Trouble down on the dairy farm

After the collapse of a major dairy co-operative, is the British industry at risk? James Thompson reports

Since the Dairy Farmers of Britain (DFOB), the UK's third-largest dairy farmers' co-operative, collapsed on 3 June, its fortunes have soured rapidly. While the majority of its 1,800 dairy farmers have managed to find new buyers of their milk, the joint receivers at PricewaterhouseCoopers have kept 200 afloat with a temporary guarantee of 10p a litre of milk.

But Stephen Oldfield, the joint receiver and director at PwC, has said the 10p subsidy is "uneconomic and not sustainable", adding that the remaining farmers may have to consider a "dignified exit from farming" over the coming weeks, although he did not provide a date. Before 3 June, DFOB employed 2,400 across its estate of five liquid milk dairies, two cheese creameries, one ingredients plant and 50 distribution depots. Its 1,800 dairy farmers supplied 1 billion litres to the food and drink industry, but this has now shrunk to 50 million.

The Co-operative Group, the UK's fifth largest grocer, has already walked away as DFOB could not meet its requirements.

While it would be easy to trot out hackneyed arguments about DFOB being the latest victim of the decline in the UK dairy industry, increased competition from exports and bullying by the supermarkets, the reality is that DFOB's collapse was somewhat self-inflicted. Industry observers identify DFOB's loss-making liquid division, which processes raw milk, as the weakest link, particularly its ill-fated co-operative's acquisition of Associated Co-operative Creameries for £75m in 2004.

DFOB failed to modernise Associated Co-operative Creameries' facilities and processes sufficiently, which meant it struggled to compete with its more muscular milk processing rivals, Robert Wiseman, Dairy Crest and Arla. In short, partly because of its inefficiencies, the liquid division's costs were too high, and it could not achieve a high enough price from buyers, such as the supermarkets, to cover these costs. As a result, DFOB was not able to pay its dairy farmer members a competitive milk price, and DFOB's farmers started to resign en masse. Since November 2008, some 900 – or half – of DFOB's members have resigned, although they were tied to 12-month contracts. The malaise of its liquid division is illustrated by the fact that so far PwC has only been able to sell four of its depots, leading it to close more than 15 sites, with the loss of 250 staff.

Mr Oldfield says that one of his first jobs was to "take off their handcuffs" and release members from their 12-month contracts, allowing them to join rivals. Of these, the UK's largest dairy farmer co-operative, First Milk, has taken on more than 400 of DFOB's members. The remaining 200 of the collapsed co-operative's members face an uncertain future, and for some, the spectre of selling or culling their cows looms, while some could go bankrupt.

Industry groups are keen to stress that the problems at DFOB are not indicative of the wider malaise of the UK dairy farm sector. Asked about this point, Peter Dawson, the policy director at Dairy UK, said: "Emphatically not. They made extensive investment in their processing capacity, which they were unable to turn around with the resources they had.

"But it is not indicative of the industry or dairy farming in general."

That said, he concedes that some dairy farmers have quit and have been hit by the recent decline in the market price of commodities – particularly skimmed milk, bulk butter and mild cheddar. The industry research body DairyCo found that since May 2002 the number of UK dairy farmers has slumped by 37 per cent to 11,779.

However, maybe Britons need to step up to the plate and support the UK dairy farming industry to stem the growing tide of exports being bought in supermarkets. Mr Oldfield at PwC says: "I like pouring British milk on my cornflakes and I believe British consumers like to do that as well. I am puzzled why we need to import so much from countries such as Ireland and continental Europe."

The dairy farmer By Kevin Rawlinson

Anthony Crozier's family has farmed at Bank Foot Farm in Northumberland for 43 years, but the demise of Dairy Farmers of Britain could have seen that legacy ended had a last-minute reprieve not saved him from selling his herd of 75 Holstein Fresians.

"We were hopeful of getting a new milk contract as the bottled supply dried up but if we hadn't, I would have been in trouble," Mr Crozier said. "My whole livelihood is in dairy farming and I couldn't have held out any more than a month," added the 45-year-old.

DFB administrator Pricewaterhouse Coopers had guaranteed farmers a basic rate of 10p per litre for their milk, but Mr Crozier says this just wasn't enough. "We were losing money hand over fist on that basic rate," he said. "It might have been possible to get a few pence more than that but we'd have needed more like 24p per litre to break even."

Not everyone has been as fortunate as Mr Crozier in finding a new deal, and many farmers are still searching for new buyers for their milk.

"These days, demand more than outweighs supply of animals and where there are quite good milk buyers, I think farmers will be in a better position than they were under DFB if they hold their nerve," said Glyn Lucas of Carlisle's Harrison and Hetherington Farmstock Auctioneers.

"However, a lot of these farmers have lost not only their milk cheques but their investments in DFB, which can run into tens of thousands of pounds."