The milk market

A beginner’s guide to the milk market and how Sainsbury’s are making sure its farmers get a fair deal

Milk, as you may have noticed, recently hit the news with many national media outlets discussing the white stuff. So to keep you in the picture, here’s a back-to-basics rundown explaining why what happens in Europe affects what you pour over your corn flakes, and how we’re working with British farmers to make sure they get paid a fair price for your pint.

Milk – the story so far

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Milk is such an everyday feature in our lives – it’s in our tea, on our breakfast cereals, and is a key ingredient in packaged foods – that it’s easy to forget how enormous and important the industry is.

Milk has gone from being a humble liquid that came from the local farm to being a commodity like oil or gold, which is produced, exported and traded all over the world.

This created marvellous opportunities for farmers to sell to markets – particularly in developing countries – that were previously unreachable. But it’s also meant that those same farmers are now subject to international factors beyond their control.

Only two years ago there simply wasn’t enough milk in the world to keep up with demand and prices soared to a record high. The outlook was so good that many farmers invested in new plant and machinery to try to meet the world’s needs.

Unfortunately these good times were not to last due to a combination of factors;

Reasons why the price of milk has fallen

Milk demand

Trade sanctions and a slow-down in consumer demand in parts of the world have caused the market to slow down.

The abolition of EU quotas

Back in the 1980s, European farmers were producing so much milk that huge amounts had to be disposed of or sold on markets outside the EU at low prices (the ‘butter mountains’ and ‘milk lakes’) to prevent them causing a collapse in prices. This led to quotas being imposed limiting how much dairy could be produced and farmers were penalised if they produced more than the limit. But earlier this year those quotas were abolished to allow EU countries to take advantage of markets outside Europe and a number of countries are now increasing their milk production, which could lead to surplus milk and milk products, and a further drop in prices.

The weather factor

In 2014 ideal weather conditions in almost every major milk-producing nation saw a bumper year of production. While this should have been good news, it actually led to an excess of milk that again has contributed to the current fall in prices.

All these factors combined impact the market price for milk, which means that farmers can end up getting paid less than it costs them to produce their milk.

Thanks to our Cost of Production (COP) model, our farmer in the Sainsbury’s Dairy Development Group (SDDG) were paid a fair price despite the issue in the market. Click on the chart below to take a closer look at how we pay our dairy farmers.

Chart showing what farmers get

What does this mean for farmers’ incomes?

Farmer kneeling with dairy cow

In 2015, the price of milk was around 28p-30p per litre to produce in the UK. In January 2013, the average ‘farmgate’ price of milk (the amount farmers receive) was 30.05p per litre. But by June 2015 the average farmgate price had fallen to 23.66p per litre – which meant many farmers were producing at a loss. And that’s just the average price – in some cases farmers are being paid as little as 18p per litre.

To put this into perspective, a normal family farm with 130 cows will produce around a million litres of milk every year. Just a 1p drop in price means that farm’s annual income falls by £10,000. Therefore a 10p drop in price – which many farmers have experienced – will result in a £100,000 loss of revenue, which for many is unsustainable.

So what is Sainsbury’s doing to help?

Farmer Tom with dairy cows

There is uncertainty as to when the situation will improve. And even if demand does start to rise again, it will take some time for that to lead to a rise in the farmgate price of milk because of the current surplus.

But Sainsbury’s has a way to help support our farmers against the volatile milk market and help them achieve a sustainable future. In 2007 we set up the SDDG supporting UK farmers. In 2015, Sainsbury’s had 290 farmers assigned to the group. *The price paid to these farmers is independently assessed under a model called Cost of Production, voted for by the farmers in the group, and ensures that the price we pay for milk reflects what it actually costs to produce.

**James Curtis, Sainsbury’s milk buyer, said: ‘In 2012, the group’s farmers voted for a cost of production model, which ensures they receive a fair price for their milk, so it covers their cost of production and also includes a profit margin for them too. This means our farmers are confident that they can invest in their farms going forward, passing these onto future generations’.

Burgh family

***The SDDG produce 97% of our By Sainsbury’s Fresh milk and overall, all our milk is produced in the UK. Sourcing in the UK reassures our customers that they’re getting the same high quality milk products every time they shop with us. All our own brand fresh milk is 100% British.

The price of feed, fuel and fertiliser can also change a lot, so every three months we check our prices against the cost of production according to figures from Agriculture and Horticulture Development Board for Dairy (AHDB), who monitor market prices of feed, fuel and fertiliser (not of milk). The cost of production is then recalculated and published to farmers so SDDG know they will always have a stable income no matter what.

As well as this, our farmers get a bonus when they meet the health, welfare and environmental standards set up for the SDDG.

This makes sure all of our milk suppliers are financially secure. As a result, the National Farmers’ Union has singled out Sainsbury’s as a retailer supporting the British dairy industry.

You can find out more about Sainsbury’s milk pricing policy here.

Find out more about Sainsbury’s milk

 

*Our 9 Northern Ireland farmers are the only SDDG members that are part of a Co-Operative so don’t receive the COP price. They do get the same benefits that the other members of the SDDG get, including vet visits and milk recordings. And they get a bonus for hitting high health and welfare standards.

**97% of our By Sainsbury’s fresh milk comes from the farmers in our Dairy Development group. We always try to buy all of the milk that our farmers produce, but the amount of milk a cow produces is not the same throughout the year. At certain points in the year (particularly in the winter), our farmers don’t produce enough milk so we need to source other milk from other farms. In spring/summer when production is high, we always buy as much milk as we need to meet our customers’ demand.

***Our filtered milk and butter are not sourced through the SDDG, although they are UK sourced.