Development

Over the last 10 years, retailers development of premium milk prices has taken off in the UK.

Dedicated/ or segregated supply chains now cover nearly 25 per cent of the UK's milk supply. In other words, 20 per cent of farmers supply their milk through a premium contract, said Mr Allen.

The first contracts were introduced by Waitrose and Marks and Spencers between 2000 and 2003. These contracts offered producers an additional 0.6 pence per litre, and were generally for liquid milk contracts.

Gradually, Asda and Sainsburys introduced similar schemes.

In Tesco, perhaps controversially, set up a dedicated and segregated supply chain through processors Wisemans, Arla and recently DairyCrest, which bases the milk price on their farmers cost of production.

This has been welcome and torn apart by the industry. Many producers feel uncomfortable, says Mr Allen, as their cards are completely on the table.

The Co-operative group are the most recent to introduce a premium, and have a relatively small pool of premium producers through Robert Wiseman Dairies, and pay a premium of 1.35 pence per litre.

Why offer a premium?

Mr Allen explained that the security of supply of fresh liquid milk is crucial for retailers.

This is where a supplier dedicates their milk supply to one retailer.

Segregated supply Whilst the milk supply is still dedicated, it is also segregated from other milk, ie. it is collected in a different tanker, fed through a different line. This makes the milk completely identifiable for the consumer.

There are huge associated costs with this.

Current scheme standards

Health and welfare: In the UK, there is a lot of pressure to reduce mastitis and lameness.

Recording

Carbon footprinting: Most schemes have some way to measure carbon output.

Biodiversity

Calf schemes and grazing policies: Most contracts like to see cows grazing/ or partially grazing throughout the year. They also restrict the export of live calves.

Retailer support: free computers etc

Constant/ level supply of milk: This what costs UK farmers, says Mr Allen. At the moment, all the schemes encourage a level supply - meaning that producers must provide a constant supply of milk throughout the year.

Pricing options

Option 1: Pay a percentage over the market price.

Option 2: Waitrose price. Although no one really knows how this is set, says Mr Allen, Waitrose like to ensure their dairy farmers are competitive and can re-invest into the business.

Option 3: Formulaic pricing. Marks and Spencers looks at the cost of production - but does not ask producers directly.

Option 4: Cost of production. Tesco asks producers to complete a survey, and from that they track the costs of production and set their price above this.

Option 5: Contracted volumes. Some producers only supply a certain volume of their milk to premium schemes, and for the remaining milk they will receive processor price.

These pricing options have added over &euro 60 million to UK retailer suppliers. On top of this there is an additional knowledge transfer budget of &euro seven million per annum, which is equivalent to what DairyCo provides through the levy budget.

Pro and Cons

Mr Allen said with retailer pricing schemes, producers know where they stand. The premiums provide stability and security for producers, as well as retailers, by building trust.

On top of this, the premium prices give producers the opportunity to re-invest. On retailer supplier farms the average growth was five per cent last year.

However, many argue that this sort of pricing is playing farmers off against each other. As those recieving lower prices are paying for the premium schemes.

Some believe that setting up these retailer contracts could limit a farmers income, as the retailer has the power and will try to manage the margin.

Future opportunities

Agflation, is a serious concern, said Mr Allen. The markets are so volatile, for the last 10 years prices have been on a downward trend. However, Mr Allen believes that prices will remain volatile but begin a long term upwards trend.

Co-ops in the UK have been strengthening, with a number emerging over the last 10 years such as FirstMilk and MilkLink. This presents a number of opportunties for UK producers.

Concluding, Mr Allen said that specialised retailers contracts had added a lot to the UK dairy industry, benefitting both retailers and producers. Whilst there are some negative aspects, there are many positives.