Episode 4: Price takers vs. Price makers - The dairy perspective
Women in Dairy Award winner Sophie Gregory and husband, Tom produce organic milk and breed beef cattle in Dorset. We ask how milk prices are formed and what Tom and Sophie do to get the best price for their product. We then discuss in some detail the state of carbon sequestration in the livestock and dairy space and solicit predictions for food price inflation. And Florian confesses his fondness for alcohol…
Contributors in this episode
Sophie Gregory
Gregory Agri Ltd
Tom Gregory
Gregory Agri Ltd
Florian Ritzmann
FutureFarm
“When people have come out of dairy what they’ve really missed is that monthly milk check. And actually at the moment, we’re on two monthlies so they give a prepayment so it’s that regular cash flow. With wheat, obviously, you’re either going to buy or sell it forward in big chunks, you know, it’s not that regular income. So it makes cash flow easier to achieve”
Florian Ritzmann: Welcome once again to the FutureFarm podcast, I am Florian Ritzmann. Our last show with Kit Papworth ended on a note of optimism. Arable farming isn’t profitable enough to attract the investment it needs, but a shift toward environmentally - based subsidies could help change that. So we wanted to poke in and around profitability and carbon a little more and get the views of other farmers and hopefully understand what is different and what is the same.
On today’s show, we are lucky to have Sophie and Tom Gregory, who are award organic dairy farmers from Dorset. They run their business with equal amounts of passion and business acumen. Now let’s hear them talk for themselves, I am sure you will enjoy this.
Sophie Gregory: Yeah, so I'm Sophie and I'm a first generation dairy farmer. I'm not from a farming background. And I came into it actually from an accountancy background, which is really helpful in the farm now. Definitely, in these times of subsidies going and things. But we are, yeah, very low input, low output. We've got 360 cows, sort of 500 kilo animals, and we're selling milk solids rather than litres. So we want to a cow that's going to give good fats and good proteins. We calve twice a year. So we're split block calving, so we calve two thirds of our herd about now. We've just had a calf this morning - this is February time. And then we start calving again middle of August. And that's mainly because of seasonality as well - to try and keep that milk profile level.
We supply Arla - we’re organic - we’ve been organic for seven years now. And that originally was more of a financial decision. But over the course of the last seven years, it's definitely become an ethos for us. It's a way that we would farm even if we didn't have an organic contract, we definitely go from the soil up, feed the cows from the ground up. So yeah, we’re a tenanted farm, we're share farming. We own 50% of everything here, bought in at 20% with a business partner, and bought into 50/50 at the moment. We are across to two tenanted farms, just under 1,000 acres in total.
Our biggest thing is to try and get as much milk from from forage as possible, and mainly from grass. So our cows have been out three weeks already. It's mainly because the weather's been quite kind. But normally grazing from February till sort of November, December time. So very, very small, limiting soil impact.
Florian Ritzmann: You say you’re a first generation farmer but you clearly know your stuff. How did you get into farming?
Sophie Gregory: I met my husband when I was 16-17. We had a baby quite young, 18m on a gap year. And I went down the accountancy route, because I couldn't go to uni because I had a young one. And it's something that matched my skill set. And he always from the moment I met him said he wanted to go back to dairy farming. His dad come out of dairy when quota was there, and he couldn't make it work. There's two family farms, both are still run by family members. So I thought he was mad, completely mad. But he wouldn't give up his dream. When we came to the farm eight years ago, I thought I was going to carry on with my accountancy work, but it became quite apparent quite quickly that I really loved it. And I started by rearing the young stock. And then I've just have become, you know, joint partners with my husband running it. So yeah, I do everything from milking to feeding calves to managing the grazing. Yeah. But it was strange because it really does match my skill set. But at school, no one would have suggested that as a career path. I'm very grateful that I've landed on my feet with it.
Florian Ritzmann: Well, I studied history, and now I run a marketplace for agricultural inputs. I guess we're alike in that regard. So from that to the 2021 Woman in Dairy of the Year. Congratulations. Do you farm anything else besides dairy?
Sophie Gregory: Dairy will always be our main thing, but we have a small suckler herd of White Park cattle, which are a rare native breed, and they are grazed on on sort of 200 block of what would be known as rewilding, which is a bit of a controversial one amongst farmers, but we look after and manage the animals and own the animals in that rewilding project. So our landlords have put a put a rewilding project together, and we’re putting the animals into that. So it's a farm that we were offered for heifer grazing and we turned it down because it's just not a very viable bit of land. So it's sort of been yet handed back to nature. And with the help of some White Park cattle.
Florian Ritzmann: Those cattle are for milk as well, or do you…
Sophie Gregory: No, no that’s for beef, so the plan with those is to sell any excess for beef. They’re a suckler herd. The calves stay with their mums to wean. we would sell any boys and keep the girls as replacement.
Florian Ritzmann: Now, when it comes to milk, you mentioned at the outset that you work with Arla and this is something that I think most consumers who just think milk grows on the supermarket shelf, they don't really know how the price of milk is actually formed. How does somebody up there at Arla decide what you get paid and what inputs do you have into that price?
Sophie Gregory: So like you guys, we-re a cooperative, so we're all farmer owned. We also get a 13th payment, as well as having a set milk price. So that's decided by the board of Representatives, and it's decided really on supply and demand and what the market’s looking like. So even if the demand at the time is not really there for a milk price increase, if they feel that that will protect future milk supplies, then they will give it. Recently we've had a situation with rising inputs, I think there was a bit of a worry that production would drop off, because people just couldn't keep up with rising costs. So it's one of the biggest milk price increases in a long time, which needed to happen. Energy's going up, everything's going up and that wasn't following. So it's normally market dependent, as in supply and demand. But if there is a situation where they need to protect that future milk, then they will. So they will offer a higher price.
But that's decided on a monthly basis, we normally get a text message, saying your milk will either be staying the same, dropping, or going up. So yeah, it's around sort of third week of the month that you get the next month’s. We can as as a member, we can stand to be elected, and then make it onto the BOR [Board of Representatives] board if you want to. And then obviously that would give a decision in the milk price. We don't generally, as someone not elected, have that much control over the milk price,
“We normally get a text message, saying your milk will either be staying the same, dropping, or going up.”
Florian Ritzmann: For argument's sake, if a litre of milk cost a pound, how much of that pound comes back to you?
Sophie Gregory: So because we're organic, we're getting about about 44p a litre, but it will completely depend also on things like volume - we get a bonus for volume. Because they want to be collecting milk from the same place, we get a volume bonus, we also get bonuses on bactoscan, which is how clean the milk is; cell count - that goes the other way that we'd be penalized. So that milk price can completely depend and also the other thing we get hit on is, in the spring, there is a reduction for seasonality, because there's always a huge flush where the cows go out to grass and create over-supply. So they try and get people to produce milk in the autumn or try and keep a level profile - that is deducted.
It's very hard to say that one person will get that milk price, every farm will be getting a different milk price, depending on what amount of milk they're selling, how clean the milk is out, you know, all of those things.
Florian Ritzmann: So that's essentially for you a way to differentiate. You said organic, you say quality - so essentially you have some some leverage, some leeway with Arla, as in the better your milk is, the more you get for it. So there's a direct incentive for you to produce better milk. Is that correct?
Sophie Gregory: Yeah, absolutely correct. And and actually, we use those incentives within our staff as well. So our main chap is not on a volume bonus, but on a bactoscan and cell count bonus. So if he hits those which are actually lower lower than what we need from Arla then he gets the reward also to try and keep everyone aiming for the same thing.
Florian Ritzmann: This is very, very different from the conversation I had two weeks ago with Kit Papworth. His price is essentially set on what is an arable stock market, his price is the world price for grain. He told me - this is quite clear from that conversation that to upgrade his product isn't really an option for him. Because essentially, the risk involved in growing a higher grade of wheat isn't really worth it because the mill might still reject it.
So this is already very interesting - your life or the way your economics work is very different. And also you say that your price is set more regularly, monthly, and by an organisation that you actually - directly or indirectly - you have a vote in it. That is interesting. So you take 44p out of the pound, essentially that comes back to you. I've had a look at the DEFRA numbers and it looks like dairy farming, you know, compared to arable, 38% of income from subsidies versus 4%. Sorry, the other way around. Dairy farming is far less dependent on subsidies, even though it is still dependent.
And that might be the reason - there is no Arla in wheat.
Sophie Gregory: I think also what we've always thought when people have come out of dairy what they've really missed is that monthly milk check. And actually at the moment, we're on two monthlies so they give a prepayment so it's that regular cash flow. With wheat, obviously, you're either going to buy or sell it forward in big chunks, you know, it's not that regular income. So it makes cash flow easier to achieve
“I suppose it was a relief amongst the whole pool of our members to see that milk price jump, and it needed to happen, especially organically, as we have really high feed costs, it’s very hard to source organic feed reasonably well.”
Florian Ritzmann: Moving on to high input prices. So you have levers of differentiation. But when your labour cost goes up and your energy costs go up, to what extent are you able to pass price increases? Again, will Arla pick this up a month later? Is that the answer here?
Sophie Gregory: I suppose it was a relief amongst the whole pool of our members to see that milk price jump, and it needed to happen, especially organically, as we have really high feed costs, it's very hard to source organic feed reasonably well. And, for us, it's, you know, trying to control things we can. So with labour-wise, we haven't really ever had much European labor because we've managed to have local and also, it's just me and my husband, we both work on the farm, and then a main chap, and then we found the way for us to control that is we always have people training on the farm. And that's a social thing for our business, I like that social impact of our business, that we're doing a good thing by bringing someone but also that comes without a huge cost, although it's our time, but we're always looking to bring new people in. Feed-wise Tom would probably say, we're going to feed a bit less, we're going to look at a different way of doing things. So we've looked at different ways of reseeding, we don't plow anymore, we're doing you know, different things to cut out that cost.
Even if we take a slight hit on production, we’re very much a cost control business. So with anything I'm buying, it's three quotes on everything, you know, everything from gloves to chemicals to - anything would be three quotes. I have people I use, but I would always check the pricing - you have to be it's got to be a business. It's not a lifestyle choice. It's a business.
Florian Ritzmann: That's why we build a marketplace online, where people can check prices for all sorts of things. But what about beef? So you've got a bit of beef cattle here as well, I'm assuming you are dealing directly with an abattoir, or how does the revenue materialise there?
Sophie Gregory: So all of that beef will be sold direct to customer because it's a rare breed. The meat is well known for being a certain caliber. We've got people already saying let us know when you have meat. We're not going to have mass numbers, it's not intensive at all, they'll have no grain or they are not substituted with any grains or anything like that. So it's got a lot of unique selling points and we won't have such a problem. I think the abbatoir cost - it will cost but it will be word of mouth and probably social media selling it because of the small numbers. If we were doing it on a bigger scale, then it might be a different story. But we have hardly any costs with those beef animals, because we're finishing them at three years old. They're not being pushed, they are doing a job. They're there for conservation reasons, so the meat that comes off them is a benefit, really.
Florian Ritzmann: So you're essentially selling them to high end butchers?
Sophie Gregory: Exactly, yeah. Or just local people? Anyone who wants to know exactly where their food is from. Or if they want, you know, if they'd rather eat a little bit less meat, but better quality.
Florian Ritzmann: And because of the numbers involved, the price discussion is probably a one on one?
Sophie Gregory: Exactly, yeah. And it'd be sort of a meat box. So you'd have a variety of things unless they want a specific thing. There's a local restaurant that had sort of half an animal first, and we were able to say, what do you want? And they had that and then the rest went into other meat boxes that. One family had this and that. We made it work.
Florian Ritzmann: It's almost like a trademark of modern farmers, this diversified revenue, particularly with the high end stuff like what you're doing there with your cattle. I hear about that a lot - essentially go for quality, smaller numbers, and more price control at the end of the day.
Okay, so at the very beginning [before the recording], we talked about carbon, I am quite interested in that because carbon - in a previous conversation we've had the CEO of a Agreena, a major certification startup from Denmark on the call, and he's essentially explained that the whole certification process is currently geared towards arable farmers because it's just simply the easiest to measure the impact of no till and all the kind of processes that you have to adopt in order to become a member of a company like Agreena.
How does it work with you guys? How would you benefit from carbon sequestration and make some money out of that?
Sophie Gregory: Can I call Tom in now? That's allowed? He just walked through the door. Because this is his absolute passion, and I'd hate for him to miss out on it. I mean from a very basic point of view for us, the biggest thing now is to get some good baselines so that we have something to go off and something to prove against. That's the first thing we're trying to do now. But yes, Tom has been doing a lot of research into it, because there is hope that it might support some of the difference between subsidy and that it might replace subsidies. Here is Tom.
Florian Ritzmann: Nice to have you on. Yes. So you were out there taking cores for, essentially for carbon measuring purposes. So do you want to talk me through what's going to happen with those cores? And going forward what you intend to do?
Tom Gregory: Yeah, so we've got a lady in doing the cores, who's knows a huge amount more about soil than I do. So I was just trying to pick her brains and learn what she knows. But then those calls will go back. And I think they use bulk density to find out organic matter and carbon, and these are baseline samples. And in five years, they'll come back and do another set to see how much carbon we've stored over that five year period. And then we can compare that to our output.
Florian Ritzmann: And what processes are you adopting to enrich the soil with carbon? What changes are you making?
Tom Gregory: It's really hard one. One of the problems with regen dairies is there's not set of rules. So we're doing loads of trials and experiments to try and find out what does and doesn't work. What I'm focusing on is soil-food led approach. So we're trying the base figures of where we are, how much bacteria, how much fungi, how healthy is our soil? What is it that's made it this healthy, or this unhealthy? And what management changes do we need to make. So we've got several trials going on on farm. We're looking at grazing round length, grazing height, grazing residual, different crop establishment methods and trying to reduce tillage. Which different types of forages and herbs and brassicas, legumes work best. And then there is some training that I'm doing, some microscope training and making compost. Hopefully, we'll be able to actually - on farm - work out whether what these trials are doing.
One of the biggest problems is the cost in soil samples, we're looking at £250 per sample. So £250 pounds per field, we've got something like 70 fields on farm. For 1500 quid, I'm able to do a course, with some with some grant funding to teach me how to use a microscope. So I can do a lot of the testing on farm.
Florian Ritzmann: This is interesting what you said at the beginning, which is that there isn't really a whole lot of rules and processes and regulations around in the livestock area when it comes to carbon sequestration. This is what we were told a few podcasts ago, that this is really most mature on the arable sector. Perennial farmers, [horticulture] farmers don't know really what to do. The standards are all very different.
Is there any company floating around that could help you with that and tell you: if you do this, we will measure this for you. And then in two years time, there'll be that many credits, here's your certificate. Now go ahead and sell it. Is it as far along as that? Or are we in the complete Wild West so far?
“When you take a livestock farm, the crop grown isn’t often measured as accurately. We measure all our grass. We measure grass growth, but there is tillage operations and compaction operations, there’s a lot of a lot more variables going on. And they’re having to work out sequestration through actual soil rather than inputs or outputs.”
Tom Gregory: I think we're in the Wild West. If you take winter wheat, you've got so many knowns. Say you have a stubble field and you cultivate your winter wheat in a certain way. And those cultivations have probably already got a carbon score. So a plow is this much carbon released or a min till is this much? And then you say, well, what's the output? The output is the grain. What's the grain yield? We know the grain yield, because we needed to know that and was the straw incorporated or taken. And that’s sort of all the maths so it's really simple for the carbon capture credit company man to come and do an audit without actually having to do soil samples, because they've already done some soil samples and they've worked out if you've got a sand loam, then you've plowed it and then had four tonnes of wheat off it and incorporated the straw.
This is the change so they can model it really easily. When you take a livestock farm, the crop grown isn't often measured as accurately. We measure all our grass. We measure grass growth, but there is tillage operations and compaction operations, there's a lot of a lot more variables going on. And they're having to work out sequestration through actual soil rather than inputs or outputs.
Florian Ritzmann: It's easier, when you put less fertiliser on, it's really easy to work out what your what you've actually done for the carbon in your soil. I get that. Okay, so you're kind of pioneers on that.
What's the main driver in the end? Is it just to have, you know, healthier soil feeds cows and they make better milk? Or is there an expectation that in two, three years time regulations will have caught up, the government will have produced this wonderful Agriculture Bill, and there will be a revenue opportunity for you as well, is it both?
Tom Gregory Yes, definitely, If we if we can prove, if we can demonstrate that you can grow as much grass organically, as you can conventionally, without any chemical or tillage inputs, that's great for the environment. But at the same time, if we can also do that with the organic milk price, that's great for our business. And when you incorporate the social aspects Sophie does as well, that seems like quite a rounded approach,
“Triple bottom line, we always try and look at the business along three lines, not just profit line. It obviously has to be sustainable, but it has to be good on the people who work here and good on the environment that we work in. Obviously, we couldn’t do it it it wasn’t sustainable, though. If it didn’t make any money, we couldn’t do it, we wouldn’t be here doing it.”
Florian Ritzmann: The flipside to going no till in in arable seems to be that for two or three years, your yields will drop. And then they should recover, maybe not 100%. But thereabouts. Are you foreseeing something similar, where you'll have maybe less grass to feed and you'll have to buy that in? Is that something that you're looking at as well?
“We could probably change and become sort of like a pin-up regenerative farm really quickly. But I think we might also run the risk of going under, so we make small marginal changes to make sure the business still is at the forefront of what we do.”
Tom Gregory: We’re dipping our toe in. Our core business as an organic dairy farm ticks quite a lot of regen boxes anyway. Because we're pretty much all grass, and we're grazing animals, and we've got ground cover and things like that. But we're making small tweaks to the business so that the actual business bottom line shouldn't be negatively affected.
So the changes aren't that extreme, we could probably change and become sort of like a pin-up regenerative farm really quickly. But I think we might also run the risk of going under, so we make small marginal changes to make sure the business still is at the forefront of what we do.
Florian Ritzmann: I just have one final question, really, which is not as much a question but more about your prediction? When I spoke to Kit Papworth, who is an arable farmer, I asked him whether he foresees a cost increase for consumers when it comes to food prices?
What I'm seeing on the input side - you might have missed this, Tom, we sell agricultural inputs on a digital online marketplace - we have seen fertiliser triple compared to where it was a year ago, that kind of stuff. And so I was asking him is this going to feed through into major major price increases? By June, should we really worry as consumers? He said, not really, because the input price for my wheat is just a small fraction of what goes into a loaf of bread.
But you mentioned everything's going up. In arable, the cost of the wheat is just one one cost that to goes into loaves of bread, but they still also need energy, they need water they need they need logistics, all sorts of things to make that bread. And so I'm just going to put that question back to you again, by the summer do you foresee a major increase in what the customer will be asked to pay for product generically? Livestock products on the shelves?
Tom Gregory: No, our products are loss leaders. Yeah, so I think they would rather increase the price of a Mars bar by 10p to counteract the losses in milk even if they've paid for the farmer more for milk. I don't think the consumer will necessarily be charged the same increase because the the milk isn't sold to generate profits. It is sold to get the people in the shop, and then they make the profit on the snacks and the crap, the alcohol you know, all the you know all the cargo I think that's where we'll probably see Walkers Crisps and Pepsi Max go, same price but 10 grammes less or you know all the tricks they do. But I think a pint of milk, a loaf of bread and a pack of beef mince…
Florian Ritzmann: Because these are essential product and you believe the supermarkets are going to wear, ultimately they're going to pay the price of these increases and not the consumer. I didn’t think of that. That's a wow. Okay, um, like I said, that was my, my last point and question for you. That was my last point and question for you.
Tom Gregory: I don't think that supermarkets will wear it though. I think they'll pass it on in other ways.
Florian Ritzmann: Yeah, that's the point you made it through to the Mars bars of this world. Okay. Well, thank you very much for your time. It's been very, very good.
Florian Ritzmann: Compared to Kit Papworth’s wheat farming business, Dairy Farmers are less exposed to raw market forces. And that seems to be largely due to the existence of powerful marketing cooperatives like Arla who sit between the individual farmer and supermarket milk buyers. And the numbers bear that out: dairy farmers get 38% of their income from subsides, compared to a much higher 66% for arable farmers. They do have a critical advantage though. If Tesco doesn’t like the price of British milk, they cannot just import it from Canada. Grain though is as an international market and local grain can be substituted by imports if it cannot be grown at an internationally competitive price.
But still, maybe arable farmers in the UK could benefit from something like Arla for themselves? Leaving that out there.
On the carbon side, we heard that carbon sequestration is a good thing to do in its own right. Lots of healthy grass grown on carbon-rich soil is good for cows, so it is a good business decision for an organic farm like Tom and Sophie’s. Can the extra carbon stored in livestock soil generate money? That’s not quite as clear yet, certainly not as clear as it is with arable – just listen to Episode 2 of our podcast with Chris Hollingsworth to get that sense.
But that is all the more inventive for us at FutureFarm to get our boots on and build proper carbon guidance into our marketplace. We’re on it, this year.
Thank you very much for listening, I hope you enjoyed this episode. Until the next time, this is the FutureFarm podcast.
