Milk price optimism as production shrinks

In the last two years we have seen milk prices slump to unsustainably low levels for many farmers because world markets became oversupplied.  However, it appears supply and demand are now coming back into balance as dairy farmers cut production.

Here in the UK dairy farmers have probably reacted to this problem more actively than in many other parts of the world.  This is exemplified by the latest Agriculture and Horticulture Development Board dairy milk production figures which show milk production in the first two weeks of July was down 10.2 per cent on last year.

In the same period the number of producers in England and Wales has fallen by 239 but that only represents a drop of 2.4 per cent.  Therefore, assuming these producers were representative of the average dairy farmer, this indicates that the cut in production has been across the whole industry, including many farmers who intend remaining in production. 

I suspect the reason is that many farmers have cut back on feeding expensive concentrates in favour of maximising production from fodder, a cheaper form of production which generally gives lower yields.

As a consequence supply has tightened and in the UK in particular this has also been exacerbated by the fall in value of sterling following Brexit which is making imports more expensive.  Accordingly milk prices appear to be on the rise as demonstrated by recent announcements from dairy companies such as Dairy Crest and First Milk.

This is most welcome news for dairy farmers, although even after the latest milk price rises many will still be struggling to make a living - especially because the fall of sterling is a double edged sword which is likely to force up many input costs such as fuel and fertiliser.

However, I am hopeful that the tide has now turned in the milk production cycle, which will mean dairy farmers can expect to see a period of growth in commodity prices. 

Of course that will probably also mean food price inflation in the shops which is something the government will not want to see just at a time of interest rate cuts and more quantitative easing. 

But the long term consequences of our exit from the EU is quite another story of potential opportunity and risk which has yet to unfold.

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