As crazy as it may seem last march was relatively normal, and no one would have ever thought that our food security was at play. Though at this stage the dairy sector was already impacted by the Covid19 impact. As the food service industry was suddenly deserted then closed it meant that 8 million litres of milk were not consumed every week. There was seldom any possibility to divert it to retailers or local dairies, those which witnessed a surge in demand. This was due to the structure of the transformation and supply chain.
The specialized nature of UK dairying industry is at fault here. Farms, factories are focused on producing specially designed products for either retailers or the food industry. The concentration of the downstream supply chain triggered this move as well as a way the drive down to milk price. Each supply chain is ruled by contracts, characteristics that are strict, every retailer or foodservice tend to source one product type from one factory only. Supply chains are thin, tailored financially to work on a day to day delivery basis with the minimum amount of stock, efficient and smartly engineered at every cog.
2019 was a grand year for UK dairying, the first year when UK was self-sufficient for milk in decades. It still needs to import loads of cheese, butter and yoghurt (high valued products) while exporting milk powder (low valued product) and rely on international supply chains.
This temporary stock of surplus dairy products destined to the food service industry and the lack of flexibility in dairy product supply chain to accommodate it meant that the dairy markets were sent reeling in the UK – Müller and Freshways being the worst it. Some workers in the supply chain being ill or self-isolating caused further troubles. We have seen some milk dumping pictures on twitter sparking an outcry – though it only represented 1 million liter according to the AHDB, 1 additional million liter of skim milk was disposed of at factories. A drop in a milk ocean one would say.
Modelized farms to look at the impact of the crisis
The work presented below is based on my master’s degree thesis from 2019 which was funded by the Carasso Foundation as part of a project aimed at understanding the impact of the CAP on farms in Europe.
I used a French method of agrarian diagnosis enabling a systems-based approach working in small agricultural area and studying it using a 3-step approach: landscape; agricultural history of the area; and finally, the production conditions of today’s farmed landscape (H. Cochet S. 2014).
Pembrokeshire a lowland Dairy Powerhouse. Here this large herd belongs to a spring calving unit using New Zealand style British Friesian. A farm system based on grass production. Public Right of Way.
South Pembrokeshire was chosen as the study area owing to its diversity, I spent 6 month doing fieldwork, conducting 92 semi-directive interviews there before drafting the thesis. Through this method one tries to modelize today’s farming systems by differentiating them on common patterns in the history evolution and the landscape. The modelization gives archetypical farms based on 3 to 7 existing farms that are a fully functioning farming system. Or a typical combination of different cropping and livestock systems (managements) working with the same kind of resource (workforce, machinery, investment, land, landscape, inputs). Those sub-systems interact together exchanging resources to get to a production or a valuable outcome. A holistic view of how a farm work including a very good idea of the peak working times and the economic impact. (H. Cochet S. D., Janurary 2017).
South Pembrokeshire is a peculiar landscape, a lowland dairy powerhouse at the south-western tip of Wales. The farming industry is diversified with a range of agricultural productions and 25 archetypical farms were designed out of it.
- 14 dairy archetypical farms grouped in 4 categories
- 12 beef and sheep farms
- As well as potatoes farms, farm supporting dairy farmers, farmers renting out their land
A complete landscape of farms interacting together. The work is based on a qualitative analysis and a qualitative modelization of archetypes. The output of this method is particularly suited for farming policy and economic context impact analysis (H. Cochet S. D., Janurary 2017).
To get an idea of the impact on dairy farms of the current crisis I selected couple systems from those categories with a range of size, calving patterns and orientations. They all sell their milk through contracts with the transformation. Every farm has a different milk price because of its milk quality (health quality but as well protein and butter contents, those are paid depending on contract terms, its size (the bigger the higher the volume payment)…). But all those systems will have milk price evolving jointly, they overlap themselves on suppliers and final products.
Characteristics of those farming systems:
No organic farm was retained because their supply chains are less dependent on the food service industry. They haven’t been pressured as much as other dairy farms from the milk and volume point of view. Their price evolution is different and thus can’t be compared.
Impact on farms; different scenarios for different farms and outlets
To analyse the effect on farms a crisis scenario was constructed looking at the accessible data on price evolution and the milk deliveries trends.
- Milk deliveries are down in the UK by approximately 1-1,2 million litres and the trend will certainly go towards a early peak as dairy incentivized their farmer to cut milk production. Freshways asked farmers to cut 5% of their milk production. The milk production is down 3-4% compared to last year. Farmers are encouraged to reduce milk production by reducing milking cows number (culling the old owns, drying off some) or reducing concentrate output.
But it is important to remember that in farming your system revolves on a long time period which is not the one of dairy markets. You plan your crops to feed you cows months in advance and you spend money to plough them in way before the harvest. Likewise a cow can’t turn its milk output on or off, there is an inertia directly related to the fact that these are living forms.
- On milk prices, the NFU was echoing that every farmer was to witness drops from 1 to 2 pence per litre from next month onward – on an average milk price around 28-30 ppl. It makes a 3-6 % reduction in milk prices. The situation is unlikely to change in the coming months according to the industry. Delayed payments of up to 1,5 months have been witnessed.
- Input prices has reduced, most notably those linked with petrol prices. Though it is yet difficult to tell how much the reduction in price will amount over the year.
For the prospective scenario we choose to apply a 5% reduction in milk prices a 5% reduction in volume as well as a 5% reduction in input prices (cake, fertilizer and fuel). These to cater for the reduction in cake consumption.
Impact on farms; which farm systems take the brunt of the crisis?
Each economic results of farms is decrypted through looking at the how the raw product is decomposed. It represents the output sold at farmgate prices. To get the added value produced by the system you have to subtracts Intermediate Consumptions that are the yearly spending to have the farming system running and Investment Depreciation that spans the accounting value of infrastructure and machinery every operating year. Finally, the Agricultural Revenue before tax takes out the rent, taxes and the worker’s salary.
Working at this scale of Agricultural Revenue before tax is interesting to compare different systems regardless of their business structure, from a family operated farm point of view. This agricultural revenue is therefore looked at when attributed at each family worker.
First we will look at who will be the more endangered if the dairies fail to pay what they were due to pay for 1 month.
For this we compared the monthly intermediate consumption cost (knowing that there are some months were farmers are strained because there are a lot of bills to pay – seeds and fertilizer in the spring, concentrate for animals every month, a breakdown of a tractor…). Intermediate consumption represents at least 2/3 of every farm monthly raw product. This figure shows how difficult it can be if farmers cannot get access to an overdraft/government loans if they don’t get paid. Due to the crisis farms would lose anyway between 5 and 20 K€ every month in terms of raw product value.
Secondly we will look at the impact on the revenue of the farm and how dependent farms are on subsidies.
The biggest archetype is operating at a loss year on and every farming system is becoming more dependent on subsidies. The spring calvers are particularly affected though they have a huge number of calves because their differentiated spring price is already low and its when they are producing most of their milk. Its low inputs and low-cost capital structure give it little flexibility to adapt but allow the system to be still sound enough to survive thanks to subsidies. The smallest archetype at 90 dairy cows is depending fully on subsidies and gives a bad revenue to its farmers. The low milk price given to this archetype due to their size is to blame.
Those who fare the best are those with the highest milk price in general and an average size around 200 DC, though they still depend more on subsidies than they usually do. All farms tend to still be able to have an economic viability with a positive added value.
We understand that the greatest danger for farms is their cashflow, not being able to increase their overdraft will be the major problem. It is likely that there will be a selection between those who are already very indebted and can’t redeem themselves with their valuable capital structure.
- Bigger farms like 1a or 3c will tend to have an easier access to an overdraft. Banks have already lent them so much cash that they must support them.
- On the flipsides farms that are owned by investment funds/pension funds looking for return on investment in the long term can steadily pursue their route – they are properly backed, and these investors are looking for a long-term ROI which is compatible with supporting temporarily the system through the crisis. This could be the case of 1a.
- Family operated and owned farms that are average to small (for the UK) are the one that could be endangered. Most notably those who just invested on their farms to ramp up production.
The scenario is rather simplistic farmers would have certainly done more adaptations, more culling, more consumption cuts reducing the operating loss of the archetype 3c that is relying heavily on bought in feed.
To summarize the findings of this analysis, there is a risk for family farms to disappear if they can’t solve their cashflow problem. Another worry is for farm transitioning to another production or changing their output type. They are likely to face bigger cashflow problems. It is in crisis that we see the true worth of Agricultural Subsidies (for those farms of the first pillar) because every archetype is depending on it fort its revenue (at least 1/5th at most over 100%). They act as a safety net during those time. Small dairy farms are the most at risk.
Alternative transformation channels for example local milk delivery/transformation (Calon Wen) or organic producers would be less impacted. The diversity of outputs will reduce the liability to price risks.
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A 5% reduction in price and in volume is relatively moderate compared to what dairy farmers suffered from in 2015/2016. Price were down more than 20% compared to the 5-year average, roughly 15% over the year. But 5% is already enough to strain farmers.
I propose to look at diverse ways of mitigating the crisis on the short and on the long-term for farmers. The farms located in the UK are a valuable asset when it comes to food security.
On the farming systems adaptation: dairy farmers can’t act too fast due to their metabolism as well as their income. They need to get a revenue and thus still need to produce. Thus, we are looking at a cost cutting exercise while trying to maintaining production. Apart from reducing the use of concentrate in animal’s diet, farmers are likely to focus on grass growing and won’t reduce much their fertilizer use (A panic buying wave took place in march on fertilizer). The oldest cows have been culled and the one nearing the end of the lactation have already been dried off. But for example, spring calvers can’t dry off any cows because they just started their lactation. Autumn calvers are in the same position with all their cows getting dried off but they don’t know what awaits them in autumn when they would have their peak production.
Yes! Calves can be kept with cows for a while, maybe a way to mitigate the crisis
An option to reduce cost and the production could be to progressively milk once a day, reducing the need for additional farm workers (less costs). It would be particularly compatible with low yield systems.
Yield reductions are tricky because it is not possible to get a cow to fully hike up its milk yield after one of them. Potentially endangering future income in the third and fourth quarter.
The milk reduction may be used to feed to calve to sell as stores or rosé veal’s (though the demand has crashed with the crisis) to give value to a milk to be dumped. But a farmer would need space and some spare straw (and winter has been long). It might need to be advertised to get properly recognized and TB stricken farms won’t be able to access it.
Subsidies: An advance on the direct payment of the 1st Pillar could act as a relief measure for farmers with a strained cashflow. The UK government is also thinking about a one-off relief package payment for dairy farmers after sneering at them 2 weeks ago.
On a longer-term perspective, farmers could feel like riding the wave of the relocalisation trend to develop local self-service milk equipment. It won’t be accessible to every farm as shown on the map and there will be a competition. One needs to generate volume to cover the cost of the equipment to meet health and safety regulation. It cost 10000 £ to build a small clean room and potentially 50000-60000£ more to buy the milk machine for the self-service and the attaining bottles. Prospects for a farm were around 100-200 bottles of 1l every day for 1 to 1,15£. It is a relatively low amount of production for a regular farm (2-6 cows depending on the yield), high valued but time-consuming and thus only be accessible to farms with spare family workers and no staff.
Many farmers and consumers will likely think about alternative channels of retailing right now. The existing one have seen an upsurge in demand, but their size is limited; they controlled 45% of the dairy retailing market in 1995 now its only 3% in 2020. But the price paid is a lot higher which is very interesting for farmers. They won’t be able to stretch themselves in terms of manpower and milk processing capacity, most fear it is only a temporary upsurge and that it might not last. People reverting to the less expensive supermarkets once the storm is weathered.
To create new transformations and retailing platforms cooperation between farmers will be the key to develop local high value opportunities but it will need support and some mentoring. Much like the coop movement for high end cheese production in cheese or Calon Wen. Small, strong with high added value product and a cultural heritage from the land.
For endangered family farms seeking market protection would me trying to get into organic schemes or obtaining a high spec-ed milk production contract.
For all these opportunities it often come to a ruthless competition between who’s the closest, who has just the amount of milk needed, who will be able to match the increase in production to reduce the collection costs. These drivers are present on all type of retailing channels for milk.
Update Early May - A Lifeline Help Package
[6/05/2020] In an announcement by Defra, dairy farmers in England will be entitled to claim up to £10,000 each to cover up to 70% of their losses – as long as they lost is more than 25% of their income – during April and May. Effectively it represents an income support package a safety net to wait for the yearly BPS to help the cashflow.
It will prove a lifeline to every dairy farming system represented though the timeframe is more extensive on these examples. A lifeline for April may particularly those with a very low milk price, the spring calvers and the small farmers. The others would seldom be impacted. It still doesn't solve the backlog of milk check payment for some.
English government challenged devolved countries to follow the lead - Wales will do and will follow.
It was not the most important measure put forward - the relaxing competition rules and telling supermarkets and processors to deal with it were really the key factors in crisis management.
Just as a closing remark this very interesting graph from AHDB showing the panic buying peak and the demand now being down on milk and fresh dairy products. Retail increased sales are not enough to balance the loss of the food service industry.
