Unlikely that milk prices will improve in the short term

The crisis in the dairy sector is well documented and it seems unlikely that milk prices will improve in the short term as world stocks of dairy commodities remain high and in Europe we are affected by the Russian import ban and increased levels of production.

This is likely to be further exacerbated by the scrapping of Milk Quota in April this year. Milk Quota was introduced by the then EEC on 2nd April 1984 so as to control the “milk lakes” and “butter mountains” that were costing the EEC vast sums of money to store in intervention stores. The introduction of Milk Quota meant that UK farmers had to cut production by approximately 20% as compared to what they had produced in 1983 and if their milk production exceeded their allocation of Milk Quota they had to pay a penal fine.

There was no compensation for the introduction of Milk Quota and as time went on the Milk Quota itself acquired a value because it became the limiting factor which stopped farmers from being able to expand. Over the first 20 years or so of its existence this country regularly went “over quota” and dairy farmers faced the prospect of fines and in some instances this resulted in farmers having to throw milk away.

However, since 2004 this country has not gone over quota and as a consequence the value of Milk Quota has plummeted from the heights of when it was worth as much as 80p per litre to today when it is worth a fraction of a penny per litre. Thus in financial terms, the fact the EU is going to scrap Milk Quota this spring is of little direct financial consequence for our dairy farmers but if the scrapping of quota encourages milk production across the EU where some countries have still been exceeding their quota, this may have a significant effect on production, further exacerbating the current oversupply situation.

However a call from the European Milk Board this week asking the EU to introduce a compensation programme for farmers to cut production seems to me to be out of step with reality. We are in a very different place from where we were 30 years ago. Back then virtually all milk produced by farmers was guaranteed to be bought off them by the Milk Marketing Board and if the price fell below a certain level the EU would step in and purchase the surplus, putting it in to intervention stores.

The introduction of Milk Quota was a means of trying to reduce such expenditure on market support and in the intervening years the level of market intervention by the EU has dropped dramatically. As a result farmers are now exposed to the harsh realities of world commodity markets over which they, or indeed the EU has little influence.

Thus it is not Milk Quota nor EU market support which will dictate the survival of our dairy farmers, it is fundamentally world commodity markets and how efficiently the dairy farm is run and to whom the milk is sold, although this latter point is sometimes more a matter of luck rather than judgment. However, the one thing I think government should do is ensure farmers are treated fairly within the food supply chain; if supermarkets want to reduce the price of milk to attract customers in to their stores, that is one thing but this should not be at the cost of the producer who has no influence on this “price war”.

I am well aware supermarkets will explain that the farmers who supply them are paid a price which should return the farmer a profit but equally I would be interested to know whether all the liquid milk that is sold in a supermarket is supplied by milk secured from their own dedicated supply contracts? If not then they will be subsidising the “supermarket” price war with milk secured off other farmers who will not necessarily be being paid a “profitable” price for their milk. I would be interested if any supermarkets would like to contact me to discuss this matter in more detail because I think a clear understanding of this would be of interest to the readership of this paper.  

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk