The Price Of Milk

Tuesday, 01 September 2015

Many a politician has fallen foul, during elections, when asked the price of a loaf of bread or a pint of milk. Discussion on the price that farmers are given for milk as rumbled on for months now. World prices for milk are now below the UK cost of production.

With renegotiation of the UK’s position in the EU underway and the potential for Brexit. It is worth considering what the future of farm payments might be if the UK was no longer within the EU agriculture arrangements.

With the world population approaching 10bn by mid-century, food security in both quantity and quality is a serious challenge. If the UK dairy industry collapsed under low world prices in the short term, dependence on imports downstream might be deeply problematic in the longer term.

So, can we construct a system for farm support that is transparent and commands public support and protects supply in the long-term while avoiding a return to butter mountains and wine lakes?

It is argued that current prices in the 20-30p range are below UK production costs at around 30p per litre. A number of supermarkets have signed up to schemes to pay farmers a higher price than current market prices.

Critics argue that the average farm gets £28,000 farm support per year, which is partly to be used to protect farms against short term volatility. In fact dairy farmers are smaller than the average. I think a figure of around £15,000 looks closer to reality for the dairy sector. So, are farmers expecting to get full costs above market and subsidy? That does not seem likely to command public support in the medium term. The lack of transparency is an open goal for critics of the current system.

One solution might be to guarantee a minimum price on an annual basis and align the subsidy to the gap. For instance if a price was agreed at 32p per litre and the market price was say 25p, then a subsidy of 7p would be paid. The problem with that approach is that government would take on the volatility, which I’m sure that the Treasury would hate. If the market price was 34p, no subsidy would be paid. The obvious issue is who does the “agreeing”. Could this be done solely within the supply chain or does government need to be involved? What sanctions might be available against retailers who sourced milk at 25p per litre on the world market and sold below UK "agreed" prices?

This way has the benefit that the least efficient producers would be squeezed out over time, providing a balance between market norms and a desire for food security. The transparency of the subsidy would be more transparent than the current system and more likely to command public support.

That is just one example of how a new model might be constructed. Looking at the many issues that this attempt at a solution throws up, shows how complex this could be if the UK removes itself from the CAP rules.

Even if the UK remains an EU member, with reform in the air, how should we construct a farm support system fit for the challenges of the current century? The world in which the CAP was first envisaged is very different to today’s situation. The pace of CAP reform has been notoriously slow over decades, but is not impervious to change.

So my challenge is this. What would be the post CAP farm payments system be in the UK? With the referendum looming, we will all need an answer for that. I’ll be intrigued to see what emerges.

This article is part of a series on the Future of Price.