Milk price wars

Milk prices are falling fast in the face of sharp falls in world market prices for a variety of dairy products and on the home front supermarket milk price wars are not helping either.

The big four milk processors have all announced milk price cuts for September and October which will result in many farmers receiving less than 30p per litre with those unfortunate enough to be supplying First Milk, seeing prices dropping as low as 25.1p per litre.

Prices on the online Global Dairy Trade auction run by the New Zealand based co-op, Fonterra fell again on 2nd September by 6% which means that average price has dropped by 45% since the market peaked in February this year.

Why the world markets should experience such peaks and troughs in prices has always puzzles me but in simplistic terms, I suspect as prices fall, so too will world production as some farmers cease production while those that continue will probably not try to push their cows with expensive feed stuffs to produce that extra litre because the profit is not there.

As a consequence there will come a time when world supplies reach a level that demand will start to push prices back up, but increasing milk production is not that easy. One can feed cows with concentrates but if you want to increase cow numbers, it takes at least 2.5 years from birth to bring a heifer in to the production herd.

This is obviously a significant time lag and I suspect it is this lag which is a contributory factor to the very unhelpful oscillation in dairy commodity prices because once the cows are in the herd producing milk, one cannot “turn them off” which then contributes to the oversupply and downturn in milk prices.

I am sure there are also many other contributory factors to world markets prices but what seems inevitable at present is that milk prices are on the slide and our dairy farmers will have to brace themselves for some tougher months to come which will no doubt result in some farmers exiting the industry.

This is obviously a sad prospect but it is a trend that has been ongoing for as long as I can remember. For instance in 1995 there were 28,093 producers in England and Wales but by the end of 2013 there were only 10,581. This represents a 62% fall in producer numbers over that period and it seems likely that with the latest round of milk price cuts, the rate that producers will leave the industry will increase, at least in the short term.

However, as with many clouds there may be a silver lining for those that survive because with an ever increasing share of the market, there should be the prospect of making more money when the markets do return to more profitable levels. The big question is how long that will take and how much pain businesses are prepared to take in the interim.  

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

News from the 'Beef Summit'

Last week saw DEFRA’s Farming Minister, George Eustice chair a so called “Beef Summit” with a view to dealing with the desperate situation the British Beef Industry finds itself in. In the last year beef prices have plummeted by around 20% which is posing very real problems to beef farmers, particularly those who “finish cattle”.

What is interesting to note here is that most farmers who finish cattle, purchase animals, called “store cattle”, from other farmers usually by auction at livestock markets. Here it is argued there is fair and open competition and thus the price paid represents the true open market value of the livestock purchased.

However, once the animals have been fattened they have to be sold to the dwindling number of abattoirs who in turn sell the majority of meat to the big supermarkets. It is this processor/retailer section of the food chain where the “market” becomes much less transparent. Thus many beef finishers are finding themselves having to compete for stock in the open market and then having to sell at “fixed” prices to abattoirs without any transparent competition in the system.

It was issues such as this that stimulated the beef summit where representatives from farming organisations, processors and retailers met in Westminster to discuss the problems facing beef farmers. The outcome of the meeting was that representatives from the farming unions and the British Meat Processors Association (BMPA) will meet over the summer to discuss a code to increase transparency.

The code will cover how trading terms, abattoir specifications and penalties are communicated to beef producers. This represents one of the areas of concern facing farmers but the retail sector is also another big issue where the perennial problem of clear labelling and fair pricing of meat is important.

Farmers appreciate that markets do go up and down but if supermarkets truly want to retain beef production in this country they need to work with the industry to give some certainty as to what prices are likely to do over a period of time.

To some extent supermarkets such as Waitrose are doing this and have recently announced that they will hold prices at no less than 345p/kg for their producers through to October. Tesco has also started a promotion of beef although from the advert I have seen includes British and Irish beef which illustrates the problem of labelling where nothing ever seems as transparent as it should be – will it be British or Irish beef that you actually have on your plate?

So it seems that although some progress has been made and that a code of conduct will be a good thing, there is a lot more still to be done before British beef farmers will feel they are at least being treated fairly by the processors and retailers that dominate the food chain “upstream” from the farm gate.

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