Manufacturing Hot Topics - Cost of Dairy Affect Food Manufacturing Companies

13 July 2018

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Speaker 1: You're listening to Manufacturing Ignition Hot Topics, bringing you right up to date on the latest trends and discussions within UK manufacturing. Sponsored by Bonfire Recruitment, helping manufacturing leaders across the UK to attract the best talent for their manufacturing company. Ignite your business or career today by visiting www.bonfirerecruitment.com. Here's your hosts Terry Mallin and Scott Buchanan.

 

Scott Buchanan: Lets move on.

 

Terry Mallin: [crosstalk 00:00:33] talk about pies right enough eh.

 

Scott Buchanan: Well, what is it, when we're talking about pies. We were talking about Bells pies a couple of weeks ago as well.

 

Terry Mallin: [crosstalk 00:00:40].

 

Scott Buchanan: That was podcast one.

 

Terry Mallin: Aye, that was podcast one.

 

Scott Buchanan: Podcast one. We should maybe do this-

 

Terry Mallin: Greggs! We've spoke about Greggs as well. I think we need to get away from the pie thing. I think we're getting a bit of an image here.

 

Scott Buchanan: Or maybe do it outwith your lunchtime or dinnertime.

 

Terry Mallin: That's true. That's true. Right okay, so moving on to this week's hot topic. And as I said at the start of the show, we're going to go through the cost of dairy products affecting food manufacturing companies. This has been a real eye opener for me as well, because actually, you can see how real external forces can affect certain businesses throughout the UK, who rely on a specific type of ingredient or whatever. And that could be anyone, that could be someone from the drinks industry, you know, whatever that might be, sugar or something like that, within that sort of Coca Cola. It's quite interesting, it's a certain focus point.

Terry Mallin: So, let's talk about dairy products. Food manufacturing sectors would use dairy products such as butter, so you've got different sectors like the bakery industry and the confectionary industry. Companies that make biscuits, or whatever that might be, anything at all, which uses butter. Just to give you an idea Scott of the price of this, okay, so prices have went from £1850 per ton of butter back in April 2016-

 

 

Scott Buchanan: Right.

 

Terry Mallin: So, what's that, 16 months ago, something like that? And in August 2017 it was £6150 per ton, so it's [crosstalk 00:02:16]-

 

Scott Buchanan: [crosstalk 00:02:16], what was that, how many months is that? April to April-

 

Terry Mallin: That's-

 

Scott Buchanan: Yes, you're talking about 15 months-

 

Terry Mallin: So, 16 months.

 

Scott Buchanan: Or something. Yeah, wow!

 

Terry Mallin: And it's went up three times the price. You picture someone making biscuits, or whatever that might be, and actually, as a consumer you're going in and buying their biscuits from the shop. Or, shortbread, right. Let's just say shortbread because that would use a lot of butter probably. You're still going in and buying your packet of shortbread out of Tesco, or Asda, or wherever it might be for £1 say. But actually, that company making that product is actually, their cost of ingredients for the butter has went up three times, and it's still £1. So, who's going to take the impact? The manufacturer.

Terry Mallin: The reason for that increase in price is there has been a reduction in the amount of milk farmers in the UK, and in areas. There was a particularly cold spring, which produced poor grazing conditions as well, okay. I was reading an article last night, and the Chairman of the Dairy Board of the National Farmers Union, a chap called Michael Oakes, reported, "Many dairy farmers were unfortunately forced to stop milk production as a direct result of the economic downturn."

Terry Mallin: "In 2014," so three years ago, "Many farmers selling milk were doing that for considerably less than it cost to produce." We all know that, we all remember that on the news. At the start of 2014 in Lancashire, which is a massive area for farming, they had more than 500 registered dairy farmers, and by the end of 2015, so say 24 months on, more than 30 of those registered farmers had stopped production and seized completely operations. You can see how there's getting less people making the product, obviously milk, or whatever that might be, butter et cetera.

 

Scott Buchanan: As you know, there's been a lot of investment within food manufacturing companies for technical individuals, and I guess, recipe makers almost. Do you know that way? And I wonder if the evolution of that has allowed a reduction on the usage of these types of ingredients, because-

 

Terry Mallin:  [inaudible 00:04:41].

 

Scott Buchanan: Well, see if you look at ... I mean, just as you've been talking now I've just Googled profits in milk. Here's an article from October 2017 and the headline is, First Milk doubles profits in full year results. Reading into it, it says, "Dairy processor First Milk has almost doubled its profits in its financial results for the year ending March 2017 following a transformation of the business." And then another-

 

Terry Mallin: Scott, that's supply and demand probably-

 

Scott Buchanan: Well yeah.

 

Terry Mallin: [crosstalk 00:05:13] they can sell it for more.

 

Scott Buchanan: And then, the other one that came up was Dairy Crest posting a £2.9 million profit growth as well. I don't know what year that was to be fair, in fact, the article was written in May 2017. I think there's probably a bit of evolution, isn't it, of the bigger company, and the agreements. And maybe passing this cost increase down to, I guess, the likes of the own brand supermarkets and so on, maybe having to increase their prices. And that there's maybe a bit of change in the middle piece rather than actually directly being passed on to the consumer, maybe? I don't know.

 

Terry Mallin: Yeah, yeah. I think at the end of the day, as I says just there, it was supply and demand. And then, flipping this on its head a bit as well, because it was in my head actually a couple of weeks ago, The Great British Bake Off. Right.

 

Scott Buchanan: Aye. That's hugely popular, yeah.

 

Terry Mallin: Yeah. Actually, I'll come back to that in a wee second. However, what you've got is you've got a lot of consumers tuning in and watching that on TV, and thinking, "I could be the next big cake person," which is fine.

 

Scott Buchanan: Right, yeah.

 

 

Terry Mallin: Which is a really good thing, but actually, when they're in that's putting a wee bit more demand on the butter. Because, me and you will go out and buy butter, but we're buying more and more to bake at home. Then actually, overall, across the UK it's going to have some sort of impact, so that is also contributing.

 

Scott Buchanan: Right, so say, I don't know, how many people do you know that baked until recent times? There's probably ... I can think of one or two, but say you know five people. Now, if every single person, only one person buys an additional slab of butter every month, or whatever it is, that they cook with, I mean, that's ... You're right.

 

Terry Mallin: It's a lot. It's a lot.

 

Scott Buchanan: That'll soon add up, aye.

 

Terry Mallin: It's a lot, and it's not just the UK. I know I've been focusing on the UK, but the EU has seen a steady decline as well. Looking into that, that's been due to, some of it is due to over supply on a global level, and that's with the lifting of the EU production regulations.

 

Scott Buchanan: Have you heard anything around how ... Cause I guess ... I mean, I remember that ... Again, this ties in with the European piece again, but there's an element of funding that the UK gets to the farming community, to support them. I guess it's not just dairy, it's probably fishing, and lambing, and similar. [crosstalk 00:07:37].

 

Terry Mallin: [crosstalk 00:07:37].

 

Scott Buchanan: That's a whole other ... I mean, that's serious, cause that's a huge market.

 

Terry Mallin: Yeah. I mean, at the end of the day this has been known for at least, throughout 2017. Manufacturers have been taking the brunt of that cost, and there's only going to be a certain point that that can last. The positive news is there is a positive trend in the right way, where I know in October 2017 the cost per ton was £5050 per ton, compared to September, of being £6150 per ton. So, it's down 18%. And, you've got to remember Scott, we're coming up to obviously Christmas. Manufacturing companies are at their peak, they're going to be using a lot of the products making all their nice biscuits and other products for that Christmas period.

Terry Mallin: And, from my insight into the industry, is that the price will hopefully continue to reduce going into the New Year, and there'll be a bit more stability, or more stability than what there currently has been with [crosstalk 00:08:46]-

 

Scott Buchanan: Well, that's good news.

 

Terry Mallin: So, fingers crossed that goes in the right way, but I think it's a wee bit of a lesson to be learnt. I think you are bang on Scott, on the nose. I didn't even think about this, but why not, with all the healthy eating et cetera there must be, I don't know if there must be, but there could be opportunities for [MPD 00:09:05]-

 

Scott Buchanan: Yeah.

 

Terry Mallin: To start looking at different options. I mean, butter is butter isn't it, but how do you really make it a comparison [crosstalk 00:09:12]-

 

Scott Buchanan: Well, I don't have butter in the house, and I've never had butter in my house cause I use margarine I guess, if I remember to pick it up. That way, I guess it's the idea now where, you know I like my Irn Bru, and I see don't see the point in things like Diet Irn Bru, cause the whole point of Irn Bru is to get some sugar and to have some good taste.

 

Terry Mallin: Yeah, yeah.

 

Scott Buchanan: But actually now, I think, I don't know the stats but Diet Irn Bru is equally, if not more popular. I know certainly Diet Coke is probably more popular now than the full fat stuff. Therein lies, I guess, a visible consumer usage change doesn't it? It's not what we're asking for anymore, and it'll be the same with butter as well. Must be.

 

Terry Mallin: Well, I think short term investment coming from Wall Street would be invest in a dairy cow.

 

Scott Buchanan: Interesting. And what would you call your dairy cow?

 

Terry Mallin: I don't know. I'm just throwing it out there. I've not even thought about it, never thought about a name. I don't even know where I would keep it, but it would be a great investment.

 

Scott Buchanan: I reckon Kevin would like playing with, let's call her Bessie the cow, out in the back garden.

 

Terry Mallin: Good. I think we'll put Bessie on the front cover of the podcast this week. Right okay, anyway, enough chat. We're digressing here, we're digressing. So Scott, that was a good hot topic, that was really interesting. I think it resonates on the basis of, it doesn't matter how efficient, how much you're improving your manufacturing organization as a business leader, how much you are in the forefront of what you're doing, but actually, external forces can have a major impact, as everybody knows, but it could be down to cost of ingredients. Where people think it's such a small thing, but the reality is, it's more than that.

 

Scott Buchanan: Sorry, just to finish off on that point. I guess, tying on with what we were discussing at the end of last week, around making sure you've got the right talent to deal with that, because at the end of the day if we know that the price of butter, those prices and the rise there is significant. That's going to have a massive impact on a given business. Now, there's certain things in terms of, if you look at, I don't know, utility companies who hedge their investment in what power they're going to commit to. Do you know that way? And buy it at a given price before it's actually coming in.

Scott Buchanan: There's probably an element of that that goes on, and you'll be closer to it than I am with the food piece.

 

Terry Mallin: Yeah.

 

Scott Buchanan: But, certainly trying to attract the key people that are good at that, that must be an asset to any business, surely.

 

Terry Mallin: Of course it is. Of course it is, and I think that brings us on nicely to our recruitment minute, which is, what I want to do is, the last podcast we've been having a discussion about problems and solutions. But let's talk about, actually, the importance of knowing your market, to recruit the best people for your business. Even the MPD people out there for your company are the best [inaudible 00:12:07] that might be, but I think that'll be a good topic for us. What do you think Scott?

 

Scott Buchanan: Yeah, it sounds like a good idea. Just so that you know, your microphone Terry, it looks as though you're coming and going from your mic. Are you doing your exercises again?

 

Terry Mallin: Do you want to know what? I've got Kevin sniffing about because he stole a sellotape roll. He had it in his mouth, I got it out, and he's sniffing about my desk, so hence the close chittering.

Speaker 1: Thanks for listening to the Manufacturing Ignition Podcast. If you've made it this far we take it that you enjoyed the show. In return, we'd love it if you would leave us a rating and review on iTunes. Subscribe while you're there and we'll catch you for the next episode.

 

 

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