The east of Scotland has much less grassland area than the west and travelling towards Kelso for miles around all you can see is large open fields of winter wheat, barley and well-maintained hedges.

Dairy farm scale has grown considerably over the last 10 to 15 years and Sandy Mitchell, who milks 1,000 cows and farms over 1,600 acres in Kelso, says all the dairy farms he knows have large-scale units housing cows all year round and feed grown on all the surrounding lands.

Sandy supplies milk on a Tesco contract. Tesco buys milk from five large suppliers in the area. So what does it mean to be supplying Tesco? Effectively you are given a guaranteed price over the cost of production. That helps when milk price is on the floor. I asked Sandy how it works. He said: “Essentially, an agriculturally trained supermarket person comes into our farm office four times per year and analyses the farm accounts and walks the farm. Powered with this information, which is inputted to Promar, a cost of production is established for the farm and Tesco guarantees a margin over this cost.”

Like all contracts, things change from year to year and Sandy has seen the goalposts shift as the business has evolved. At the start supply conditions were mainly around milk quality. Now suppliers have new targets to meet, which at the start might have been voluntary but now have become obligatory for a standard base price. Tesco, of course, claims these rules ensure dairying is competitive and up to global standards.

Targets

If targets are not met and you are in the bottom 5% of suppliers, you get a grace period of six months to improve or you could be cut loose from the contract. Some of the conditions include issues such as cows being scored for mobility every three months, cleanliness, body condition score, proportion of herd health checked with blood and milk samples taken, carbon footprint established. All information is inputted into a score card system and a weighting applied to each item.

Tesco doesn’t process or bottle the milk itself. All the Mitchell milk goes to the MÜller processing plant at Bellshill (an hour and 30 minutes from Glasgow) where it is processed and packaged.

Of course, it is effectively a liquid contract with no bonus to the Mitchells for milk over 3.85% fat and 3.30% protein. Milk is supplied with a flat profile all year round with no seasonality bonuses or deductions. When selecting sires for breeding replacements, it means fat and protein don’t get a look in and decisions are taken on litres and longevity.

Compact feeding

Similar to the Coopon Carse farm featured two weeks ago, this farm is also using compact feeding, which is essentially wetting the mix (on this farm adding 5kg of water per cow) in an attempt to reduce the level of sorting at the feed face. Sandy refers to the feed that is left to stew overnight as porridge and it contains the caustic wheat feed (5kg), water, premix (10kg) with mycotoxin binders and Vitagold. When feeding out the following day, the forages are included (10kg wholecrop wheat and 22kg grass silage) to bring the fresh weight mix allocation close to 56-57kg per day. When I called this was delivering daily milk yield close to 35kg per cow on three times a day milking.

Of course, all homegrown grains are stored and treated on farm so I walked into four industrial sized feed sheds (see video) that many feed merchants around Ireland would be delighted to have for storing feed. Sandy said feed cost alone is close to 12p/litre for cows, delivering between 9,500 to 10,000l/cow.

Background

Over the past 30 years, Kennetsideheads Holsteins in Roxburghshire, has been synonymous with high-yielding cows, quality genetics and profitable milk production. Sandy and his father Jimmy Mitchell have continued to expand and consolidate the herd. In 2012, the business invested more than £1m (€1.16m) in a 60-point rotary (240 cows/hour) up from a 36-point rotary parlour which was installed 10 years earlier. Two milkers on the outside with another on cow movement. The parlour cost in the region of £350,000 (€410,000) but a new 28,000 Mueller bulk tank (£50,000) as well as water cooling, cubicle housing, slurry storage etc brought the total investment to £1m.

Sandy showed me around the farm and the new cubicle shed for 300 cows. It was very similar to many other sheds I have seen in Scotland but was higher spec. The shed for 300 cows is 78m long x 32m wide and is open-sided to allow feeding all around the outside. With automatic scrapers, slurry storage for six months, rubber matting in the passageways and double-chamber water-bed system in the cubicles.

Comment

Win-win situation for the purchaser

There are no Irish farms you could walk into that are milking 1,000 cows, three times a day, every day of the year. The scale would blow you away. The factory-type milk production is cold and calculated. Precision is demanded. The differences with most Irish dairy farm systems are stark.

White water

Effectively, the Mitchell business is being asked to deliver a liquid milk contract where composition is not important. The Mitchells seem to operate in a very business-like fashion, as you would expect from a well-established farm. All the issues of an intensive high input and output system prevail – high labour input, high cost of production, high replacement rate (see table with numbers). All is operating on a tight margin but such large-scale volume means the business can survive.

Tesco contract

In Ireland, farmers give out about sharing sanitised and unaudited profit monitor information with each other for fear milk buyers would get hold of the information. For farmers supplying milk on the Tesco contracts, the farm accounts are opened to an expert supermarket eye. The buyer has complete transparency. They justify this by citing consumer issues such as transparency, animal welfare and competitiveness.

I understand the cost of production (COP) is averaged over the whole group and then any premium is added the same for everyone dependent on milk quality issues. No doubt there are huge extremes within the groups, with production costs ranging from the mid teens to over 40p/l. These types of contracts have been hugely divisive within the UK industry over the past couple of years. Situations existed where one farm was obtaining less than 20p/l and his neighbour might have been getting 10p/l to 12p/l more.

The obvious benefit for the supplier is that in years like we have had for the last two, where global prices crash, their margin is maintained. For the purchaser, it’s win, win – they don’t have to invest in processing, they acquire marketing information to set themselves apart from competitors and they control the standards at farm level which evolve as global trends change.

This time last year Tesco wrote to suppliers outlining new price review terms and ranking suppliers based on their performance, with the worst potentially losing their deals. At the time, Tesco claimed the move was in the best interests of customers, while maintaining the highest standards of animal welfare. The supermarket requested all farms to submit their accounts to Promar, an independent consultancy, so that it can properly analyse the price to pay for milk. An incentive of 0.5p/l for farmers who submitted their accounts was removed – previously that was the carrot.

In my opinion, some points are worth noting on these supermarket contracts – high-cost producers are not incentivised to lower cost; contracts with individuals create big differences between suppliers which causes problems for co-ops and divisions among suppliers; supermarkets can drive the agenda at farm level; the supermarket is making no investment in processing equipment long term in the sector and of course the supermarket is setting the milk price – not farmers.

Big getting bigger

Scottish dairy farms are getting bigger and the mix of co-op owned and private milk buyers continues to evolve.

Earlier this year German-based dairy giant Müller closed its Aberdeen plants and about 50 farmers in the region who send milk to the northeast dairy are required to pay for the increased cost of transport (1.5 p/l). Müller Milk and Ingredients subsidiary is investing £15m over three years at its Bellshill dairy in Lanarkshire, aiming to expand its product range. In 2012, the company bought Robert Wiseman dairy. Last December, it bought Dairy Crest’s dairy operations. Graham’s the Family Dairy, based near Stirling, has about 100 suppliers in this region (some previously First Milk suppliers) and again is investing in a wider range.

It looks like the big herds are just going to get bigger and most of the milk will be produced from cows housed all year round.