A recent BBC South Scotland News article stated that “Farmers across Scotland are being urged to attend a series of meetings to outline proposals for a new pricing formula for milk.”  Why?  To create a pricing formula that “…will represent the true value of the product, reflecting a supply and demand dynamic that UK milk prices have failed to recognize over the last decade.”

Hmmm, just how do market prices fail to to reflect supply and demand for ‘over a decade’?  The only situation I can envision is one in which the government intervenes vis-a-vis price regulation or subsidies.  Absent those, the market price will reasonably approximate supply and demand.

What’s really going on here?  I must confess that I’m reading between the lines, but there are several explanations for low milk prices in Scotland.

Shrinking Market
When birth rates drop in a country, the demand for milk does as well.  So one possible explanation is that Scotland’s in a low-birth rate portion of the cycle.

Excess Supply
The Scottish farmers may have made dramatic improvements in husbandry and are getting higher quantities of milk for their herds.  Or the number of dairy farmers may have grown dramatically during an earlier high-birth rate cycle.  Either way, supply now exceeds demand.

Subsidies that once encouraged milk production have been taken away leaving dairy farmers with only market prices to support their operations.

Given these scenarios, do you really think that a new ‘pricing formula’ is going to solve the problem?  Nor do I.  So what is needed?

If you take a moment to review all of the scenarios outlined above they all relate to one thing, excess supply.  There are two ways of dealing with this problem:

  • Increase demand.
  • Industry consolidation.

Increase Demand
Instead of spending countless hours trying to create a pricing formula, the industry ought to be looking for ways to stimulate demand.  The key is a marketing strategy that gets consumers to look at milk in a different light.  Tying it to favorite foods or as a vital ingredient to enhance the taste of food are a couple of examples that come to mind.

Industry Consolidation
The alternative, industry consolidation, isn’t nearly so pretty.  Some of the more fiscally sound firms will merge and remove some supply that way.  The weakest will ultimately run out of money and exit the industry.

What does this mean for you?  When you see declining sales, whether in your business or in the industry as a whole, revisit your marketing strategy, not your price strategy.

Author – Dale Furtwengler