August 26, 2008

Milk Producers Will Fight Retail Price Wars

Dairy farmers must be ready to take on the retailers if the latest round of supermarket milk price cuts threatens to damage farmgate prices.

That was the message from the National Farmers' Union, whose dairy board chairman, Gwyn Jones, vowed to be at the forefront of the fight.

An NFU delegation led by Mr Jones held talks with Tesco to express concern at its decision to launch Fresh 'n' Lo at pounds1.06 for a two-litre carton.

Many of the other major retailers followed Tesco's example and announced price cuts on milk, but Mr Jones said he was unconvinced by the retailers' strategy and by claims that they, rather than farmers, would absorb the price cuts.

Mr Jones said: "Let's consider the Tesco launch in isolation. You only have to cast your mind back a few years to see the devastating impact retail price wars can have on farmers' margins.

"Tesco denies that this move will have any impact on the farmers supplying milk through its Tesco Sustainable Dairy Group, and in the short term that may be the case. But more concerning is the impact this move will have on farmers' confidence and the prospects of a price increase this autumn.

"The Tesco Sustainable Dairy Group is still in its infancy and the launch of a tertiary brand of milk, albeit at the expense of Tesco's own margin, sends out the wrong message to farmers who are still adjusting to being in a relationship with a retailer.

"For now, at least, it would seem that the core Tesco Sustainable Dairy Group farmers are insulated from the fallout of any price war purely because of the strength of their contract with Tesco. But not all farmers can say the same."

He said that, as predicted, Tesco's competitive advantage lasted all of 24 hours as the other retailers reacted "in a tidal wave of ruthless discounting".

Tesco were fervently denying that their actions would be felt in any way by farmers, but he was not convinced.

Mr Jones said: "Not only does this create a difficult climate for negotiating autumn milk price increases, in the longer term retailers have a finite ability to take a hit on their margins.

"And the ability of the discounters to sell milk at below the cost of production and absorb these costs will be weaker than that of the big four. We know from bitter experience where they'll come looking for cuts in the long run."

But this time, he insisted, the industry would be ready.

"We shall not lie in wait for the inevitable margin slashing of which we still bear the scars," he said. "Farmers have to protect themselves. The NFU has long been calling for better contracts in the dairy industry which offer greater clarity, transparency and stability for dairy farmers.

"Having proper contracts that bring certainty to the way milk prices are determined, require proper negotiation between both parties to agree change, and, ultimately, create a fairer balance of power in the supply chain, will protect farmers from becoming the hapless victims of a clash-of-the-titans price war.

"Our priority is to empower farmers to demand changes to their contract that will reduce their vulnerability.

"Even in today's industry climate with milk in short supply, costs going through the roof, a favourable exchange rate and the need for further price increases, retailers have demonstrated their unnerving ability to rock the stability of the industry overnight. In doing so they have demonstrated the desperate need for better contracts in the dairy industry."

(c) 2008 Western Morning News, The Plymouth (UK). Provided by ProQuest LLC. All rights Reserved.