Milk crisis comes to our doorsteps

FARMERS SUFFERING from low prices have so far targeted supermarkets with their protest but foodservice firms can’t afford to ignore the issue, writes David Burrows.

Foodservice Footprint Unknown-1-300x225 Milk crisis comes to our doorsteps Features Features  Subway Starbucks Sodexo Shaun Allen Robert Graham Richard Lochead Pret A Manger prestige Purchasing McDonalds Greggs Graham's Family Dairy Graeme Kilpatrick Gather & Gather Elizabeth Truss DEFRA Dairy prices Costa CH&Co Caffe Nero Burger King BRC Aroma AHDB Acquire Services

The milk crisis has finally spilled over into the foodservice sector. In recent weeks retail representatives have been urging consumers and campaigners to challenge other food outlets on their procurement practices. The argument goes: if hospitality and foodservice took the same approach as retailers to sourcing and support, it would help alleviate some of the current problem.

 

Politicians have now jumped on the bandwagon. Last month, the environment secretary launched a review of buying habits across the public sector. “We are urgently pursuing a range of measures to build on best practice in the industry, provide better promotion of our world-class products, and boost support for local producers from the public sector including government departments, schools and hospitals,” said Elizabeth Truss.

 

Her counterpart in Scotland, Richard Lochhead, has written to Starbucks, Costa, Caffè Nero, Greggs, McDonald’s, Burger King, Pret A Manger and Subway to ask why they aren’t using more locally sourced milk. “One in three Scots visit a coffee shop at least once a week, spending an average of £80,000 a day. Many will be shocked to learn the milk is often not Scottish, especially at a time when dairy farmers are struggling,” he said.

 

But some observers suggest politicians may need to look closer to home. “You might want to look at a group that buys a tremendous amount of milk,” says one senior retail industry source, “and that’s the government. [It] should be transparent too.”

 

So is the retail sector being unfairly targeted? Should the supply chains of contract caterers and high street foodservice brands be scrutinised more closely? And how can this help beleaguered dairy farmers?

 

This summer the average price of four pints of milk was the lowest since 2003. The current crisis is due to the global imbalance in supply and demand caused by political, climatic and economic events. In other words, it’s not all the supermarkets’ fault.

 

“We have never blamed retailers for causing the current crisis,” says Siân Davies, the NFU chief dairy adviser, “but we maintain there are ways that British retailers can better support UK dairy farmers. We have to remember that 85% of the milk produced in the UK is consumed here, and the majority of this is purchased at retail – so retailers do have a responsibility.”

 

Some have tried to use the global market to their advantage. The Agriculture and Horticulture Development Board dairy average figures are between 28 and 30 pence per litre (ppl) – far above the current UK average farm-gate price of 23ppl. “If retailers want to drive value out of the dairy supply chain by discounting on shelf they need to ensure they fund this themselves rather than take advantage of global issues that are completely out of the control of UK dairy farmers,” Davies says.

 

That the farming sector’s plight has not fallen on deaf ears is testament to the power the NFU wields, not least across Whitehall. Producers have emptied supermarket shelves of milk and marched in their thousands to raise awareness of the dairy crisis, both at home and in Brussels. Some supermarkets have already moved on price, while meetings with UK ministers to discuss longer-term security have been “productive”.

 

“There was agreement that a widespread culture change is needed within the food supply chain to ensure that farmers see a fair share of risk and reward,” the farming unions said in a statement after the most recent ministerial-level meeting. “The government and devolved ministers need to deliver on their promises, work together to achieve this culture change across the supply chain and to see real understanding of the cost of production to farmers.”

 

The Conservative manifesto included a number of pledges to support British food and farming. In relation to public procurement the commitment was ambiguous: “We will ... back British food at home, by guaranteeing that all central government departments purchase food to British standards of production by the end of Parliament.”

 

Take a look at the information being pushed out from DEFRA currently and the message to farmers remains: we’ve got your back. A six-month review will start soon to find out the proportion of British dairy products procured not just by central government but hospitals and schools. Officials say the aim is to identify the potential for future procurement opportunities.

 

That the government has started to look beyond Whitehall is good news. DEFRA says it wants to “build on the progress within central government – which is already generating £11m of business for dairy firms by ensuring that all fresh milk and more than 90% of butter and cheese bought in central government is British”.

 

But how much is it paying for the milk? An exact price isn’t possible, DEFRA responds, because a number of different contractors are used. However, 92% of the food DEFRA buys meets the Government Buying Standards, which stipulate that dairy products must meet the voluntary code of practice on best practice on contractual relationships. This code is supposed to “reassure dairy farmers that their contracts are not putting them at a disadvantage in the marketplace”. But at the last count DEFRA was only one of four departments that sourced 90% of food in line with the Government Buying Standards.

 

What’s more, the dairy code is designed first and foremost to “deliver greater transparency and predictability in milk pricing arrangements”. Truss has announced a new commitment to publish details of central government catering contracts, including their renewal dates, to bring “transparency to the market and allow dairy farmers the opportunity to prepare and compete for contracts”. But the price paid for the milk will remain a mystery, it seems.

 

This could pose some awkward questions for Number 10 if the “back British food” PR push continues. There’s unlikely to be a Jim Paice moment any time soon – the former farming minister who didn’t know the price of milk because his wife bought it – but politicians will need to tread more carefully, especially if they go on the attack and demand that businesses support farmers.

 

Last month, Lochhead used the Aroma café in Edinburgh’s Western General Hospital for a press meeting in recognition of the chain’s policy of sourcing 100% Scottish milk. The café’s supplier is Graham’s Family Dairy, which was last year awarded the contract to supply the whole of NHS Scotland with its milk. However, faced with a glut of milk from its farmers, Graham’s slashed the price it paid at the farm gate by 1.5ppl, and 7ppl for the surplus litres this year. “There was just too much milk around so we had no choice,” its MD, Robert Graham, told the Grocer in July.

 

Suppliers were none-too-happy. NFU Scotland’s Graeme Kilpatrick said at the time that “milk buyers have a duty to alert producers in a reasonable fashion so that they can adjust their production and avoid the damaging impact sudden price changes can have”.

 

Markets are currently extremely volatile, and have been for the past decade in the dairy sector. Shaun Allen, purchasing operations director for Prestige Purchasing, says more needs to be done to develop a more sustainable and stable way of working together between farmers, producers, suppliers and buyers. This should be seen as an opportunity, he adds (see boxout).

 

However, the foodservice sector is a notoriously hard one to reach. “We really struggle making inroads into the contract caterers and foodservice providers,” Davies explains. The contract caterers in particular have rarely attracted the scrutiny that retailers have faced.

 

“As milk buyers in the UK, [we] are a small player, representing less than 0.5% of the market,” reads a statement from high street chain Costa. A Gather & Gather spokesman heads down a similar track: “The total production of milk in the UK [was] approximately 14.4 billion litres in 2014; [we] purchased approximately 2.8 million litres, 0.02% of total UK milk production.”

 

The companies suggest they are merely putting things into perspective. With milk there is an argument that the volumes bought and sold pale in comparison to those by supermarkets, but they are far from insignificant and it’s certainly not an excuse to slip under the radar. As Davies suggests, the individual volumes may be small, but together the sector does have a role in supporting UK dairy.

 

And some are, with Costa singled out for praise – they are “leading the way” among the UK’s coffee shops, according to Davies – thanks to a cost- of-production scheme. Gather & Gather also pays a premium over and above DEFRA’s 24.5ppl farm-gate price.

 

Joanne Sexton, the procurement manager for Acquire Services, is adamant that the foodservice sector is generally paying more for its milk than the retailers. “Having been immersed in the foodservice sector for over 20 years and working as the procurement partner with many trusted suppliers, we know the foodservice sector pays more for milk than the retail sector.”

 

Footprint approached 10 of the major foodservice providers to find out. None offered a price, and only two – Sodexo and Gather & Gather – said they would be willing to publish the figure, with the caveat that everyone else did too. This response from the CH&Co communications director, Andrew Merrett, perhaps best illustrates the industry’s take on price transparency: “The challenge for contract caterers in publishing prices is that a company’s product prices can provide competitive advantage over other caterers and are therefore commercially sensitive.”

 

An industry observer offers a deeper insight into foodservice firms’ reticence. “One of the reasons is that they will add a level of margin to their prices before passing the cost on to their customers – sometimes 30, 40% or more. If their net price is in the marketplace it could undermine their commercial position with
their clients.”

 

So if the government published its milk price, especially at department level, could it create mayhem? Perhaps. On the other hand, could it provide the much-needed transparency and stability the supply chain so desperately needs? Davies says: “The consumer price and the farm-gate price is well known and publicised. If foodservice providers and caterers have nothing to hide in the way they support British dairy farmers they should be more vocal in how they do so.”

 

Transparency is a word that government has used often in its recent communications. The retail sector has also put the theme front and centre – a flurry of high-profile scandals including the horse-meat discovery and the Rana Plaza factory disaster in Bangladesh has left it with no option. The dairy crisis is the latest test.

 

“We are going out of way to be transparent,” says the British Retail Consortium’s external affairs director, Fintan Hastings. “You have to be as transparent as you can – and not just on dairy [because] one way or another people will find out.” The government, its contract contractors and even high- street coffee chains have all been warned.

 

Small volumes belie influence

 

“There are opportunities for the UK foodservice industry to have a greater influencevon the price paid to the farmers. While there are some examples where direct and collaborative relationships already exist and prices are agreed with local producers and farmers, this tends to be on a relatively small scale. It would require a fundamental change in mindset with a strategic and collaborative approach from operators,
food service suppliers, processors and dairy farmers to develop a more stable and sustainable supply solution.”

 

Shaun Allen, purchasing operations director, Prestige Purchasing

 

 

Many variables

 

“There are various factors to take into consideration when looking at how the different sectors buy milk (and indeed how much they pay for it).

 

For example, logistically the foodservice sector is required to distribute smaller quantities which incurs additional costs; unlike the multiples who can consolidate deliveries into a centralised distribution centre. There is of course the fact that the multiples are buying in larger quantities so have more bargaining power with regards to pricing. In the retail sector this commodity is kept at low margins, and in some cases a loss leader. Therefore one must question what price has been paid to the farmers to continually keep the margins low.”

 

Joanne Sexton, procurement manager, Acquire Services

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