of profit in the chain, unless they added extra value. Since supermarkets don’t add value to milk, then their profit margins should be pretty close to that of farmers. My understanding is that farmer’s profit margins are a lot smaller than the supermarket’s (or the distributers).

    The price of milk leaving the farm is around 20p/litre, whilst it costs about 20p/litre to produce the milk. Supermarkets are selling milk at around 60-70p/litre. 40p/litre profit on just heat treating milk and distributing it seems quite high.

    If it was all above board, then even though the OFT investigated and didn’t find enough proof, why did the supermarkets still pay a fine.
    http://www.guardian.co.uk/business/2010/apr/30/oft-milk-butter-price-fixing

  3. SadbutMadLad:

    “What has happened is that the supermarkets are using their power in the market to demand lower prices and thus narrowing the profit margins of farmers.”

    Customers* using their power to push down prices is very much in line with normal market practice and nothing to strange at all. (see e.g. Porters five forces)

    “If everything was going according to plan, then everyone would get relatively equal levels of profit in the chain”

    Says who?

    *Supermarkets are at least as much customers of the farmers as the end-users are (although there is as far as I understand it at least one more step in the value chain between supermarkets and farmers)

    “Since supermarkets don’t add value to milk,”

    Sorry, but this is utter BS. Of couse supermarkets add value to milk. What consumers want is milk in their supermarkets, not milk at the farms. (Actually what they really want is milk at their homes but the most convenient way for most people to get that today appears to be through supermarkets)

    “The price of milk leaving the farm is around 20p/litre, whilst it costs about 20p/litre to produce the milk. Supermarkets are selling milk at around 60-70p/litre. 40p/litre profit on just heat treating milk and distributing it seems quite high.”

    But they don’t make 40p profit/litre now do they? Because heat treating and distribution obviously also have costs. Without knowing these costs there is no way for you (or me) to say if they are high or not. (Also I believe VAT is charged on milk)

  4. The Pedant-General

    there’s no VAT (yet – don’t give anyone ideas) on absolutely basic foods – milk is about as basic as you get.

    The divide between basic and not-basic is arcane (try googling Jaffa Cakes and VAT for good measure) but to give you a feel for where the divide is:
    – Crisps, ordinary boring ready salted ones, are VATable as it is considered perfectly possible to slice and fry potatoes at home.
    – Doritos however are not VATable: milling corn into dough, then rolling, baking etc are really quite hard to do so it’s not reasonable to expect the public to do this at home.

    But oddly biscuits (without chocolate at least) are not VATable even though they are not commonly made at home, where cakes (which are more commonly made at home) are considered a luxury and therefore VATable.

    Don;t get me started.

  5. So the price of a litre of milk now in July is a minumum of 80 pence per litre but the farmers are still only being paid around 20 pence per litre despite a current shortage in milk due to the dry weather. Pick up the Farmers Weekly and see how many dairy herds are being sold weekly at the moment. Somebdy somewhere is making a great deal of money. What is going on?

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