It’s official: the milk wars have begun. Just a day after Tesco slashed the price of a pint of milk from 95p to 90p, Sainsbury’s has matched its rival’s prices.
A 5p cut on a pint may seem tiny but it’s one that matters hugely to the millions of households struggling daily with the soaring cost of living. It’s the first cut in milk prices for three years and likely to be only a matter of time before discounters such as Aldi and Lidl follow suit. For now Waitrose and the Co-op are holding out.
It’s not surprising that even such a small price cut has made the headlines: milk is still a mainstay of our diet. We drink 15 billion litres of the white stuff each year, nearly all of it produced by the UK’s 1.9 million dairy cows. It’s also a big industry, one worth £9.2 billion a year and supports about 80,000 jobs directly and indirectly.
Despite the rage for the increasingly popular – but still unconvincing oat and almond alternatives – we consume on average around 2.5 pints of milk per head per week and although that’s about half what it was in the 1970s, it’s not changed much over the last five years. (We also eat 2,000 tonnes of cheese a day.)
The price of milk has become symbolic of the cost of living crisis: it’s seen some of the most eye-watering price increases over the last year with milk shooting up by 43% since February last year, low fat milk rising by 45% while semi-skimmed rose by a third. Even for those who can easily afford such price rises, check in at any Notting Hill supper and you’ll hear that the cost of a pint has replaced house prices as the main talking point.
Price comparison website, trolley.co.uk, reckons the average price of 234 milk products of different sizes across supermarkets have soared by 27% from £1.46 to £1.85 year on year. Other dairy products – like butter – are almost worth their weight in gold: the price of a 250gr bar of President unsalted butter jumped by more than 30% to £2.85.
Tesco’s latest price cut is another small sign that inflation – certainly food inflation which rocketed to 18% last month – is coming back down to earth as wholesale prices for fuel and fertilisers are finally falling. The retail price cuts come after some of the country’s largest wholesalers reduced their prices by a whopping 5p a litre – a big cut for milk.
It’s because of what’s described as the “spring flush”, a time when cows tend to produce more milk after they have been let out into the fields. This has led to an oversupply in the market and the National Farmers’ Union reckons that farmgate price will fall to less than 40p per litre next month, down from 48p in February.
What’s even better news is that Tesco is bringing down the price without having to squeeze the pips out of its dairy suppliers to bring down their wholesale prices. It’s an important distinction to make as Britain’s 12,000 dairy farmers have been struggling to contain their own costs as they have had to absorb the sky-high price rises for energy, feeds, fertiliser and labour. Some have feared going out of business because of these crippling price rises.
But Tesco works with its 500 or so dairy farmers to ensure the fairest of prices for all parties. It has a price-setting mechanism which pays suppliers independently of the price it charges customers, which means farmers are covered for the costs of production which includes all their inputs from energy to labour.
This pricing also gives farmers security when the market price for milk falls below the cost of production: since November 2007, Tesco reckons it has paid £300m over market prices to its dairy farmers, helping with the cost of production but also allowing farmers to invest more in animal health and welfare.
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Indeed, over the last year, Tesco paid its dairy suppliers a 20% rise in prices they pay for the milk. It’s also been paying an above market price to its lamb farmers, helped fund the UK’s pig industry, given financial support to the fruit and vegetable growers and egg producers, helping them with the cost of production as they too have been crippled by the staggering increase in costs.
Yet Tesco didn’t have to make this cut. It would have been easy to keep prices as they were, to enjoy what in the US economists are calling, “greedinflation”. The retailer could have taken the cynical option, keeping prices as they are because consumers have got so used to higher prices, says Laith Khalaf, analyst at AJ Bell. “It’s a good move by Tesco to be cutting, and we should give them credit.”
Hargreaves Lansdown’s Susannah Streeter adds that the lure of a cheaper pint is a smart move to get more shoppers through the door at a time when supermarkets are battling it out for market share.
No one is immune from the fierce supermarket war, not even a giant like Tesco with 27% of the UK’s food market. It’s this fierce competition which keeps food prices relatively low compared to other goods and why our grocery bills represent a smaller proportion of consumer spending than at any time in recent decades.
When Unite’s general secretary, Sharon Graham, charged Tesco earlier this week with “excessive profiteering fired up by astonishing corporate greed”, she was quite wrong. Unlike many other corporates, supermarkets like Tesco operate on the slimmest of margins and are always monitoring their prices amid competition from Aldi and Lidl. As the latest financial results show, Tesco’s profits were halved to £1 billion and margins are amongst the slimmest in the sector at 3.8%.
What the latest price war illustrates clearly is that lower energy, commodity and and fertiliser prices are finally feeding through to factory gate prices. While milk output prices for January were still up 37% on a year, they had fallen by 4% a month later.
If wholesale prices keep falling at this rate, the Bank of England and other forecasters may well be right that inflation will be more than halved to under 4% by the year end. If that is the case, we may even see interest rate cuts.
Yet as the severe supply chain disruptions caused by lockdown and the shortages of food stuffs and fertilisers because of the Ukraine war have shown, having a viable and vibrant food industry is essential to national food security. Minette Batters, National Farmers Union president, is right to keep beating the drum, warning the government to do more to protect homegrown food supply.
Encouraging more self-sufficiency and helping farmers to improve their production of food should be up there alongside health and defence as the three top priorities for any government. If the cost of living crisis is still the main news at the next election, politicians will have no excuse if they don’t know the cost of a pint when ambushed on the doorstep. Clue: despite these cuts, it’s still double the 46p price of a decade ago.
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