Milk's no cash cow

Dairy farmers are deserting the industry in droves, writes Michelle Knott. But others hope value-added products will boost their incomes

As Charles Dickens's Mr Micawber put it in David Copperfield: 'Annual income 20 pounds, annual expenditure 19 pounds, 19 shillings and six pence, result: happiness. Annual income 20 pounds, annual expenditure twenty pounds, ought shillings and six pence, result: misery'.

Finding themselves in the latter position in recent years, British dairy farmers have, therefore, been rather miserable and the result is an entire industry in crisis.

"Last year milk prices averaged about 18 pence per litre, while the average cost of production was more like 20.5 pence," says Nick Everington, chief executive of the Royal Association of British Dairy Farmers (RABDF). "The industry, as it stands, is not sustainable and we're losing about three farmers a day. That's about £300M a year lost to the rural economy."

Meanwhile, the Milk Development Council's (MDC's) latest survey of intentions warns that a third of farmers are either planning to leave the industry within two years or are undecided about their future.

Milk has been regarded as a low-price commodity, with competition between processors and retailers pushing down prices. However, farmers who aren't quitting the industry are looking to more lucrative, value-added products.

On the grand scale, farmers' co-operatives now own around 30% of the UK's dairy processing capacity, while at the niche end of the spectrum, farmers want to meet demand for local food by processing their own milk.

The major co-operatives are relative newcomers to the processing sector and there have been significant developments in the past 12 months.

For example, First Milk became the UK's biggest major cheese manufacturer in September when it added Dairy Crest's own-label creameries in Cumbria and Wales to its portfolio. First Milk, formed in 2001, is the largest dairy farmers' co-op in the UK, processing 2bn litres of milk a year from its 3,000 members. Its cheese division supplies 35% of the UK's cheddar. First Milk has announced it will spend £3.3M on cheese processing at the former Dairy Crest plant in Haverfordwest, Wales, and £3M on whey processing at the site.

In another example, Milk Link (2,000 members) completed its purchase of The Cheese Company in December, adding the remaining 25% of the company to the 75% it purchased in 2004.

The problem for farmers, however, is that all this investment in facilities and marketing means that co-ops have not been the best payers, compared to the likes of Arla or Robert Wiseman. But Milk Link has announced that it will pay members a dividend for the first time this year and will distribute more than £2M to them in June. Other co-ops are also working hard to turn the situation around.

"Whatever return we've got, we want to get it back to the farmers as soon as possible and we're doing that through the milk price at the moment," says Paul Flanagan, of First Milk.

"The situation is not sustainable and we exist to do something about it," agrees Paul Jennings of Dairy Farmers of Britain (DFoB, 2,600 members).

"The idea is to raise the milk price and we need strong brands to add value. We're spending a lot on creating brands and the facilities to process those brands."

DFoB was established in 2002 and estimated at the time that it should start feeding benefits back to members in three to five years, so watch this space, he adds.

On-farm processing

There has also been activity among farmers at the other end of the scale, says Amanda Ball of the Milk Development Council (MDC): "It appears that more and more farmers are looking at on-farm processing."

RABDF members are also increasingly interested in processing, according to Everington: "We've seen quite a lot of people manufacturing ice cream and moving into other niche areas, such as goats milk and ewes milk. Farmers are also looking to add value by bottling their own milk."

"But it doesn't suit everyone," he warns. "Whether you're selling through a retailer or from a farm shop or farmers' markets, you're looking at a whole range of new skills."

Edmund Proffitt, processing manager for industry umbrella body Dairy UK, also urges caution: "There's a growing trend for farmers to look at developing greater margins from their milk but the key issue is that farmers and smaller processors need to do their research. Anyone can buy equipment but there's no point making your product and having it sitting around. Get the market sorted out first."

The MDC, an essential port of call for anyone looking for advice on a new dairy venture, can help potential processors identify opportunities.

"We're undertaking market research to help farmers make the right decision by finding out what consumers are looking for," says Ball. The results should be available in the next few weeks.

"The important thing is getting people to appreciate that innovation isn't always in physical product. It can be meeting a need. It's all about differentiation - you spot an opportunity in the market and fill it," she says.

Whether there's a gap in the market for selling an artisan cheese at a farmers' market, or selling 5M litres of liquid milk to a regional supermarket, Ball says the common driver is increasing demand for local food of known provenance: "Consumers want to reconnect with where their food comes from and that presents an opportunity for farmers and major processors."

Local sourcing

For example, First Milk has just signed an

18-month deal to help Asda develop its cheese range. "Retailers are increasingly focused on local sourcing, which gives us an opportunity to talk about the cheese we're producing in Cumbria or West Wales, rather than simply English or Welsh cheese," says Flanagan.

DFoB, meanwhile, is looking to increase margins by raising the profile of its brands. "Strong brands are essential because they're all about adding value, but media campaigns are extremely expensive," says Jennings.

DFoB has some established brands, such as Cadog Welsh cheese and butter and Capricorn goats cheese and is now adding to its portfolio. For example, Tesco's own-label local choice cheese range is co-branded with DFoB's umbrella brand, which is less than a year old. DFoB has also launched the Wondercow range of flavoured milks and probiotic drinks for schools on the back of the government's healthy schools initiative.

With so much investment going into building brand awareness, these are lean times for equipment suppliers. Processing capacity has been changing hands, rather than undergoing any great expansion.

"We've seen significant rationalisation over the last three or four years in response to consumer demand," says Proffitt. "I think there's more to come."

However, Tetra Pak Processing's David Hannah sees room for growth with new equipment for farmers and other, smaller processors.

In terms of products, he says locally bottled milk and yoghurt for smoothies are bigger opportunities than ice cream or cheese.

"I think in the beverage market you'll see an explosion in smoothies. They're a high-margin product and are easy to make.

"Manufacturers in the carbonated market haven't responded yet, dairy manufacturers target the mass market and juice manufacturers aren't used to handling dairy products.

"That leaves a great opportunity for local producers," he says.

"A lot of small farms will also go into processing their own milk.They can command a local premium. Food miles won't just be an ethical issue, they will become a commercial advantage as fuel costs rise."

Hannah says equipment suppliers are beginning to look at serving this market using modular systems.

"Four or five companies are already in the early stages of producing a dairy-in-a-box," he says. "It's like a lorry container. All the farmer has to do is connect up the gas, water and electricity and away he goes."

But however easy equipment manufacturers would like to make it for people to set up shop, everyone is dishing out the same advice.

"Farmers really need to do their research before they invest in stainless steel," says Everington. FM

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