The folly of cheap milk prices
For those who read my blog you will be aware that I am a strong advocate of the British farmer and I am delighted that there are early signs of the supermarkets and processors increasing their payments to farmers.
This episode has raised some very interesting business management issues about how you set prices and to what extent you need to consider the long term effects of your pricing policy on your customers, suppliers, and shareholders.
Starting with the effect on customers – The supermarkets have for far too long used milk as a loss-leader to the extent that people have stopped valuing milk. Their price expectations are so low that they have been conditioned into paying a price that is, in many cases, below cost. This is not a sustainable position and has led in no small part to the almost complete demise of doorstep deliveries. Most people had no idea that they were effectively underpaying for their milk, such is the influence of the retailers and are only now beginning to realise.
Suppliers, that is to say the British dairy farmers, have been through some of the toughest times imaginable in recent years. They have been treated appallingly, mainly because as a sector dominated by small producers they do not have the power to influence the huge buying power of the supermarkets. This continual downward pressure on prices, fuelled by the supermarket price war, has put so much pressure on the industry that dairy farmers are going out of business on a daily basis. I grew up in a village in South Devon which, when I was a child, had three dairy farms within a mile of each other. Now they have all gone and this has been replicated across the country. The long-term effect has been that farmers have not been able to invest in their farms and new entrants have been deterred by the very low returns which dairy farming produce. The eventual outcome would be a complete disappearance of British milk and a dependence on imports – which would further impact on our already dreadful balance of payments.
You would imagine that shareholders would welcome the returns that this milk pricing has delivered and be delighted that such an aggressive pricing policy has been adopted. That is the simplistic conclusion. The wider fallout from this policy has been potentially huge reputational damage and adverse customer feedback. I certainly detect almost 100% support for the farmers and an almost militant dislike of big business on the back of BP, LIBOR, and G4S. The speed with which they have backtracked tells you that these issues are now at the forefront of their minds. To ignore these issues would be foolhardy, as it would almost certainly impact negatively on share prices.
We need to treat farmers in an equitable manner to ensure that we have a sustainable and profitable milk production sector, because once it has collapsed we will never be able to rebuilt it in the face of cheap and potentially inferior imported diary products.
Hawkmoor Associates Limited
This was posted in Bdaily's Members' News section by Phil Dibbs .
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