Most of us will have milk in our fridges – it’s a basic product consumed by the majority of people on a daily basis and hence a common feature of most shopping trolleys. As we saw in the post Got milk?, the low price of milk has been causing problems for farmers. This has caused one Morrisons store to take a different approach.
In the increasingly globalised world, British dairy farmers are no longer competing against each other. The global market place means that they are now facing growing competition from abroad and in this global world, supply exceeds demand. Even in the EU, the member states in 2015 are exceeding the milk production levels from 2014. In many markets, we wouldn’t be so concerned about production (or supply) rising, as demand can keep pace. However, in the market for milk, it’s not a product that you consume (that much) more of as your income rises. So, as the world gets richer, demand for milk is not increasing at the same pace as supply – demand in China has collapsed. This means that prices are being forced down. Adding to this global market place, we saw the European Union remove its quotas on milk production, thus boosting supply and Russian bans on imports.
The farmers themselves are in a tricky situation. They are often the small players in the supply chain, with prices being forced down by customers, supermarkets and milk processors. AHDB Dairy, the trade body, says that the average price of milk has decreased to just 23.66p per litre. According to leading industry experts this is well below the costs of production, suggested to be closer to 30p per litre. If these figures are even close to being accurate, then clearly dairy farmers’ costs of production per litre are no longer covered by the price they receive. Every litre of milk produced represents a loss.
The price that supermarkets pay to farmers for milk does vary, with some such as Marks and Spencer and Tesco ensuring that they pay farmers a price above cost. However, Morrisons in Bradford has adopted a new strategy and brand. Their new milk brand ‘Morrisons Milk for Farmers’ has been launched at a 23p price rise for every four pint bottle. The catch: they will become the first UK retailer where the 23p price hike goes directly to farmers. This represents 10 pence per litre of milk going directly back to the farmers that produce it. This is a bold strategy, but data and surveys do suggest a willingness to pay more from customers, if it means that dairy farmers get a fairer deal. The protests we have seen across the country have certainly helped to generate interest and created awareness of the difficulties that many farmers are facing. Rob Harrison from the NFU said:
“We are pleased that Morrisons has acknowledged the desperate situation that many dairy farmers still find themselves in and recognise that retailers have a big role to play in, helping customers to support the UK dairy sector…
…Research from Mintel revealed over half of people who drink cows milk, would be prepared to pay more than £1 for a four-pint bottle of milk, as long as it is dairy farmers that benefit. This new initiative will enable them to do just that. The 10p a litre extra will go directly back into the dairy sector will make a difference on farm.”
The interesting thing will be to observe the impact on sales following this 23p price rise. We would normally expect customers to look for the cheaper substitutes, but evidence does suggest that British consumers are willing to pay the price premium if it means helping British farmers. A similar strategy adopted for British Cheddar Cheese proved fruitful and over the coming weeks, we will see if the average consumer is willing to pay directly the dairy farmers. The following articles consider this topic.
Morrisons milk for farmers brand goes nationwide at £1.12 for four pints The Grocer, Carina Perkins (12/10/15)
Morrisons to create new milk brand for farmers BBC News (11/10/15)
Milk price row: farming union leaders meet Morrisons bosses The Guardian, Graham Ruddick (11/10/15)
Morrisons to sell new ‘Milk for farmers’ brand to support British dairy producers Independent, Loulla-Mae Eleftheriou-Smith (11/8/15)
Government to give one-off milk payment for dairy farmers as Morrisons launches premium milk brand City A.M., Catherine Neilan (12/10/15)
New Morrisons milk brand pays farmers more The Yorkshire Post (12/10/15)
- Using demand and supply analysis, explain which factors have caused the price of milk to fall.
- When incomes rise, the demand for milk does not really change. What does this suggest about the income elasticity of demand for milk and the type of product that it is?
- If prices rise and sales also rise, does this suggest that British milk has an upward sloping demand curve?
- If we do see little effect on the demand for milk following Morrisons 23p price rise, what conclusion can we come to about the price elasticity of demand?
- Why do supermarkets and milk processors have the power to force down prices paid to dairy farmers?
- What type of market structure do you think dairy farmers compete in?
- If dairy farmers are unable to sell a litre of milk for a higher price than it costs to produce, is it a sensible strategy for them to remain in the market?
You’ll be familiar with these types of posts from me, which typically start with a comment like: ‘On my commute to work on …’. That’s one of the good things about a long drive – the interesting and informative discussions that you hear on the radio. This one is another interesting piece from BBC Radio 4, looking at a very topical issue, especially to those living in the South West and other rural areas in the UK.
We have recently seen pictures of farmers protesting about the price of milk and in places like Somerset, the protest took a rather odd method, where farmers from across the region entered supermarkets and simply bought all of the milk, before giving it away. The issue is that dairy farming is no longer profitable, as the price that dairy farmers receive for each pint of milk is now lower than the cost of providing it. Thus, for each pint they make a loss.
There are many reasons that have contributed to this situation, including pressures imposed by customers demanding cheaper prices; pressures from supermarkets using their monopsony power to force down the prices paid to farmers; and pressures from abroad. In the case of milk, we have a surplus and with a perishable product, i.e. one that cannot be stored, unlike wheat, this has contributed to falling prices. Data suggest that we are seeing approximately one farmer per day being forced to leave the indsutry.
This programme explores the current dairy farming crisis and draws some similarities with the wheat crisis that the UK experienced in the 1930s. The programme below is 30 minutes and provides some interesting insights on two important commodities and the economics behind the markets.
Today’s crisis in dairy farming and the wheat crisis of the 1930s BBC Radio 4; The Long View, Jonathan Freedland (29/9/15)
- Using demand and supply analysis, explain the situation in the milk market.
- Now consider the wheat industry and provide a similar analysis of how prices are set and what caused the problems seen in the 1930s.
- Although these two commodities have similarities they are also very different. Why can two different commodities experience such similar problems at such different times?
- What are the key demand and supply-side factors affecting the current low price of milk?
- Consider the market for (a) milk and (b) wheat. What are (if any) the market failures within each area?
- Agriculture is an area where we do see significant government intervention. Should the UK government be doing more to help the UK’s dairy farmers? If so, what should they do and would this intervention create further problems, e.g. unintended consequences?
Up until a year ago, milk and cheese prices were soaring woldwide (see Cheddar – the king of cheeses at £2000 per tonne). A surging world economy and rapidly growing demand from China and India were driving up commodity prices, including milk and milk-based producs. In the UK, average farmgate prices for milk had risen from 19 pence per litre (ppl) in 2006 to 27.4ppl by October 2008 (see here for data). Since then, however, as the global economy has plunged into recession, milk prices have fallen. By September 2009, the farmgate price had fallen by over 18 per cent to around 22.4ppl. With rising costs for fuel and cattle feed, many dairy farmers are now making a loss and are either quitting, or considering quitting, the industry.
It’s a similar story in Europe, North America and other dairy producing regions of the world. In Europe “the mood is turning sour. Last week 300 tractors dragged milk containers over fields in southern Belgium, dumping a day’s worth of production (see video). Similar protests were made in Germany, France, the Netherlands and Luxembourg. The crisis has driven many EU farmers into a ‘milk strike’, with thousands refusing to deliver to the industrial dairy conglomerates that produce everything from skimmed milk to processed cheese.”
So is this just market forces in action and will prices rise again as the world economy recovers? Or is it a reflection, in part, of the monopsony power of the supermarkets and the milk processing industry? The following articles look at the issues, both in the UK and the rest of Europe and in the USA.
Milk ‘strikes’ and shortages hit Europe as UK dairy industry reels from crisis Observer (20/9/09)
German agriculture ministers meet as European milk crisis escalates Deutsche Welle (17/9/09)
EU Milk Strike Joined by More Than 60,000 Farmers, Group Says Bloomberg (18/9/09)
EU to boost aid for dairy farms BBC News (17/9/09)
Milk: Commission proposes further measures to help dairy sector in short, medium and long term European Commission Press Release (17/9/09)
Milk output fell in August as dairies cut herds Chicago Daily Herald (19/9/09)
New England tries to save dairies The News Journal (Delaware) (20/9/09)
- For what reasons are many dairy farmers now making a loss?
- For what reasons has the power balance in the wholesale milk market shifted towards milk purchasers (such as supermarkets) and away from farmers?
- How would a phased liberalisation of EU milk production help the UK’s dairy farmers?
- Discuss the likely effectiveness of the European Commission’ proposed measures to help dairy sector in short, medium and long term.
- What is likely to happen to milk prices over the next two years and what will be the likely effect on supply? Explain your answer and consider the relevance of price elasticity of supply.
- “Agriculture officials and farmers in Vermont, New Hampshire and Massachusetts have launched a program called Keep Local Farms. … Organizers say they hope to appeal to consumers’ growing taste for local foods” (see final linked article above). What determines the likely effectiveness of such ‘buy local’ movements? What incentives are there for people to buy local? If countries in general encourage people to buy local, is this a zero sum game? Explain.
The combination of high global demand for milk and variable weather has led to a rapid rise in the price of milk. Cheese is made from milk (sorry to state the obvious!) and so cheese prices have risen to a new high in excess of £2000 per tonne and further price hikes are expected. One conclusion that could be drawn from this is that it is better to have a takeaway pizza now rather that in a month’s time, but what other effects is this price increase for milk likely to have?
Cheddar hits £2,000 a tonne as global milk demand soars Guardian (15/7/07)
||Identify the key determinants of demand for cheese.
||Using diagrams as appropriate, illustrate and explain the changes that have taken place in the market for cheese.
||Assess the extent to which the price increase for milk can be passed on to consumers of associated products like yoghurt and cheese.