After more than a decade of campaigning by NFU Scotland and other UK farming unions calling out unfair practices in the dairy supply chain, new legislation on dairy contracts has come into effect.
“It is hoped that the new regulations – the Fair Dealings Obligations (Milk) 2024 (FDOM24) – will establish transparency and accountability across the dairy supply chain by stopping contract changes being imposed without agreement.”
So started an NFU Scotland press release on July 10 – two days after the guidance notes had been issued (aka rushed through) and a day after all new milk contracts had to be compliant with the regulations. Existing milk contracts now have a 12-month transition period before they must be compliant with new legislation.
The new regulations are big news, but will they have a big impact?
Well, I think they are going to have less of an impact than was expected – especially when the legislation was first muted. They have been watered down a lot from the original proposals, which effectively looked to ban discretionary pricing and replace it with a milk pricing mechanism that no-one could think of that would work. And there also looks as if there could be a fair few loopholes on prices that processors can use, should they wish to do so.
There are also elements that I think are still to be fathomed out, such as seasonality payments. They still don’t look particularly clear to me.
But the new regulations do have the potential to increase transparency on milk pricing, say the unions, and do provide a formal and comprehensive mechanism for complaints on contracts should farmers, or rather farmer groups, wish to use them.
And it’s here where the practical elements of the regulations come into play because the regulations are tools primarily for producer groups, I think. I don’t see them as tools for the unions or AHDB to use to on behalf of producers. And that begs the question as to whether the processors or the farmers themselves are going to set up these formal groups or not.
Scotland’s farmers are reasonably well served on this front already with Muller, Arla, and the Milk Suppliers Association (Lactalis) all having solid representative structures. Over time, I suspect Yew Tree’s farmers will migrate into Muller Direct (assuming the deal is waved through by the CMA).
Graham’s is similar to many other processors in the UK in that it doesn’t have a formal producer group in the same way as, say, MSA-Lactalis, Muller or Arla (that I know of anyway).
One of the fundamental issues with the more formal groups such as a Dairy Producer Organisation is the cost of setting them up and running them. They are not cheap.
Spreading the cost of setting one up and running it over, say, 100 farmers, will not be popular with farmers as the individual cost could be high. Thus it will be interesting to see what happens with these processors and any producer groups going forward.
Now to the market and as ever in the summer the market is seasonally quiet. The first GDT in July was down by 6.9% and all eyes were on it again for the second one in mid-July. A second consecutive major reduction on the platform and sentiment would potentially have crashed. And the omens weren’t good as normally July’s events always fall – it’s four years since the last one didn’t.
Happily, though, it delivered some good news for sellers by posting an increase of 0.4% in the overall index, with cheddar the big winner and up 6%.
But while generally positive, it wasn’t a great event for all sellers and all commodities – Arla’s SMP returned its lowest value since last autumn of $2440/t, which is equivalent to €2240/t. This is bad news for those on ingredients contracts, and is indicative of a widespread malaise on the global market as far as the commodity is concerned. Having climbed to the dizzy heights of €2480/t in early May, Dutch food grade SMP has now suffered seven consecutive weeks of decline, which has taken the price back to €2330/t – its lowest price since April.
There was some positive news for butter from the Dutch Dairy Board in mid-July, however, which moved up €30/t to €6680/t and thus arrested a third consecutive week of declines. The price is now back to where it was at the end of May.
But traders are playing games with their offers because of the time of year and the quiet market, so it remains to be seen if this also results in declining prices. UK butter is stable at £5700/t to £5750/t. Butter makers will also be pondering Q4 and Q1 2025 prospects too, as there is a significant drop-off on the GDT between prices now and those then. The danger is that lower New Zealand prices undermine Northern Hemisphere ones.
Cream is between £2.60 and £2.65/kg, which is a good price, and with poor SMP prices it is essential that cream stays high to support liquid milk prices. Commodity returns, especially for SMP, won’t do it on their own.
Cheese is stable in the UK at £3800/t for mild, with very little activity and no urgency from either side to trade still. It’s a similar situation in Europe although there are some slight seasonal wobbles.
So, what does all this mean for milk prices going forward? Well, I’m writing this before knowing what the major companies are likely to do for their August/September prices. But with the market stagnant I can’t see many significant milk price rises on the cards, I’m afraid. But also no reductions either, so my best guess would be a stand on by many, if not most, processors. We shall see.
Talking of best guesses, back in January at the Semex conference, I predicted milk prices for July would range from 37p to 39p for July for a standard litre, with the average being 38.6p. And the actual non-aligned average (weighted across milk processors for volumes) for July? It was 38.8p. What was it I was saying at the start about transparency on milk prices again?
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