Supermarkets grab 90 per cent of milk profits

Could it be the same with poultry products?

Farmers’ Union of Wales milk committee chairman Eifion Huws today welcomed the conclusions of a study by Oxford University economists as confirmation of the excessive supermarket power over the milk supply chain.

“Their painstaking research supports our long held belief that the milk supply chain is controlled by the supermarkets, and that processors must merge in order to secure a fairer distribution of profits,” said Mr Huws

The research, which was co-funded by the Milk Development Council and Defra, confirms that supermarkets can dictate the upper price limit for milk because they have the option of obtaining cheaper milk from abroad or overseas.

The researchers found that supermarkets are able to secure 3.2p per litre (ppl) or about 64 per cent of a 5p profit margin, and therefore nearly 90 per cent of the total supply chain profits.

The model shows that if there were fewer competing processors, an increased share of the profits would be returned to processors and the farmer-owned co-operatives, with less going to the supermarkets.

It also shows that such a change would have very little impact on the price of milk for customers, but would reduce the amount of profit currently secured by supermarkets.

“This clearly shows that the UK competition authorities have previously overstepped the mark by stopping mergers between dairies, while ignoring the massive growth in supermarket power over the supply chain,” said Mr Huws.

“Under no circumstances should they now stand in the way of such proposals in the future. Economists Howard Smith and John Thanassoulis’ discovery of a new source of buyer power when supplier cost functions are non-linear is a real revelation,” said Mr Huws.

“In my view they have shown conclusively that negotiation with a large buyer increases the seller’s expected output, which changes the expected average costs of supplying the buyer. This increases the power of a large buyer when the seller’s cost function has increasing returns to scale.

“They also show that upstream suppliers respond to buyer power by selecting technologies with increasing returns to scale, which disadvantage smaller buyers and benefit larger buyers.

“This sort of thing makes farmers very angry,” added Mr Huws.