EDITORIAL : THE GUARDIAN, UK

Dairy industry: milking the market

The dairy industry has been under pressure for a generation, as the statistics so vividly illustrate

Anyone who ever wanted to get to grips with the global economics of food should be paying close attention to the current row between dairy farmers and the supermarkets about the price the latter pay the former for their milk. It is a paradigm of how an apparently straightforward market relationship can be distorted. And that is why what might look like a standard spat between rural conservatives versus urban defenders of cheap food is so significant – and why the deal forged by the farm ministers from England, Wales and Scotland, who hastened to the bucolic surrounds of the Royal Welsh Show at Builth Wells to try to arbitrate between the two sides, is unlikely to have much of a shelf life.

The dairy industry has been under pressure for a generation, as the statistics so vividly illustrate. In 1995 there were 28,000 dairy farmers. Last year there were just over 11,000. Over the same period the average herd size has more than doubled as the less efficient holdings were forced out of the business – but even so, the UK no longer produces enough fresh milk for consumers. Meanwhile, the price of a pint of milk (or, more likely, four) has tumbled. Milk is the ideal supermarket commodity: an everyday essential with a short life span. Cut its price and it's sure to bring in the shoppers. Market fundamentalists would cheer at the benign effects of competition, and as food takes an ever larger share of the daily budget, while charities report that the demand for food handouts is reaching a new high each week, it might seem contrary to quibble.

But the backstory to cheap milk is a tale of ever more powerful supermarkets, and their growing capacity to distort the market. Last year, a long investigation by the Office of Fair Trading resulted in fines for price fixing against eight dairies and supermarkets. But they don't need to break the law to shape the world in which they operate. According to DairyCo, the industry's independent research and advice organisation, this power is well illustrated in the rise in the margin the major retailers like Asda and Morrisons take on a pint of milk. Ten years ago it might only have been 2p on a 30p pint: now the cut can be as much as 10p. The consequence of the retailer taking more is that there is less for the middlemen, the processors who buy the milk from the farmers and sell it on to the supermarkets. They have been squeezed, often squeezed out of existence, destroying on the way ambitious attempts at producer co-ops. The ones that survive do so only by holding down the price that they pay to farmers. The news that the Royal Welsh deal will allow producers to escape unfavourable contracts with processors more quickly will not have much impact if there is no better prospect on offer.

And that is only part of the equation. This market is so dysfunctional that the price of milk is no longer responsive to the cost of producing it. Normally a cut in price like the one the supermarkets were imposing would be prompted by a fall in the cost of production. Unfortunately, most dairy farmers have been hit by the soaring grain prices that are also threatening global food security, This means that producers are not only facing the prospect of a 4p per litre cut in price, but also simultaneously confronting a 2p per litre rise in costs. The effect is that the average farmer who as recently as March was just about breaking even is now 6p per litre below that. The result is exactly the kind of outcome Mr Micawber would have predicted.

This is not a question of driving efficient production. Nor is it a nostalgic appeal for the benefits of the traditional way of doing things. Milk can be produced competitively by small farms, even though some farmers will no doubt argue that the future lies in units for 8,000 cows nurtured by teams of vets. In the end this is not about price, but about value. The issue is the value of food and the value of food security. It is about regulating the market, and keeping it regulated. Only governments can do that. And only producers can make them do it.

Stock markets: dial Kay for capitalism

The real question is whether British business can be given sticks and carrots to change the cultural habits of a lifetime

Can the rhetorical vogue for "responsible capitalism" be made to mean something in practice? In the wake of the financial crisis there are few more important questions for the credibility of an alternative economic vision. The issue haunts the report which the business secretary, Vince Cable, commissioned from Professor John Kay last year. If the answer to that question were to be no, then it is hard to see where the non-socialist progressive project to which Mr Cable and so many other UK politicians are committed now stands. On Monday Mr Kay came up with his findings – in the shape of a 40,000-word review of UK equity markets and their impact on the performance and governance of UK quoted companies. In essence his answer is, yes, responsible capitalism can work, but equity markets will have to change big-time if it is to happen.

Mr Kay thinks the markets suffer from a number of interrelated structural failures. At the heart of them is short-termism, which has meant that executives have succumbed to a groupthink that encourages them to maximise shareholder value through strategies which focus on restructuring and mergers rather than investment and product development. The equity markets are central to this, since they encourage the sale of shares over the stewardship of good companies, and because they are now so thoroughly globalised, thus reducing the connection and engagement between shareholders and executives.

This has spawned and been characterised by a second problem which Mr Kay calls "an explosion of intermediation", in which transactional toll collectors have inserted themselves into the old relationship between investors and executives, taking large personal profits out of the investment in the process. The list of these transactional professionals now includes nominees, fund managers, fund of fund managers, insurance companies, pension fund trustees, retail platforms, independent financial advisers and more. The longer the chain, the weaker the relationship between investor and company executive. The result is lots of transactions but very little in the way of long-term relationships.

What to do about all this? Mr Kay has plenty of good suggestions. They range from stopping the need for companies to report quarterly, and banning short-term, performance-related bonuses, through EU-wide obligations to act prudently in clients' interests and encouraging asset managers to run more focused portfolios and use their power against rogue companies. Mr Cable rightly promises early action, but the real question is whether British business can be given sticks and carrots to change the cultural habits of a lifetime. It is hard to be optimistic. But if it does not happen, responsible capitalism will remain a phrase, not a reality.

In praise of … the Cockburns

These radical aristocrats – or aristocratic radicals – have been pillars of progressive journalism for decades

When distinguished sons and daughters follow distinguished parents it is easy to mutter about charmed circles. Yet there are genuine family talents that span the generations. The Huxleys and Freuds are examples, and the death of Alexander Cockburn is a reminder that the Cockburns are another. These radical aristocrats – or aristocratic radicals – have been pillars of progressive journalism for decades. Claud Cockburn, although not without some blind spots, battered at received wisdom in the 1930s. His sons, Alexander and Andrew, continued the tradition in the United States, Alexander indicating that continuity by calling one of his columns Beat the Devil, from the title of his father's novel. Here, Patrick Cockburn has been for years one of the best Middle East reporters and analysts. Alexander's writing has been praised as the key to "a life of joyful and creative resistance" – a fine phrase that could well be applied to them all.