The UK’s largest dairy has warned its milk supply could be at risk if its farmers are no longer paid.
Arla Foods chief executive said costs are rising at unprecedented rates and farmers are unable to cover their expenses.
“Due to the recent crisis, feed, fuel and fertilizer have skyrocketed and hence cash flow at the farm is negative,” said Ash Amirahmadi.
He added that farmers are producing less milk because of the higher costs.
“Dairy farmers in the UK have been producing more for the last seven to eight years but now it’s going the other way,” Mr Amirahmadi told the BBC.
“In February they produced 2% less and in March it’s 4% less.”
With costs rising by around 36%, he warned farmers that they must make difficult decisions and trust to keep producing.
And that means securing a higher price from Arla’s customers – the supermarkets.
“The most important thing now is that we put our arm around the farmers… and pay our farmers more to cover their costs and make sure the milk keeps flowing,” Mr Amirahmadi said.
Arla Foods is the fifth largest dairy company in the world and the UK’s largest supplier of fresh milk and cream. The cooperative has 2,100 dairy farmers in the UK and 8,950 across Europe.
David Christensen, an Arla dairy farmer from Oxfordshire, said he had “never experienced conditions like this in 30 years working in the industry”.
His fertilizer bill has gone from £350 a ton to £900 a ton and his fuel has more than doubled – he won’t be able to afford any more cost increases after the summer.
“There’s no doubt that if the economics aren’t right, one of the options is to cut production… milk prices have to go up. It’s no longer sustainable,” he said.
Arla’s boss said the price of milk in stores is now 7% lower than 10 years ago.
But the price consumers pay is different than the prices farmers receive to produce it.
For farmers, the break-even price is crucial. This includes any additional income and government subsidies.
Over the years the industry has kept costs down by becoming more efficient and many supermarkets have contracted directly with farmers based on their own production cost models to try to give them a fairer deal.
But industry sources have said that even these so-called matched contracts are failing to keep up with skyrocketing costs.
Mr Amirahmadi’s comments come as his company unveiled a five-year plan to grow and future-proof the company while facing pressure from inflationary spikes.
Arla believes that increasing global demand for dairy products is an opportunity for UK farmers. The prices paid to farmers abroad are now 15% higher than the prices paid to farmers here.
It is already experimenting with exporting fresh British milk for processing at its European sites, which is then sold on international markets.
The diary giant is the first manufacturer to consider this on a large scale.
“The good news for farmers and indeed the UK dairy industry is that export opportunities give farmers more options and this means the whole UK dairy industry should be boosted by these markets,” said Mr Amirahmadi.
As for the UK, he believes the dynamic needs to change. He said the liquid milk market has not served farmers for too many years.
“Over the next five years we will have to make some tough decisions about where our milk goes to ensure farmers can break even and continue to invest in reducing their emissions on the farm,” he added.
“The profitability of some of our dairy contracts will need to increase significantly upon renewal to compete with more attractive business opportunities that are opening up.”
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