Tesco last week announced plans to cut the price it pays to dairy farmers in its dedicated supply group. The retail giant blamed falling profitability and lower feed costs for its decision to slash prices.

From 1st April, farmers in Tesco’s Sustainable Dairy Group will receive 29.56 pence per litre, following a cut of 0.65ppl. Tesco had been paying its suppliers a relatively high price for their milk, at 30.21ppl. It trailed only Marks and Spencer (32.02ppl), Waitrose (31.49ppl) and Sainsbury’s (30.79ppl).

Tesco’s retail prices are calculated by a cost-tracker on a six-monthly basis, which takes account of fluctuations in cost of production, investment provision and labour costs. Farmers in the group have expressed satisfaction with the model which, by pricing milk independently of market fluctuations, provides consistency. However, Tesco has been criticised for over-publicising its raw milk supply model whilst being reticent to apply the same standards to farmers supplying milk for processing.  

The retailer claimed that the price of feed, particularly feed wheat, which had eased 21 per cent over the past year, was responsible for the cuts. The company said this reduction more than made up for rising fuel and labour costs.

Analysts have expressed fears of a ‘rebound’ in the dairy market, with processors and retailers following Tesco’s lead and cutting back down the supply chain once again, after a steady rise over the past few years. Farmers’ unions have warned of the effect that this could have, as farm gate milk prices remain below the cost of production and producers in the UK remain amongst the worst paid in Europe.

The NFU’s dairy board chair, Mansel Raymond, warned “Tesco farmers will be concerned that feed costs are forecast to be declining, which most farmers would find hard to believe. This certainly is not licence for other milk buyers to cut price, particularly in light of the intense competition which exists between milk buyers for farmer supply. Average milk prices in the UK are still at or below the break-even price.”

The company’s Sustainable Dairy Group was examined by government ministers as a potential model for UK producers to follow when milk quotas come to an end in 2015. Tesco’s decision follows announcements of similar cuts by processing giant Muller, which has also cut its farm gate prices.

Last year, the company started a new round of price wars in the UK by cutting prices on a range of staples across its stores. The decision to cut items including fresh produce and dairy products sparked outrage in the farming sector.

Tweet