Milked dry: British dairy farmers uncovered
www.telegraph.co.uk
Sunday Telegraph
2nd September 2007
By James Hall,

British dairy farmers are at breaking point, as James Hall found out when he got stuck in for a day of blood, sweat and teats. The farm he visited sells its milk to the supermarkets for 1.5p less a litre than it costs to produce.

It's 5.50am and I'm covered in dung. "You've got a bit on your face. Have an antiseptic wipe," laughs Bob Felton, the farm manager, as he removes a dollop from my cheek with a disposable towel usually reserved for cleaning cows' teats.

For the past 50 minutes we have been milking a 250-strong herd of dairy cows. From our position in the concrete dugout along the middle of the milking shed we clean udders and apply suction nozzles as the cows pass through the barn, 24 at a time. "The Pit" is a loud and dirty place to be: clattering machinery, lowing cattle, flying waste. And around us the world sleeps.

This labour-intensive process will carry on for another two-and-a-quarter hours, by which time some 3,300 litres of milk will have been extracted from the herd. In 10 hours' time, once the shed has been washed down and the cows rested, the cycle will commence again.

But here's the rub. Every time that Bob and his team at Henden Manor Farm in Kent milk the cows, they lose money. This is because the price the farm gets paid for its milk is around 1.5p per litre below the cost of producing that milk. This morning's session alone has cost the farm around £50.

The UK dairy industry is suffering badly due to baffling economics such as this. Since 1996 the number of dairy farms has nearly halved, closing at a rate of 25 a week, while the price that farmers are paid for the liquid has dropped by 30 per cent, according to the Milk Development Council.

This has happened because of fluctuating commodity prices, massive increases in the cost of running a farm and unrelenting demand from the UK's large supermarkets for the best possible terms from farmers.

As with most suppliers to Britain's all-powerful supermarkets, dairy farmers have been worried about speaking out over their predicament lest they have their contracts terminated. However, Henden Manor Farm is different. The farm's owner, Martin Lovegrove, is so concerned about the state of farming in the UK that he has given The Sunday Telegraph warts-and-all access to his farm, staff and financial records going back a decade.

I decide to risk blood, sweat and teats by going to investigate. The situation I find is as revealing as it is worrying.

Henden is a 600-acre farm located in rolling countryside a few miles outside Sevenoaks in the Weald of Kent. It was bought by Lovegrove, who owns an oil and gas advisory business in the City, and his wife Roni 10 years ago. Although the farm is not Lovegrove's main source of income, it is not a hobby farm. Henden supplies milk to one of the UK's largest food retailers (through one of the UK's largest dairy processors), and its herd is three times the size of the national average. It is a living, breathing, working farm.

But Lovegrove has had enough. "We are coming to crunch time and the demand and pressures are getting so much that people need to realise that farming is in an appalling situation," he says.

He opens a spreadsheet on his laptop at the kitchen table in Henden's 16th-century manor house. If the stats belonged to any other business it would have been forcibly shut years ago. The cost of running the farm has increased by 9 per cent every year for the past decade and yet it currently employs fewer staff than it did back then.

Last year, it was paid 21.8p for every litre of milk that its cows produced, but its costs per litre were 25.3p due to the price of feed, labour and other costs. This means that it lost 3.5p for every litre it sold, although it managed to claw back the equivalent of 2p a litre through cattle sales. Loss per litre this year, including cattle sales, will be around 0.5p.

More worryingly, the business has been heavily subsidised by Lovegrove. He estimates that for every single litre of milk the farm has produced over a 10-year period, he has invested 6p in modernising, growing and developing the farm. This investment is over and above the losses that the farm has had to absorb through negative sales margins.

"This is a business like anything else. And for any business to work you have to generate more money than you spend. As it stands today, there is no way you could take anything out of this business. In fact, this farm should have shut down years ago," he says. He uses a simple business matrix to sum up how tricky the situation is. "It is a fact of life that our Return on Capital Employed (ROCE) is less than 1 per cent and probably less than 0.5 per cent. I can put money in the bank and get over 5 per cent," he points out. For Henden to achieve a conservative 5 per cent ROCE, it would need to be paid at least 31p a litre.

Henden is not badly run. It produces more than 2m litres of milk a year, has a contract with a huge retailer and its cows' milk yields are well over the national average. It has doubled the size of its herd over the past eight years.

As I sweep the dung from the morning milking into the path of a tractor pushing what looks like a massive spatula on wheels (which in turn sweeps the waste into a silage pit) I ask Bob, who lives in a converted oasthouse on the estate, how farming has changed in the 17 years he has worked at Henden.

The first thing he mentions is paperwork. Ten years ago 10 per cent of his time was taken up with admin. Today it takes up a third of his time. The effect of this is that the farm manager has less time to manage the farm, which means that the relative cost of doing so increases.

Much of the bureaucracy is Defra-related. For example, the Government's introduction of cow passports (no photo required) adds layers of work. Although this has improved the traceability of livestock - something seen as essential after foot and mouth and BSE - it means that every single movement of a cow must be logged and sent to a central database in Cumbria.

European regulations stipulate that all cows must have ear tags with a mind-boggling array of identification data on them. Again this produces large amounts of paperwork. Some old cows that I meet on my visit have been tagged in the ear so many times that little of their lobes remain. More paperwork still comes from the retailer and processor to whom Henden supplies its milk.

One of the general reasons for farming's malaise, says Lovegrove, is that farmers do not view it as a business, despite the increasing red tape. This has lead to a widely held perception that farms are somehow not subject to the same economics as other areas of commerce.

"This is at the heart of farming. Farmers cannot be absolved of blame in any shape or form. They have really not pushed across their storyline to the consumer and to the middlemen, including the supermarkets, at all well. "They have not worked collectively, partly because they are not businessmen and they don't rate this as a business," he says.

However, a far more pressing concern, and the nub of the problem, is the farmers' position in the food chain. Lovegrove argues that farming's role in putting good-quality food on our tables has been devalued.

" People saying that farmers are the weakest link in the supply chain is absolute confirmation of where farmers have got it wrong. We are the producers so we should have absolute power. Retailers produce nothing, bar the packaging and the market," Lovegrove says.

" For us producers to use that power with a capital 'P' would be insane and wrong. But there is an imbalance and it needs to be addressed," he adds.

What he means is this: the "value" of supermarket food relies on three parties - the farmer, the retailer and the shopper. At the moment power lies with the shopper (who demands low prices) and the retailer (who gives consumers what they want). It is the farmers and other producers who are currently being under-valued.

But Lovegrove thinks that this could soon change. Rising global demand for commodities and falling supply means that food prices are set to rocket over the next few years. A typical basket of food could rise by up to 10 per cent over the next year, according to a research by The Sunday Telegraph. Dairy producers are set to benefit the most, fuelled by strong demand for milk from China.

Lovegrove sees a 35p litre in the not too distant future. "One travels in hope. Life goes in cycles and the world will hit a rough patch. In a rough patch the value of food will be appreciated and the power will lie with the producer," he says.

" Countries have had wealth for so long that their priorities have changed. Vogue magazine is more important than food, and yet we can't live without food and we can live without Vogue magazine - unless you're my daughters.

" The world economy has had good growth but it is not going to grow at the same pace over the next 10 years. There will be a rebalance to fundamentals: the important things will be your home, water, food and energy," he says.

Away from the grand topic of global geopolitics, there is an incident in the farmyard. One of the machines in the dairy is not working and an electrician is called out. It is a simple problem and easily fixed but highlights just how slickly a working farm needs to be managed. Cows need to be milked and this requires electricity.

I am told on numerous occasions that their udders will "basically explode" if they are not milked regularly.

Lovegrove says he will continue subsidising the farm for two years and have a rethink if nothing improves, although he remains optimistic. As I pack up my wellies I cannot think of any other business where a combination of hard (occasionally unsociable) work, inside knowledge and constant battles against over-burdensome regulation goes so unrewarded. Not for the first time on the farm, I get pat on the back for my efforts. But it is the farmers who deserve one.