US lessons on how farmers can make a dignified exit from milk

DAIRY farmers received their Easter eggs a shade early with the announcement last Tuesday that Tesco was to raise the ex-farm price paid to selected producers to 22p per litre.

The deal, which is for an initial six-month period, is estimated to cost Tesco about 45 million.

That's peanuts to this colossus of the retail sector. But will it stick and what will be the consequences for the 13,000 dairy farmers throughout the UK?

For a start, only 850 producers will benefit directly, and of that total, about 70 are in Scotland.

Judging from some of the media comment one would have thought that every farmer with a herd of cows was set to gain substantially. The reality is that unless the remainder of the major retailers follow suit, it is conceivable that by autumn the price will drop back.

Farming is no different from any other industry in having to face the laws of supply and demand. I will not gain many brownie points for suggesting that the UK industry is producing too much milk and if less was available the price would probably increase. But that is the very essence of a real market.

For many years arable farmers throughout the EU have been paid to take land out of production. This set-aside measure was introduced because there was too much grain on the market. However, the position has changed dramatically and world stocks of cereals are now at a historically low level. Set-aside will go next year in the impending "health check" on the Common Agricultural Policy.

Milk production in the EU is controlled by quotas, with the UK having the right to produce 14 billion litres each year. If that figure is exceeded, farmers are subject to a super-levy. However, in recent years production has fallen substantially short of quota as farmers have come to realise that there is little profit in flooding the market with excess milk.

That message is clearly percolating through the dairy sector, judging from the most recent survey by the Milk Development Council into farmer intentions. I have read the report - well, most of it - and am not surprised that over the next two years milk production in the UK is likely to fall by 7 per cent or 900 million litres.

Willie Lamont, chairman of NFU Scotland's milk committee, said: "The uncertainty in the industry is very obviously having an effect and making people think seriously about quitting. Even the most efficient units are either giving up or failing to reinvest, which is a worrying pattern. It is important that the Tesco move marks the beginning of a positive momentum to build a sustainable future."

Economists, certainly those who subscribe to the thinking of Milton Friedman, would argue that if there is less milk around then the price will surely rise. That appears to be the line now being pursued in the US.

Last month the details of the next "herd retirement" scheme were announced by Co-operatives Working Together (CWT), the federal organisation for a large number of small co-ops throughout the US. Over-production is also an issue in the US and the Department of Agriculture in Washington has forecast that there will be an increase of more than a billion litres in the current year. Inevitably, that will put pressure on returns to dairy farmers.

But the US industry is not just throwing its collective hands in the air and crying foul. CWT is encouraging farmers to quit milking cows and will offer them compensation for taking that option. In practice, farmers submit bids for what level of compensation they are willing to accept to make a dignified exit. The funding is raised by a levy on all producers.

Recently, CWT announced that it had received a total of 1,397 bids, almost double the figure for the previous year. Almost 350 bids from 39 states, representing 54,000 cows producing more than 500,000 million litres of milk, have been accepted. The herds of those farmers whose bids were successful are now in the process of being inspected to verify production records. The cows are then tagged and dispatched for slaughter.

Jerry Kozak, president of CWT, remarked to the effect that so many bids had been received it was clear that retirement was the favoured option for a substantial number of producers.

Kozak said: "The combination of economic indicators that we have been monitoring told us that this was the right time to act. As a result of the strong response to this round, we were able to select bids at much lower cost per [unit] of milk removed, and spend less on our overall budget than we had anticipated. This will provide more funding for future herd retirements and for our very active export assistance programme."

That looks like a sound example of capitalism and market management in the very best American tradition. However, I doubt it will happen on this side of the Atlantic: probably it is too simple and would not keep many civil servants in a job.

Perhaps the biggest mistake of all in the EU was to introduce milk quotas. Farmers were virtually presented with a tradable capital asset on a plate, though its value is now very much diminished, and a market underpinned by a range of support measures.

Subsidies are unravelling fast and farmers must produce for a real market. As ever, the most efficient will prosper.