Is the value of milk what it costs to produce?

I have just read an interesting article by Pat Tomlinson from Old Mill accountants and financial planners, about the role of cost of production based pricing for milk.

Mr Tomlinson says “Call me old fashioned, but when I studied basic economics (albeit last century!), the price of a product was determined by the relationship of its supply and demand in the marketplace.” He goes on to say that despite frequent references to the fact that “bottled water costs more than fresh milk”, we never hear about what it costs to produce a bottle of water, since it is usually priced on supply and demand  – not the cost of production.

He believes that cost of production pricing has been taken up by retailers because they have decided that it is a fairer way to price a proportion of their milk supply, although he says that these pricing models are, in reality, perhaps “less unfair than other pricing mechanisms”. The supermarkets who price milk in this way have “revelled in the glory of paying a less unreasonable price than other milk buyers or indeed other supermarkets – but have still not paid a true market related price”.

I agree with Mr Tomlinson’s comments on recent developments and discussions on milk pricing. He says they “seem disproportionately based around costs of production and whether specific methods of determining that figure are right or wrong. They are all wrong – at least as tools for setting the price of a perishable, limited supply, staple product (i.e. fresh British milk) whose demand is increasing and supply is falling”.

I believe that, at present, the price of milk is effectively being fixed by supermarkets and its value has been diminished in consumers’ minds as a result. No wonder people tell me that the dairy companies and the supermarkets don’t want another brand of milk. There is real fear in the supply chain of our farms being recognised as the point at which the quality and value of milk is determined. Processors and retailers see adding value as their domain and are anxious to ensure that there is little or no distinction in the way in which milk is produced on different farms, leaving them to innovate, differentiate and profit from it.

Whilst cost of production pricing has helped to put a bottom in the market, it fails to reward the real value of our milk and, whilst there is temporary acknowledgement of increasing costs on farms, the long term expectation will be that we can produce more for less. There is a real danger that the relentless pursuit of lower costs of production on farms will put increasing pressure on farmers and cows. Free Range Dairy is not simply a lobby group or producer organisation seeking collective bargaining power, it is farmers working together to change the market place for milk from herds that are grazed. This is essential if we are to break free from the stranglehold of the major retailers and see the value in our milk returned to our farms.

Which do you want, the cost of production or the real value of your milk?

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