The Dairy Industry in Wales

The dairy industry is facing challenging times.   Many of the forces for change in the dairy sector are not unique to the Welsh dairy sector.   Perhaps the most pressing challenge for the industry is adjusting its structure to compete in a now global market in an unregulated environment.   Although the number of milk producers has fallen across Wales, following the pattern seen in other parts of the UK, milk production has remained relatively stable.   Processing capacity has been rationalised, as it has in many other primary producing Agri-Food sectors.  The importance of niche markets will continue to grow, with production building in many cases from a small base. 

The pace of change is set to continue and to meet the challenge Wales must compete for success in the international environment.   Some of the main aspects of the forces influencing the market include; increasing customer demand for higher levels of added value and innovation; an increasing focus on the need to farm in environmentally sensitive ways; guidance on health and nutrition and the promotion of high levels of animal welfare. 

There are pressures on milk prices and though the Assembly Government has no role in commercial negotiations, it is essential for all those in the industry to improve transparency and communications at all levels of the supply chain.

Low farmgate prices are of concern to the industry generally and in relation to production costs.  There can be substantial differences in the costs of production and profitability between the most and least efficient dairy farmers. The 25% of farmers with the lowest cost of production were producing milk for an average 12 pence per litre less than the 25% with the highest costs.  The challenge is for as many dairy farmers as possible to match the performance of the most efficient.

The Welsh Assembly Government recognises that the farmgate price of milk is currently too low (17.17 pence per litre in July 2006) for some businesses and that some will leave the industry.  One of the benefits of decoupling Europe’s Common Agricultural Policy support from production is that farmers now need to make decisions about the future of their businesses based on the market and consumer needs rather farming to attract subsidy.  The cuts in Europe’s market support prices for milk and milk products, which were introduced partly due to pressure from the WTO, are compensated by the Single Payment which dairy farmers have been entitled to since 2005.  

The dairy industry in Wales is well placed to compete in a more liberalised world market, as there is a climatic advantage, a flexible milk quota regime and some highly efficient producers and processors ready to supply an affluent UK market.  Farm size, efficiency and costs of production compare favourably relative to partners throughout Europe.  Production of higher value-added and branded products is increasing and specific or niche markets are being developed all the time.  There are positive signs that the dairy industry is working to address many of the causes of low farmgate prices.  Innovation is increasing, new branded products are being marketed and structural changes have taken place.  The dairy industry in Wales has benefited significantly from Processing and Marketing Grants (PMG): since May 2001, 46 PMG projects have generated over £36.3m investment in the dairy sector with grants totalling £13m.  Grant recipients include South Caernarfon Creameries, Aeron Valley Cheese and Rachel’s Dairies.

It is the Assembly Government’s intention to issue for consultation in the near future, a new Strategic Action Plan for the Welsh dairy industry and to work with the Dairy Strategy Group to implement the plan.  Each of the factors that are impacting on the dairy industry in Wales presents both challenges and opportunities which will be taken forward in the proposed strategic action plan by the industry.  These include the need to improve the efficiency of the supply chain generally, to increase the level of effective communication at all levels and comply with new environmental regulations.  Many of the improvements needed can be solved by collaboration rather than negotiation.