THE WELSH DAIRY PROCESSING SECTOR Final Report April The Welsh Dairy Processing Sector Report Prepared for.

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1 The Welsh Dairy Processing Sector Report Prepared for DairyCo i

2 This report was produced by Promar International Ltd, on behalf of DairyCo and the Welsh Government. Promar International Alpha Buildings London Road Nantwich Cheshire CW5 7JW Disclaimer The information contained in this report is based on a range of sources including Government publications, feedback from a range of Wales based and non-wales based dairy processors, as well as the opinions of other industry experts and public information sources. Promar International accepts no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof. The opinions expressed in this report are those of the author and do not necessarily represent those of the funding organisations. ii

3 This report has been funded through the 'Improving the Welsh Dairy Supply Chain' project. This project has received funding through the Rural Development Plan for Wales , which is funded by the Welsh Government and the European Agricultural Fund for Rural Development. iii

4 TABLE OF CONTENTS Management Summary... v 1. Introduction Project Summary Specific Aims Acronyms Approach/Method Methodology Notes on Milk Flows Clarifying Dates Raw Material (Milk) Flows Welsh Milk Production and Utilisation Utilisation of Milk Produced in Wales Total Milk Production and Utilisation Welsh Industry Product Mix Welsh Milk Processing Sector Processor Numbers Sector Analysis Infrastructure Employment Milk Fields Customers Industry Issues Future Business Development Processing in Wales Future Milk Requirements Importance of New Product Development Attractive Milk Fields Government/processing Sector Interactions Impact of Welsh Government Actions Working with the Processing Sector Welsh Government Support of NPD iv

5 MANAGEMENT SUMMARY Introduction and Background This report focuses on the status of the Welsh dairy processing industry in The report updates and builds on a previous study published in This report was completed by Promar International, on behalf of DairyCo and the Welsh Government. The study has been funded through the 'Improving the Welsh Dairy Supply Chain' project which is funded via the Rural Development Plan for Wales. The research for this report was completed between November 2013 and January Approach Welsh milk production has averaged almost 1,500 million litres over the last five years Almost 55% of milk produced on Welsh farms is processed in Wales Volumes of milk exported to England for processing have declined Imports of milk to Wales for processing have also declined The information contained in this report is based on interviews with senior managers representing the major processors and buyers of Welsh milk (17 companies with processing facilities in Wales as well as six England-based companies). Over the last five years, Welsh milk production has averaged almost 1,500 million litres per year. This is 50 million litres higher than reported in the previous study (2011). Production peaked at 1,581 million litres during the 2011/12 season, against a low of 1,403 million litres in 2008/9. Our analysis shows that around 55% (835 million litres) of the total milk produced on Welsh farms is processed in dairy plants located in Wales. The balance (about 690 million litres) is transported to England for processing. In the 2011 study we estimated that 13% (190 million litres) of Welsh milk was being exported to England for processing and then re-exported back to Wales for consumption as fresh Welsh milk. In 2013, we believe this figure has decreased to around 9% (140 million litres). Although Wales continues to be a large exporter of milk, some milk from English farms is still transported into Wales (imported) for processing. Changes in company ownership and strategy mean that Wales now imports less milk for processing than it did previously. Imports have decreased from 130 million litres in 2011 to around 40 million litres in This is not a bad thing as it reflects a more local/sustainable sourcing pattern. v

6 More than half of total raw milk (produced and imported) is processed in Wales Cheese dominates Welsh dairy processing There are 45 approved cows' milk processing establishments in Wales The Welsh processing sector has seen significant change in the last three years When imports of milk are taken into account, the Welsh industry has a milk intake in the region of 1,566 million litres. Again, more than half of this milk, 56%, is processed in Wales (almost 875m litres). Of the approximately 875 million litres of milk processed in Wales, the vast majority is processed into cheese. In 2013 we estimate that Wales produced around 88,000t of cheese, accounting for slightly less than 90% of the milk processed in Wales. Liquid milk, at around 70 million litres, is the next largest product category with Other products, such as yogurt and ice cream, accounting for approximately 30 million litres. Although there have been a number of changes in the industry over the last few years the total number of establishments has been very consistent. In 2013, there were 45 FSA approved establishments processing bovine (cows) milk in Wales. Cheese manufacturing plants (22) dominate the sector, accounting for almost half of all premises. Ten ice cream manufacturing plants account for a further 22% of premises and seven milk and cream processing plants account for a further 15%. Over recent years the processing sector in Wales has been strengthened by developments such as the completion of the new Tomlinson s liquid milk processing facility and the announcement that Volac will invest significant funds to further develop its processing site at Felinfach. Countering those positive stories are the closure of the Dairy Crest site at Whitland and the departure of Saputo from the Welsh industry. There are two gaps in the Welsh processing mix Although the Welsh industry is able to produce a wide range of products, the industry continues to lack a milk powder processing capability or a truly large scale liquid milk processor. vi

7 A milk powder processors could make more sense than a new liquid milk processing plant Given the distance from consumer markets, a very large liquid milk processor is unlikely to be a viable proposition in Wales. However, with current high commodity prices it is not hard to imagine how an efficient milk powder processing plant could add value and flexibility to the Welsh industry. The key factor when considering what type of processing capacity is required in Wales is not so much about how much milk can a new plant consume, but what margin can be made on the milk going into that plant. At present milk powders provide an attractive option, however, given the cyclical nature of commodities like WMP and SMP, the overall sustainability such a plant is open to debate. Most of the processing capacity in Wales is in old plants Many of the larger plants in Wales have been in operation for 30 years more. Despite their age, owners are typically upbeat about the plants capabilities and the ongoing investments that have been made to keep the facilities running efficiently. In the future, Welsh dairy plants will require even more investment to keep them competitive with other global suppliers. Employment in the industry has been relatively steady In 2011, our analysis identified that there were almost 1,300 people directly employed across the cows milk processing industry in Wales. Despite some high profile departures from the industry (i.e. Saputo), staff numbers seem to have remained relatively stable. Our latest estimate suggests that there are around 1,200 directly employed in the sector. South West Wales continues to grow as a key dairy region Exports are a key growth area for most Welsh companies Data from the RPA shows that South West Wales (Carmarthenshire, Ceredigion and Pembrokeshire) accounts for 60% (911 million litres) of all milk produced in Wales, up from 58% in Since the last analysis we have detected a distinct increase in the number of Welsh companies interested in exports. In the past, the Welsh industry had a number of companies that were solely focussed on internal Wales or GB markets. Today, a much wider range of companies are looking to export markets for growth. vii

8 The Competition for Welsh milk has increased For most dairy businesses, NPD was seen as vital Welsh Government assistance is appreciated by the industry Companies highlighted many areas where the Welsh Government could continue to contribute The dairy task force provides an ideal to channel to take this feedback forward The Welsh industry needs to capitalise on the current positive market situation to create a better and more sustainable industry for the future Milk buyers have indicated that competition for milk in Wales has increased significantly in the last three years. Most Wales based processors expected to require more milk in the future. Of the companies we spoke with, 82% felt that NPD was an important part of their business. The companies indicating that NPD was not important tended to be smaller processors that were focusing on efficiency or building scale. Almost 75% of the Welsh companies we spoke with had received some form of assistance from the Welsh Government in the last three years. Not surprisingly, companies were very positive about the assistance they received. However, most companies appeared to genuinely believe that the assistance had provided real additional value to their businesses - either kick-starting new projects, or enabling them to bring forward investment that would improve the competitiveness of their business. We received a wide range of comments on how the Welsh Government could continue to work effectively with the industry. These thoughts have been summarised into five categories: focus on the competitive advantages of Wales encourage collaboration increasing demand for dairy products helps build provenance of Welsh milk understand processor needs/requirements ensure CAP reform supports Welsh dairy farmers The feedback from companies reflects the wide range of participants in the industry and covers both tactical and strategic issues. Working with the Dairy Task force to prioritise this feedback and integrate it with the overall industry plan would be a worthwhile approach. This study was completed against the backdrop of relatively high international prices for dairy products and, despite tough recent seasons, a relatively positive farmer base encouraged by high milk prices and decreasing feed costs. The underlying positive environment has no doubt contributed to the optimism of the overall industry. Our analysis suggests that overall, recent changes have been positive for the industry and that the industry is more outward looking and confident about its future. viii

9 Given the cyclical nature of the dairy industry globally, the industry needs to capitalise on this confidence to drive change and investment now, to make sure that the industry is even more competitive and productive in the future. ix

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11 1. INTRODUCTION 1.1 Project Summary The dairy industry is one of the main agricultural sectors in the Welsh economy. Having an accurate and up to date understanding of how the industry is structured and issues impacting the industry is critical for public and private sector policy making and planning. This report updates and builds on a previous study completed in 2011 that aimed to: provide an up-to-date analysis of the dairy processing sector in Wales, covering firmagraphic details, such as number and size of processing plants summarise the issues and challenges currently facing the industry and the overall flows of milk in and out of Wales 1.2 Specific Aims The requirements for this project were to identify detailed information which can then be used to better understand the processing sector, and its needs, in Wales. Specifically, the study aimed to identify: 1. The number and type of dairy processing facility based in Wales 2. The size (approximate turnover and staff number) and set up of the business 3. The amount of Welsh milk being processed and Welsh milk s share of total milk processed. For processors based outside of Wales, the analysis will include recent purchase trends and channels used i.e. direct vs indirect etc 4. The types of major products cheese, butter, liquid milk etc. and the split across commodity, added value and niche 5. The market for the products (retail, public sector, direct sales, export) 6. Future assistance required in terms of support with specific reference to NPD 7. Future intentions regarding increasing production (and milk intake) over the short, medium and long term as well as aspirations to export/increase existing exports 1

12 1.3 Acronyms bn CAP DFOB EU FMCG FSA GB NPD m RPA SMP t UK Billion (1,000 million) Common Agriculture Policy Dairy Farmers of Britain (former) European Union Fast Moving Consumer Goods Food Standards Agency Great Britain New Product Development Million Rural Payments Agency Skim Milk Powder Metric tonne United Kingdom 2

13 2. APPROACH/METHOD 2.1 Methodology The data used in this report is based on interviews with senior managers from major UK dairy processors based either in Wales or England. Our analysis of data from the Food Standards Agency, shows that in 2012 there were 45 FSA approved cows (bovine) milk processing establishments in Wales. In our research we interviewed respondents from the 17 largest Wales-based companies and six England-based processors buying Welsh milk. The interviews were segmented to ensure we covered the full range of size and type of dairy processors operating in Wales. We also made sure that we captured data on the companies that process the majority (>80%) of Welsh milk. The interviews were conducted by experienced Promar researchers (the team that produced the 2011 report, also completed this study) and based on a semi structured questionnaire format. Data obtained from the interviews was then augmented with desk research and other analysis. 2.2 Notes on Milk Flows Identifying exact milk flows and utilisation within the dairy industry is a very difficult task. Overall, there is a high degree of commercial sensitivity regarding milk utilisation. All companies are looking to maximise returns from the milk they buy and many are reluctant to share information on this topic in any detail. There is also a relatively high level of trading or swaps that occur between milk buyers. This trading means collecting accurate details of milk purchased from Wales or England can be less clear especially for companies that operate milk fields across both countries. Processors with multiple product capabilities (i.e. cheese, liquid milk, butter, powder etc.) will allocate milk inputs into different products depending on milk volumes available, market prices for milk and the prices available for processed products. This means milk flows and product output will often vary based on short term conditions rather than any strategic move into or out of one product by the company. The final challenge was that a number of the companies operating across GB simply did not have access to Wales specific data. Internal statistics at a sub-gb level tended to be broken down into company specific regions rather than regions based on national boundaries. Given the variable nature of milk utilisation, particularly in the liquid milk sector, and the limited amount of information available, much of the milk volume data used in this report is 3

14 based on broad data provided by the companies themselves combined with some estimates, rather than 100% exact figures. Overall we were very pleased with the time and information provided to Promar by respondents. There were only 1 to 2 Welsh companies that declined to provide information towards the study. 2.3 Clarifying Dates This is the second report produced by Promar on the Welsh processing sector. The first report was completed in 2011 and is based primarily on data collected from This second report was produced in April 2014 and is based on data from 2013, although occasional data from 2012 is used when later data was not available. 4

15 3. RAW MATERIAL (MILK) FLOWS 3.1 Welsh Milk Production and Utilisation DairyCo Statistics show that at the end of November 2013 there were 1,874 milk producers located in Wales, a 1% fall from the 1,901 in existence the previous year and a 4% fall from the 1,951 milk producers recorded in December Despite a reduction in producer numbers, the number of cows in Wales increased between 2010 and 2013 by 0.5% from 221,000 to 223,000 head. Despite the recent increase, cow numbers are still significantly lower than previous levels i.e. 268,000 head in The UK s Rural Payments Agency (RPA) data indicates that over the last five years Welsh milk production has averaged 1,499 million litres. Over this period production has grown from a low of just over1,400 million litres in 2009/2010, to a high of 1,580 million litres in 2011/2012. Production in 2012/13 was lower at 1,527 million litres, but poor weather and forage growing conditions in the season no doubt contributed to the decline. 5

16 3.2 Utilisation of Milk Produced in Wales Promar analysis of the milk intake in both England and Wales indicates that in 2013 around 55% of milk produced in Wales was processed in factories located in Wales. This represents a volume of 835 million litres, and shows a sizeable increase of 23% over the estimate of around 680 million litres for Exports of Welsh milk to England for processing is estimated to have decreased from around 40% of total Welsh milk production to around 36%, a fall of 4% or 33 million litres. Exports of Welsh milk for processing and then re-import as Welsh fresh milk are also estimated to have fallen from 13% of Welsh milk production to around 9% (from around 190 million litres to around 140 million litres). There are a number of reasons for the above changes. Firstly, Welsh milk production was 5% or 80 million litres higher in 2013 than There have also been a number of ownership and business strategy changes in the industry including relationships that have enabled one liquid milk processor to process a large portion of their Welsh milk in Wales rather than shipping it to England for processing. Welsh Produced Milk Utilisation Exported & Reimported 9% Welsh Milk Production ~ 1,527 m litres Exported 36% Processed in Wales 55% Source: Promar Interviews 6

17 3.3 Total Milk Production and Utilisation The above data focuses solely on milk produced on Welsh farms. In reality, the Welsh and English borders are very porous with some milk processors operating milk fields that cover both parts of England and Wales. This means that some milk produced on farms in England is also transported into Wales (imported) for processing. The information captured in this study suggests that around 40 million litres of milk from farms located in England are processed in Wales. This figure is considerably lower than the 130 million litres recorded in This decline is not necessarily a bad sign for the Welsh industry. The previous high levels milk import levels were largely driven by the policies of a former dairy company which used their cheese plant in Wales as a balancing site for the rest of their UK milk operations. The changes in ownership since that time means the plant is now supplied using local or regional producers with fewer requirements to process imported milk. It is also worth noting that much smaller volumes of other dairy products such as butter, whey and cheese are imported into Wales for further processing or packing. When imports of milk are taken into account, the Welsh industry has a total milk intake in the region of 1,566 million litres. Over half of this (55%), around 874 million litres is processed in Wales. Milk Production & Utilisation in Wales 2,000 1,500 1,527 1, Million Litres Produced in Wales Exported for Processing 39 Imported for Processing Processed in Wales -1, Source: Promar Interviews 7

18 3.4 Welsh Industry Product Mix The previous section shows that around 875 million litres of mainly Welsh, but also some English milk was processed in Wales during Most of this milk is converted into cheese. In 2013, we estimate that Wales produced almost 88,000t of cheese, up from 80,000t in 2010, a 10% increase despite the departure of specialist cheese processor Saputo. As in 2010, in 2013 cheese accounted for almost 90% of the milk processed in Wales and over half (51%) of all milk produced in Wales. Cheddar and Mozzarella/pizza cheese continue to be the two main types of cheese produced in Wales. As in 2010, Cheddar type cheese continues to account for over 60% of the cheese produced in Wales. Liquid milk for the local market is the next largest product sub-group, with production of over 70 million litres. Liquid milk production in Wales has actually increased in recent years and now represents just over 8% of all the milk processed in Wales, up from 6% in The Other category contains a range of dairy products ranging from yogurts, clotted creams, ice cream, butter as well as other dairy products made in Wales. Collectively this group accounts for around 4% (approximately 30 million litres) of the milk processed in Wales. Dairy Products Made in Wales (LME) Other 4% Cheese 88% Liquid Milk 8% Source: Promar Analysis NB The above analysis focuses on milk utilisation and does not include co-products such as lactose or whey derived from cheese manufacture. 8

19 4. WELSH MILK PROCESSING SECTOR 4.1 Processor Numbers Although there have been a number of high departures from the Welsh processing sector in the last three years with the loss of Saputo and the Real Welsh Milk Company, there have also been a number of new companies entering the market i.e. Dairy Partners. In the previous report, our analysis of Food Standards Agency data showed that there were 45 establishments in Wales processing cows (bovine) milk in Analysis of the same data from 2012 (latest available) identified that there were still 45 establishments processing cows milk. In the chart below, we have categorised each of the 45 plants into a single type based on the main or core product they produce. As with our previous analysis, cheese manufacturing dominates the sector, with 22 establishments accounting for almost 50% of approved premises. Ice cream manufacturing is the next largest sub-sector with ten establishments or 22% of approved premises. Milk and Cream processing is the third largest sub-sector with seven establishments or 15% of approved premises. The main changes, since 2010, include the loss of two dedicated butter processors and the change in category for one company from mixed processor to mainly cheese processor. The Welsh industry has also gained another operational liquid milk processing establishment although this is really just a new facility for and existing milk processor. (In our last study the facility was built, but not fully operational.) Cows Milk Processors in Wales by Main Product Type Yogurt, 2 Whey, 1 Butter, 2 Milk & Cream, 7 Ingredients, 'Approved' Dairy Processing Establishments Cheese, 22 Ice Cream / Cream, 10 Source: FSA / Promar analysis 9

20 The above analysis excludes any dedicated whey processing facilities as well as any specialist packing plants for dairy products. 4.2 Sector Analysis The Welsh dairy sector continues to be dominated by cheese processors. This is not surprising given the relatively small local population and the distances from milk fields to large consumer centres such as London and Manchester etc. Over the last three years the cheese processors have continued to invest in their businesses to improve production capacity and or efficiency. Cheese production in Wales is relatively diverse, with plants producing a range of products from bulk cheddar and mozzarella to a wide range of specialist or niche products. Welsh facilities have the capability to supply large and small retailers and foodservice operators, both in the UK and export markets. The removal of milk quotas in 2015 and ongoing internationalisation of the UK industry provide opportunities for Welsh cheese processors to grow and expand the range and volume of cheese products they produce. The recent decision by Volac, the industry s only major whey processor, to invest heavily in their Felinfach production site provides a boost for the cheese processing sector in Wales. The development of the new Tomlinson s dairy provides Wales with an efficient medium scale liquid milk plant. Although the size of the dairy means that it is unlikely to compete with the lowest cost producers in the industry (i.e. Arla Aylesbury), it does provide North Wales with a relatively efficient local milk processor. The Welsh industry is also home to a large scale yogurt manufacturer supplying premium products to UK supermarkets and potentially international customers. Welsh processors of raw milk are also complemented by three specialist contract packing plants capable of packing a range of liquids, fats and cheese. Despite the range of companies in Wales and the variety of products produced, there are still two major types of dairy processor that are absent from Wales. As mentioned in the previous report, the Welsh industry lacks a large scale milk processor capable of meeting the needs of the major supermarkets. Given the development of the new Arla Aylesbury plant near London and the current preference for sitting liquid milk processing near to major population centres, there appears to be very little chance or economic sense of trying to attract a large liquid milk processor into Wales. 10

21 As discussed in the 2011 report, the Welsh industry continues to lack any capability to produce milk powders. Given the recent high prices for commodity SMP/WMP, there is logic in thinking that an efficient scale powder plant in Wales could add value to the industry, by diversifying the product base and giving Welsh producers even more flexibility and access to international markets. Of course, in times of low commodity prices such a plant could be seen to detract value from the industry by exposing Welsh producers to international markets and competitors. Making an informed decision about whether a milk powder plant is suitable, feasible or desirable for the Welsh industry is beyond the scope of this study, but in terms of a long term plan for the industry it is an issue that needs to be addressed. It is worth noting that although the Welsh industry has no capacity to produce milk powders, Welsh milk could still be processed into milk powder via the UK s main milk powder factory located at Westbury in England. 11

22 4.3 Infrastructure Welsh processors were generally positive about the quality and suitability of their processing facilities, with the highest percentage of respondents ranking their facilities at 7 or above (on a scale of 1-10 where 10 is world class and 1 is very poor). Processors often stated that the facility may look poor on the outside but that there had been a lot of investment over the years and that the inside was full of high-quality equipment/technology. Overall Welsh processing facilities appear to be fit for purpose. Although it is interesting to note that only one processor describe their facility as being state-of-the-art or world class. All respondents said they had made some sort of investment into their processing capacity or equipment over the last three years. Many make ongoing investments to their facilities, while other processors had one-off specific projects which had taken place over the last three years. Examples of investment included: Increasing production capacity of operation Increasing product storage facilities New processing equipment with greater efficiencies and flexibility Infrastructure investment new more efficient boilers, waste management systems etc. Over the next three years 85% of the processors spoken to had plans to further invest in their business. Again, investment is set to be mainly focused around improving efficiencies within the site and/or increasing production capacity. The 15% who were not planning on investing in the next three years were all small sized processors whom had made a large investment at their facilities in recent years. Future Infrastructure As mentioned in the previous report, dairy processors in Wales will need to continue to invest in their plants to maintain facilities that are competitive either with processors in the rest of the UK or the rest of the World. One major cheese processor highlighted that as a large exporter they were competing with other cheese plants around the world, not just in the UK. 12

23 As well as investing for efficiency, Welsh cheese processors will increasingly have to invest to meet new consumer/industry requirements regarding sustainability. Efficient water and energy use as well as waste/co-products and air quality management will all require investment. In many cases investment in sustainability will not just include the actual processing site, but the whole supply chain from farm to customer. Some dairy companies are already working with their major retail customers to build sustainability into their supply chains i.e. increasing the focus on milk production from forage. In the 2011 report we mentioned the need for Welsh dairy companies to be able to access low environmental impact energy sources such as natural gas or renewables. Since that time at least two major companies have invested in converting their factories to natural gas and renewable energy. In the future we expect that other factories will have to follow this example. 13

24 4.4 Employment Promar research indicates that in 2013, there were over 1,200 people directly employed across the dairy processing sector in Wales, this compares closely to the 1,300 estimated in The industry appears to have stabilised around this level following larger declines in the late 2000 s with the demise of Dairy Farmers of Britain and restructuring of Saputo etc. Staff numbers over the last three years have remained fairly stable, despite losses of companies like Saputo. Changes in business strategy by some companies have resulted in some staff losses, while other companies have continued to build efficiencies and therefore required less staff. The largest five processors in Wales account for over 65% of the total people employed in the industry. Around 40% of processors have plans to increase their staff numbers in the future due to expected business growth. It is important to note that along with direct employment, dairy processors would support at least equal numbers of employees in associated industries such as milk collection, engineering services etc. 14

25 4.5 Milk Fields Welsh milk production continues to be concentrated across two broad regions, the South West (Carmarthenshire, Ceredigion, and Pembrokeshire) and the North East (Conwy, Denbighshire, Flintshire and Wrexham). Collectively, these two regions account for over 75% of Welsh milk production. Milk production in the South West has increased slightly over the last three years (up 9% in volume terms) while milk production in the North East has decreased slightly (down 3% in volume terms). Regional Milk Fields Production 2009/10 vs 2012/13 County Preserved 2009/10 Deliveries 2012/13 Deliveries Borough / County litres (m) Share % litres (m) Share % Change Carmarthenshire Dyfed % % 9% Ceredigion Pembrokeshire Conwy Clwyd % % -3% Denbighshire Flintshire Wrexham Powys Powys 127 9% 132 9% 4% Blaenau Gwent Gwent 89 6% 85 6% -4% Caerphilly Monmouthshire Newport Torfaen Gwynedd Gwynedd 77 5% 81 5% 5% Isle of Anglesey Cardiff South Glamorgan 21 1% 24 2% 16% Vale of Glamorgan Bridgend Mid Glamorgan 16 1% 18 1% 15% Merthyr Tydfil Rhondda Cynon Taf Neath Port Talbot, West Glamorgan 10 1% 8 1% -19% Swansea Grand Total 1, % 1, % 5% Source: RPA 15

26 4.6 Customers The wide range of processors in the Welsh industry means that there are an equally wide range of customers served by these businesses. Over the last three years, individual processors have often seen large shifts in their customer base. In some cases this has been a strategic change driven by the processor, in others it has been forced upon the processor as buyers have changed their preferred suppliers. Overall there do not appear to be any consistent shifts across the industry in terms of focus on retail, foodservice or processing sectors. Some processors have chosen to focus more on supplying retailers, others have chosen to supply less to retailers or diversified away from certain groups of retailers. The one customer group that appears to have increased in importance over the last three years is exports. In this study over 60% of Welsh processors interviewed stated that exports were an important or growing part of their business. A range of businesses from cheese to yogurt processors saw exports as a key growth area for their businesses. 16

27 5. INDUSTRY ISSUES 5.1 Future Business Development The dairies spoken to in this study were mainly positive in regards to their future business development. 41% cited business growth as a core focus for their business over the medium/long term. A number of the large dairy processors had existing growth strategies which they were following, and would continue to do so in the future. Innovation and NPD were also ranked highly as a priority for processors. 27% of respondents felt that developing new products was the most effective way of creating growth. Larger processors were focused on innovating and developing in their existing core markets, while smaller processors were looking to develop niches which would create a point of difference to their business. Investing in the business was seen as an important area for development in the future. Investment was either to be focused on buildings and machines, or on people. The smaller processors had a keen focus on investing in their people, and ensuring they recruited the right people to the job. Business Development Focus Recruit 9% Quality 9% Investment 14% Growth 41% Innovate / NPD 27% Source: Interviews / Promar analysis 17

28 5.2 Processing in Wales A number of the larger processors felt that having a site in Wales was an integral part of their business strategy. However, the economic viability of operating a processing facility in Wales differed, depending upon what product was being produced. Cheese and whey processors felt it made sound business sense to operate a facility in Wales, near to where the milk is produced, as it saves on transport costs. However, large liquid milk processors continue to believe that having a milk processing plant in Wales is not economically viable. The current trend for supplying mass market milk to consumers (i.e. via the major supermarkets) is to have large, highly efficient factories located near to major population centers. Arla s Aylesbury plant is the latest and largest example of this trend. The relatively small and dispersed population in Wales means that there are no large consumer populations that would form an attractive market for a modern large liquid milk processing plant. As a consequence, processors still find it profitable to take milk from Wales for processing in the UK and then returning it to Wales for sale as Welsh milk. Smaller and niche sized producers of liquid milk differed in their views on the viability of producing liquid milk in Wales. Processors such as Dairy Crest have struggled to identify a viable model for producing local milk in Wales. Dairy Crest states that they were unable to reconcile the volumes and prices that buyers were willing to pay for locally processed Welsh milk. On the other hand, processors such as Tomlinsons appear to have created a stable positioning in the market by processing their own milk for local distribution as well as that of other processors. Small dairy processors felt operating in Wales was a crucial component of their brand identity. For these, it was vital to use Welsh milk in their products to further strengthen their values. A number of smaller processors also commented that a high proportion of their customers were local, so being situated in Wales enabled them to better meet their needs. 18

29 5.3 Future Milk Requirements Almost all of the processors agreed that demand or competition for milk (including milk produced in Wales) had increased in the last few years, particularly given the current high global commodity prices. All of the major liquid milk processors said that they were open to sourcing more milk from Wales, but that this milk would not necessarily be processed in Wales. As an example, Muller Wiseman stated that they had three processing facilities in England that were capable of handling milk from South, Central and North Wales. Other large Wales based processors were typically looking for more milk in the future. Only one large processor stated that their Welsh facilities were already working at capacity. The few medium sized processors in Wales tended to be optimistic about their future demand for Welsh milk citing growth plans that would require increased milk supply. Smaller processors were often more content with their current Welsh milk intake. For many, any increase in volumes here would need to be linked to an increase in demand for their product ensuring they had a market to sell the additional volumes to. Compared with the previous study in 2011, processors were far more active and positive about sourcing milk from Wales. 19

30 5.4 Importance of New Product Development For most dairy businesses NPD is vital, of the companies we spoke with, 82% felt that NPD was an important part of their business. Many of the larger processors had dedicated in-house teams which focused solely on NPD for the business in most cases these were located outside of Wales. A number of Wales based companies stated that in the last 2 years they had created teams specifically focussed on NPD. For the larger companies NPD was an ongoing process and something which buyers expected from their suppliers. NPD activities varied from tweaking existing products to say improve the functional properties of a cheese, to developing whole new innovative products, such as dairy beverages. The focus on NPD varied even between companies in the same sector. One large milk processor stated that NPD was the number one driver in milk, while another stated that the concept of NPD in milk was great, but that there was only so much you could do to liquid milk! Companies that said NPD was not important to them tended to be small processors, who generally focused on making and marketing one product. These companies were more interested in increasing volumes and improving their efficiency rather than diversifying. NPD was seen as a costly process by the smaller processors, and not always worth the time and resources. 20

31 5.5 Attractive Milk Fields The factors that make a milk field attractive to processors can be separated into two areas borrowing from Maslov s hierarchy of needs we have listed these under two headings. Hygiene factors The two most common hygiene factors identified were Distance and Density. Distance is of course relative to the location of the processor, but all processors want milk suppliers that are close to their factories to minimise transport costs. Distance can be modified to some extent by access to good transport infrastructure ie 50 miles on the M4, is much less than 50 miles through narrow B roads. Density of suppliers was another key requirement close proximity of famers allows for flexibility in routing and more efficient tanker collection runs. Density of the milk field is more of a concern when dealing with small farms where multiple stops are required to collect full tanker loads. Milk Quality was another key factor for many processors. Having confidence that suppliers were able to produce consistent quality milk or milk of a particular standard was important for many suppliers. Production pattern or system was another requirement. Some processors were looking for flat supply curves from producers as they needed consistent high quality milk year round to meet their customers needs. Other processors were more relaxed about supply pattern so long as the producers were maximising their efficiency (and lowering their production cost base). These processors were content to balance milk themselves from a mix of year round and autumn/spring block calving suppliers. Wales is currently seen as providing a good mix of block and year round calving herds. Motivating factors Over and above these hygiene factors, a number of processors were looking for more from their suppliers. Processors were looking for positive, motivated suppliers that were committed to the industry and those that they could develop a good working relationship with. One supplier talked about wanting more suppliers that were always on the phone to the company not complaining, but engaging with the processor on issues such as milk quality, 21

32 production volumes etc. Others talked about suppliers that had some understanding of the processors position i.e. being aware of the constraints and pressure of the processing sector. Suppliers that were taking a long term view by improving traceability and sustainability of their businesses were also seen as being more attractive. Overall the view was that Wales is probably on par with the rest of the UK in terms of these motivational attributes. The findings from this study show that increasing the attractiveness of Wales as a milk field is not just about creating bigger farms, closer together there are a range of factors that make milk fields attractive. Ensuring Wales has a high percentage of motivated, outward looking, sustainable milk producers is a key part of making Wales an attractive milk field. 22

33 6. GOVERNMENT/PROCESSING SECTOR INTERACTIONS 6.1 Impact of Welsh Government Actions Over the last three years, almost 75% of the Welsh dairy processors we spoke with had received some form of assistance from the Welsh Government. Three of the six largest dairy processors in Wales reported that they had received assistance from the Welsh Government in the last three years. Assistance from the Government was delivered in a number of different formats: Modernisation helping to finance development or improvement of a range of plant and equipment from boilers to to packing lines New Product Development investment in NPD support Marketing support activities such as business mentoring and attendance at global trade shows Not surprisingly the feedback on this support was very positive. Businesses claimed that they assistance had kick started a number of projects: the funds pump primed a number of projects that have made our business more efficient and sustainable Others stated that the support had allowed them to bring forward investment the new plant would not have gone ahead without Welsh Govt support we did not have the resources to develop the plant four years ago The only concerns regarding the Welsh Government s actions were that in the past, funds may have been allocated disproportionately to smaller processors that may have not really helped the overall industry. It was felt that for some companies the funds would have only postponed their failure and departure from the industry. Some Welsh companies seemed unsure whether they were eligible for any assistance. A few non Wales based companies, but with significant interests or suppliers in Wales also mentioned that they would be interested in talking with the Welsh Government about how they could work together, but were unsure of who to talk to or where to start. 23

34 6.2 Working with the Processing Sector A range of comments were received regarding how the Welsh Government could most effectively support the industry in the future. The comments varied from big picture strategic messages such as focussing on the competitive advantages of the Welsh industry to the more tactical such as stopping some middle ground processors selling milk too cheaply. Key issues raised include: Wales has a mild climate, good grass and land. The overall industry strategy needs to focus on maximising these competitive advantages The overall industry plan also needs to focus on increasing collaboration across the industry both between farmers and between farmers and others parts of the industry for example processors, input suppliers etc. Build provenance/image for Welsh milk as they have done for beef and lamb and as Scotland has done for its milk Any development assistance needs to be focussed the Government must understand the needs of processors and their requirements. Assistance should also be targeted into growth sectors rather than mature ones The Government needs to ensure that CAP reform supports Welsh dairy farmers. They should join forces with the UK Government to act together The feedback from companies reflects the wide range of participants in the industry and covers both tactical and strategic issues. Working with the Dairy Task force to prioritise this feedback and integrate it with the overall industry plan would be a worthwhile approach. 24

35 6.3 Welsh Government Support of NPD Opinions on how the Welsh Government could work with processors on new product development (NPD) in particular varied considerably. Some companies were very aware of what was available: The Government already has two facilities (Horeb and Anglesey) which are focused on improving in NPD, they have already done their bit in this area They do some good stuff already Some companies expressed a lack of awareness of what actual support was available: as a company we do not really know what, if anything is available Other companies felt that the Welsh Government should be doing more in this area: they should offer more support and innovation within the sector A number of other companies also suggested that NPD was not really an area the Welsh Government should be involved in or at least not at the product development level. There was a feeling that the larger companies should be able to develop and commercialise their own IP for new products. Working with Government in this area would only create confusion particularly if the Government insisted that the findings were shared with other companies. Businesses should not rely upon the Government to constantly help them and fund them they should be able to operate without additional support One company felt that any Government funded research should focus on precompetitive areas so that the whole industry could benefit from the research. The other issue raised was that any funding for NPD should really be additive and not simply replacing what the companies were going to spend anyway. Despite the caveats and concerns about funding of NPD, many companies felt that if the funding was available they would want to use it. 25