Rural

Client Guest Spot – Giles Barber, Farmhouse Cheesemakers

4th June 2016


Insights from the heart of rural Somerset

The Barber family have been farming and cheesemaking since the early 1800s. Although time has moved on, the focus is still on producing West Country Farmhouse Cheddar.

Why have we ended up with a milk price where it currently is?

The sharp drop in milk prices of between 30-40% since their peak in early 2014 has been a worldwide issue. Some industry commentators have described it as a “perfect storm” whereby a number of unrelated factors have combined simultaneously to bring about a significant shift in both the actual and perceived supply and demand for milk and milk derived products resulting in a world over-supply situation and precipitating a sharp fall in the milk price.

 

The most important factors being:

  • A slowdown in world demand for dairy commodities (most significantly in China due over-stocks and Russia due to the continuing dairy import ban);
  • European milk quota de-regulation providing an end to both individual farm and total country milk production caps resulting in some sharply increased milk production in Europe;
  • Buoyant milk production as a result of recently record high milk prices across the globe and particularly benign weather conditions for dairy farming adding to the growth in milk production (including New Zealand which is responsible for over 30% of world traded dairy commodities).

Milk prices will not recover until supply and demand are or are perceived to back in balance.

 

How does this relate to pressures on the milk buyers from their customers?

In a competitive marketplace, where free market economics rule, increasing supplies of milk products has meant that the buyers have not necessarily needed to be the first to apply downward price pressure. This often comes first from other milk processors/dairy product manufacturers dropping prices to move surplus product. Buyers often then react by taking advantage of this competition which in turn means competitors keep reacting to each other’s price reductions in order to maintain sales and market share creating a downward spiral of pricing.

 

How different are the current pressures on those processing milk compared to those supplying the liquid market?

Much of the “bottled” milk market is controlled through the major retailers and their own brand liquid milk. Virtually all of these multiples contract directly with the supplying farms and most have a cost of production based pricing model. Farms supplying this channel have managed to avoid the worst of the effects of the world dairy market slump as a result.

 

Is there a feeling how the milk market may move (either way!) over the next 12-18months?

It’s very difficult to see past the spring peak in milk production that is just around the corner. Prices will continue to be very weak over this period and only after this will the next market direction become clearer. If the “spring flush” in Europe is as big as that of last year then milk prices are likely to continue to be weak for some time and recovery will be some way off. If milk supply is moderated across Europe, either by weather or farms choosing to produce less, this could help arrest the downward trajectory of prices and provide a base from which milk pricing can recover but probably not until later in the year or into 2017. Supply and demand is king.

 

How big an issue is farmer oversupply or are imports the major factor in the market?

In the sense that we are not self-sufficient in dairy products in the UK you could in some sense say that imports are the causal factor. The fact is that we are not a closed market and all supply and demand factors from local to global are important. It is certainly true to say that most milk processors in the UK are struggling to come to terms with the unexpected increase in their milk supplies whilst demand has been at best flat. Spot prices for excess milk sold on the market by many processors have sometimes been as little as half of that paid ex farm by that same processor.

 

How have Barber’s been affected by the instability in world dairy markets?

The crash in market prices has been as swift as it has been brutal. We are fortunate to have a wide range of established and loyal customers who have been prepared to work with us to manage the situation. Whilst they are understanding of the precarious situation for dairy farmers our customers also have competitors. They rely upon us to maintain their competitiveness and so whilst we are not in the commodity market we cannot afford to lose our pricing relevance to it. This means that our milk pricing, whilst often at a premium to commodity based processors, must also bear relation to the “market price”. We have attempted to cushion the blow for our suppliers over the last 18 months by reducing our milk price more slowly than some other milk processors in the UK. Whilst this has had a negative impact on profitability we have successfully protected sales whilst we feel trying to do the best by our suppliers. The business will still put in a strong financial performance this year in spite of this and remains in a very solid position to grow when the market recovers.

 

We gather that Barber’s has reduced the number of farms it buys from. Can you explain why? And are you buying milk from abroad?

The one aspect which we feel that we could have managed better has been control over our milk supply. Having come from a market regulated by milk quota for many years much of the industry has struggled to adapt quickly enough to the new milk supply dynamics post-quota. We work in a business where many of our cheeses are aged for over a year and predicting demand for these and therefore the supply of milk can sometimes be a two to three year process between forecasting demand, contracting milk supply and then selling the final product. The dairy market slump has resulted in a slowdown of our annual rate of sales growth from an average 7% over the last 10 years to virtually 0% this year. Therefore, our actual milk requirement has been lower than we forecast. This has also met with a significant increase in milk supply ex farm above and beyond those farms own forecasts. This has related to both very good grass growth conditions and farms also seeking to produce more milk to compensate for the lower prices per litre with no quota cap on supply.

Better foresight from us and more communication between us would have helped. Unfortunately, we could not carry this additional supply through into 2016/17 so have had to take steps to address the issue. We have more rigidly enforced the existing forecasting requirements in our milk supply contract and based upon these 2016 milk supply forecasts we have not been able to maintain a supply contract for all suppliers. However, it has been important for us as a business with strong family values to try and manage this situation as responsibly as possible.

So far, in spite of the market conditions, we have hopefully been able to find alternative buyers for all of the farms we have needed to talk to. Some of these discussions are on-going but assuming they all stay on the current plan we shall have completed our milk balancing exercise shortly having found alternative homes for all of that excess milk. That being the case and assuming milk supplies are broadly in line with forecast we foresee no further cuts in the supply base.

As for buying milk from abroad that’s an easy one to answer – absolutely not. We can even go as far as to say that all of our sourcing has always been West Country milk and that is a very important cornerstone of the provenance of our product – it’s the best milk, we’re proud of it, and of the farmers that supply us.

 

One final thought – for those still supplying you should they be fearful of further cuts, particularly in the near future?

Some of these discussions are on-going but assuming they all stay on the current plan we shall have completed our milk balancing exercise shortly having found alternative homes for all of that excess milk.