Dividing the spoils in the milk industry

“Supermarkets use their gigantic size and bargaining power to capture almost all of the profit from the milk industry, leaving farmers with a tiny proportion of the total: equal to only half a pence for each litre of milk. That is the central finding of new research by Drs Howard Smith and John Thanassoulis presented at the Royal Economic Society’s 2008 annual conference. Farmers are in the weakest position, only able to secure 0.5 pence per litre, or about 3% of the total supply chain profits from liquid milk.”

Many of us use the supermarkets as an example of monopsony power in markets - using their bargaining power to drive hard deals with their suppliers. New research presented at the March 2008 RES Conference provides evidence on how profits from each litre of milk sold are divided up among market participants. It is not good news for milk farmers struggling to make an economic profit and justify staying in the industry.

“Supermarkets use their gigantic size and bargaining power to capture almost all of the profit from the milk industry, leaving farmers with a tiny proportion of the total: equal to only half a pence for each litre of milk. That is the central finding of new research by Drs Howard Smith and John Thanassoulis presented at the Royal Economic Society’s 2008 annual conference. Farmers are in the weakest position, only able to secure 0.5 pence per litre, or about 3% of the total supply chain profits from liquid milk.”

The research suggests that dairy farmers might help to counter-balance the power of the supermarkets by strengthening farmers’ cooperatives. This is already happening in many parts of the country. But fundamentally the retailers will always hold the whip hand in pricing negotiations and contract agreements. The danger is that the market failure due to excessive monopsony power will lead to many more milk farmers leaving the industry, thereby increasing the demand for imported milk.

Related reading

Supermarkets admit milk price fix (BBC news, Dec 2007)
EU farmers to produce more milk (BBC news, March 2008)
Milk prices report sparks call for fair trade rules in UK (IC Wales, Mar 2008)
First Milk report highlights the real return producers need (Farmers Guardian, March 2008)