UK farmers concerned as supermarket price wars continue

Posted by Daniel Palmer on 20th August 2008

Dairy farmers must be ready to take on the retailers if the latest round of supermarket milk price cuts threatens to damage farmgate prices, the National Farmers’ Union (NFU) dairy board chairman has advised.

The price ward between the major supermarkets has come at a time when discount supermarkets have been gaining popularity due to the credit crunch. Tesco, Sainsbury’s and Asda have been at the forefront of the battle, with offers such as sausages for 8p each and the promotion of a set menu to feed a family of four for just £5 a day.

An NFU delegation, led by Gwyn Jones, held urgent talks with Tesco last Friday to express concern at its decision to launch Fresh ‘n’ Lo (a milk brand)  at £1.06 for a two-litre carton.

Many of the other major retailers followed Tesco’s example and announced price cuts on milk, but Mr Jones said he was unconvinced by the retailers’ strategy and by claims that they, rather than farmers, would absorb the price cuts. “Let’s consider the Tesco launch in isolation for a moment. You only have to cast your mind back a few years to see the devastating impact retail price wars have on farmers’ margins,” he noted. “Tesco denies that this move will have any impact on the farmers supplying milk through its Sustainable Dairy Group (TSDG) and, in the short term, that may be the case. But more concerning is the impact this move will have on farmers’ confidence and the prospects of a price increase this autumn.”

“The TSDG is still in its infancy and the launch of a tertiary brand of milk, albeit at the expense of Tesco’s own margin, sends out the wrong message to farmers who are still adjusting to being in a relationship with a retailer. For now, at least, it would seem that the core TSDG farmers are insulated from the fallout of any price war purely because of the strength of their contract with Tesco. However, not all farmers can say the same,” Mr Jones added.

Mr Jones believes the following tactics of the other retailers are bound to put heightened pressure on farm-gate prices to fall. “As was expected Tesco’s competitive advantage lasted all of 24 hours as the other retailers reacted in a tidal wave of ruthless discounting,” he reported. “Not only does this create a difficult climate for negotiating autumn milk price increases; in the longer term retailers have a finite ability to take a hit on their margins and the ability of the discounters to sell milk at below the cost of production and absorb these costs will be weaker than that of the big four. We know from bitter experience where they’ll come looking for cuts in the long run.”

“This time, however, the industry will be ready,” Mr Jones warned. “We will not lie in wait for the inevitable margin slashing that we still bear the scars of. Farmers have to protect themselves. The NFU has long been calling for better contracts in the dairy industry, which offer greater clarity, transparency and stability for dairy farmers.”