On the price of milk

Some people are getting very confused here I think. Try this from The Guardian:

How much is a fair price for a pint of milk? The answer is: whatever price allows everyone in the supply chain – farmer, dairy, supermarket – to turn an honest profit.

What?

Seriously, The G is arguing that a fair price includes a fair profit margin? Doesn\’t that completely destroy everything they say about banks, oil companies and multi-nationals?

For example, a \”fair profit margin\” would obviously mean a profit over and above the cost of capital. Something the British banks haven\’t achieved in years: meaning that this argument leads to one insisting that bank profits should be higher than they are.

As to what is actually driving the milk price. We\’re in a rigged market because of the EU. That\’s one cause.

But far more importantly, we\’ve the standard interaction of supply and demand. Dairy farming is becoming more efficient: as farming has been doing since the Neolithic. That rising food production is what has enabled civilisation to develop. More milk is being produced from less land with fewer cows. It really is not a surprise that prices paid to producers are falling in real terms.

The effect of this is to bankrupt some producers and force them out of production. Which is, harsh though it may sound, exactly what needs to happen. Production is becoming more efficient thus we need fewer producers.

*Shrug*. That\’s just the way it is folks.

16 thoughts on “On the price of milk”

  1. Shinsei67 – They are only standing up for them because they have a lack of understanding of what “fair price” & “whatever price allows everyone in the supply chain – farmer, dairy, supermarket – to turn an honest profit” means if applied to every industry including the ones they don’t like.
    So in effect they are showing economic ignorance and this is not so unusual for the G.

  2. Doesn’t the cost of capital incorporate a “normal” profit margin?
    Or have I got that wrong?

  3. cjcjc

    You are correct. If the cost of capital is calculated correctly (not always easy) it covers the expected return on investment of the shareholders and the creditors. So yes it does include a “normal” profit margin.

  4. No a fair amount of ignorance here.
    Milk is perishable and an effluent problem if not
    processed.
    Milk prices are driven by the marginal return from
    storable commodities of butter/skim milk powder.
    This distortion is used by the supermarkets force
    the price of fresh milk down.
    If you wish to have fresh milk you need to pay the price associated with that product or we will all end up with either uht or powdered milk in our tea/coffee.

  5. Hmmm… Of course, if there is an oversupply of milk, it would be unreasonable (and impossible without subsidy) for everyone to achieve a “fair profit”. But could it not also be, in this case, that there exists a state of monopsony, where there is insufficent market freedom to escape the buyers’ power?

  6. Are consumers willing to pay more for each level of the production system to turn a ‘fair profit’?

  7. @Martin Davies, some indeed are. Hence the proliferation of “fair trade” type milk in Germany. Which as Tim might say is one of those wonderful things that we can choose to enjoy in a free market. There are after all a lot of suckers out there who embed enough value in the acquisition of products overpriced compared to the indistinguishable competition (eg designer clothes) that overcharging for milk also works. And if that’s what the customer in a free market wants, someone will supply it.

  8. No, grain prices are rising and most dairy herds in UK are grain-fed, but sale prices are set long by contract so slow to respond. Places that grass feed, like Nw Zealand, aren’t so badly affected.

    The bit that most people miss is this: the prices paid under contract in the UK for milk vary enormously. The best payers in the UK are… wait for it… Tesco, M&S and Waitrose. The worst payers? Artisan cheese-makers of the sort so beloved of the Groan.

  9. The other week I bought a four-pinter for 1 GBP. We celebrated with a mug of hot chocolate each and made some creme caramel.

  10. Why do you think agriculture is becoming more efficient and has done since the Neolithic? The Enclosures were n’t more efficient during the first killer wave 1500 -1700.See” Utopia” by Thomas More (1516 ) where he bemoans the spread of large scale agribusiness, in this case sheep-ranching, using remarkably robust language ,absent the abstract nouns and circumlocutions of the modern Academic Register,although employing some complex syntax, features which an ignorance of the Parts of Speech denies one the abilty to appreciate. .He says that apart from turning poor farmers off their land and into robbery and beggary,”these rich men”..”ingross and forsetall and with their monopoly ..keep the market alone as please them” with the result that the price of wool went up while thousands of sheep died of footrot because, presumably, they were grazed on wet land.(This rather knocks your pet notion, that enclosures diminished malaria /ague, on the head since there would n’t threafter have been much enclosure of land unsuitable for sheep.Sheep mania did end but the sturdy peasantry were still rioting over the enclosure of the marshy Otmoor near Oxford in the middle of the Nineteenth Century.

  11. Oh, no inconsistency at all, just a rare failure by Tim to provide the full context of the Guardian view. Of course the supply chain should all make “fair” profits and then each should be taxed heavily if that made them “too rich” and if the “fair” retail price became “too high”, part of the proceeds of that taxation would be used to provide subsidies to “the poor” or perhaps even everyone, if the product is deemed to be “essential”.

    Much better that we create a bureaucracy to further administer and control pricing and taxation (thereby creating more jobs!) than that we let inefficient producers employ their capital more profitably and let prices fall to a point when no consumer need “know” the price of a pint of milk because the price is trivial even for the poorest in society.

    Oddly I’ve seen little support from the Guardian or the farmers for legislation being introduced by the government which is designed to achieve some of their aims in terms of preventing supermarkets abusing their power over suppliers.
    http://botzarelli.wordpress.com/2012/05/10/supermarket-sweep/

  12. Since more wrote utopia in latin, i wouldn’t draw a lot of english lessons from his “complex syntax”. Good luck using it as a historical document, too. Your own syntax could do with a few full stops, if i might suggest, though i like the idea the peasants revolted for 400 years in Otmoor. Persistent buggers, clearly.

  13. @AM
    I would prefer to take More’s word on his own time when” sheep were devouring men”in England , than the opinions of a historian,no doubt infected with the Whig optimism that things invariably get better through time.
    The point about Otmoor is that English country people were rioting about enclosures , somewhere or other ,for hundreds of years non-stop,sometimes coming together in major outbreaks such as the Midland Revolt ,in which people got killed in the same county as John Clare, and Ket’s rebellion in and around Norwich. The idea that the enclosures show the onward march of agricultural and social improvement is a joke, especially as regards the early phase (lasting hundreds of years) of running sheep over arable land.
    If English history is not your thing ,you might care to consider the example of the American Great Plains ,which were in great shape from the TW-adduced Neolithic times onwards but degenerated into a Dust Bowl in the Thirties after agricultural improvers took ploughs to the very thin root mat and then watched all the soil blow away as far as New York.Large areas are still uncultivable.Soviet agri-technicians adopted
    similar enclosure and other “progressive” methods of agriculture with predictable results.

    Try a few capital letters.

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