Upturn in milk prices

Dairy farmers flocked to the Dairy Show held at the Bath and West Showground on 5th October and I was struck by how positive many of the attendees were despite the very difficult year that many have experienced.

This generally positive attitude is perhaps a reflection of the recent upturn in milk prices and the hope that there will be further more significant increases to come. However the picture painted by farm accountants Old Mill appears to be rather more gloomy than the mood at the show would indicate.

Based on analysis of both Old Mill and the Farm Consultancy Group clients’ accounts this showed that on average dairy farmers lost 2.71p/litre in 2015/16 and are set to lose a worrying 2.81p/litre in 2016/17.  However these figures exclude non-milk income such as calf and cow sales and when these are included this produces small profits of 0.99p/litre and 1.08p/litre respectively.

Even so, these are not huge profits but although they are average figures and what always astounds me is the huge variation in performance between the top and bottom 25% of dairy businesses and this was once again borne out by Old Mill’s analysis.

Their figures showed that production costs among the lower quartile were a hefty 33.87p/litre, against 22.84p/litre in the top 25%. The bottom 25% also received 2.29p/litre less for their milk, at 25.01p/litre. This meant they made a loss of 5.65p/litre in 2015/16 – including non-milk income - compared to the top quartile’s average profit of 8.75p/litre.

Andrew Vickery, head of rural services at Old Mill, commented that, “It’s encouraging to see that, even in these tough times, the UK’s top dairy farmers are still managing to make a profit,”  but he went on to add, “all producers have looked hard at their cost base and found ways to reduce expenditure. However, while many have improved efficiencies, there is now very little meat left on the bones for any further cost reductions.”

As a result, following a prolonged period of low milk prices, cash flow is a significant issue for many dairy farmers and so now more than ever it is important to look forward and plan ahead.  In this context having a clear understanding of one’s cost of production is vital according to Phil Cooper from the Farm Consultancy Group.

Phil commented, “Improved dairy commodity values are now starting to filter through to farm-gate milk values, so producers need to make sure their business is in the best possible shape going forward, he adds. Don’t make drastic changes in times of uncertainty, but do plan ahead. Take professional advice and understand your costs of production, so that when you make a decision to change you’ll know it’s the right one.”

So, after a challenging year it appears most dairy farmers are keen to hang on to fight another day which demonstrates to me the resilience of this very important part of our farming community here in the south west.

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

Compensation for dairy farmers

The EU are proposing to compensate dairy farmers for cutting milk production in a bid to boost its price.

Indications are that payments of 12p/litre may be paid to farmers who commit to reducing milk production over a three-month period compared to the previous year. However funds will be limited and are likely to be paid on a first come first served basis, so farmers are advised to get prepared for the application period.

This could be a real opportunity for some farmers here because, as I reported a couple of weeks ago, milk production in the UK fell by around 10 per cent in July compared to a year ago. Some farmers will have already “pre-qualified” for this particular scheme without having to change anything.

Applications will be made to the Rural Payments Agency and will need to be accompanied by written proof of 2015 production levels which should be relatively easily achieved through the provision of last year’s milk cheques and estimated revised production levels.  

The total pot of money available across the whole of the EU will be £125m and I expect there will be four application periods until the money runs out. But with UK production having already fallen sharply, this money could be used very quickly and farmers are advised to apply at the first opportunity.

According to NFU chief dairy adviser Sian Davies: “When the application window is opens there will be a form made available on the RPA website which farmers can download ready to submit along with their milk cheques.”

It is believed the first application period will relate to reduced milk production from October 1 to December 31, 2016 and any potential applicants should consider what level of production they think they will have during that period in order to be ready to submit the form.

This EU initiative is clearly welcome but if the EU had not abolished its milk quota system in 2015, when world markets were falling in the face of rising milk supplies, perhaps the current level of overproduction in the EU would have been less severe and the latest dairy compensation scheme would be less necessary.

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

Demand in milk and prices

Arla Foods have announced yet another milk price reduction with their UK standard price per litre dropping by a penny to 19.12 pence. This is well below the cost of production for almost all farmers and does not bode well for the coming months.

The market continues to be impacted by the global imbalance between milk supply and demand.  Commodity stocks are high and the market is extremely competitive which is continuing to generate further downward pressure on prices.

Arla Foods Farmer Board director Johnnie Russell said: “Recent data suggests that the global growth in milk production is levelling off, which may lead to volumes stabilising later in the year.  However, it is too early to predict whether this trend will continue over the coming months.”

This potential change in sentiment is reflected in the New Zealand co-op Fonterra’s forecast for the coming year where it raised its predicted price to 14.6p/litre.  But this remains a pitifully low price. Only two years ago Fonterra was paying farmers 29p/litre.

Fonterra’s very modest optimism is not based on an increase in demand for milk but rather on the expectation that farmers will start cutting production across the world due to the poor returns.

This optimism was reflected in the Global Dairy Trade auction which saw prices rise by 2.6 per cent - the third increase in four sales.  But despite this, prices remain stubbornly low with no consistent pattern of sustained price rises.

Having said that, the Dutch dairy board has also raised its official prices for butter, milk powder and cheese for the first time in over a year which lends support to Fonterra’s cautious optimism.

However with EU milk production 7.2 per cent higher on the year in the first quarter of 2016 and world production also up 3.9 per cent over the equivalent period it is clear that something dramatic is needed to rebalance supply and demand.

The hope is that the rate of increase in production will moderate if not fall and this is reflected in the EU’s milk market observatory board’s prediction that EU production is expected to rise by only 1.4 per cent over the whole year.

But it does not take a genius to work out that if demand does not also pick up by at least that amount, there is limited hope of a serious increase in milk price for at least the rest of 2016.

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

The farmer protests in Brussels

The farmer protests in Brussels remind us that the problems facing our dairy industry are EU-wide. Indeed they are worldwide as supply is outpacing demand.  

This is bad news for everyone other than the consumer but ironically, at least in this country, I suspect many shoppers would be happy to pay more for their milk if this helps our dairy farmers survive.

However, with supermarkets facing fierce competition they are desperately trying to attract more customers into their shops and a price war on milk has been one of their battle grounds. 

Some movement has been seen in recent weeks with various supermarkets agreeing to pay more for liquid milk and milk being made into their own brands of cheese. But this still leaves many of our dairy farmers producing milk at less than the cost of production which cannot last for long before farmers are forced to quit the industry.

It is the impact these prices have on an individual farmer’s cash flow which is crippling those who do not have sufficient financial resources to survive a downturn such as this.  

That is why the EU has agreed to make 500m euros available for dairy farmers across Europe to help relieve this cash flow crisis.  It is likely this will translate in to around £29m in the UK but my fear is that we will now enter a prolonged argument as to how this money should be allocated with the result that by the time it is eventually paid, it may be too late for some businesses.

When such payments have been made in the past they have usually come on a flat rate basis to every farmer which makes it easier to get the money out quickly.  However, because there is such a broad range of milk prices being paid to dairy farmers I believe this money should be focussed on those receiving the lower milk prices.

Such decisions, and the mechanism for payment need to be agreed quickly and I urge government ministers in DEFRA to focus their efforts on getting this money out as soon as possible. 

They must also continue to fight EU bureaucrats to relax the rules and allow the new Basic Payment Scheme funds to be released as early as possible in England where it is currently feared technical checks may hold up payments when farmers are struggling across all sectors, not just the dairy industry.


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

Milk protests have been stimulated

Although some supermarkets are now guaranteeing to pay a minimum price for liquid milk, they have given no such assurance for the price paid for other dairy products made from milk such as butter, yoghurt or cheese. These products account for around half the milk produced in this country -- so providing guarantees on the price paid for liquid milk is only half the story.

This has stimulated milk protests across the country and farmers have blockaded the massive Morrisons depot near Bridgwater. Farmers for Action (FFA) decided to shut down the depot for a second time in a week because Morrisons turned down their request to bring forward talks on the price it pays dairy farmers for milk used to make cheese.

But it is not as simple as that. I am no expert on the milk supply chain but I do know there are many different brands of cheese and other dairy products supplied to supermarkets, and I don’t see how Morrisons or any other supermarket can control the price that all these cheesemakers pay for their milk.

Supermarkets could of course pay cheese makers more for their cheese on the basis that the makers then pay their farmers more for the milk. The price paid for cheese is obviously the fundamental point but even then it becomes increasingly complicated in that unless the cheese producer supplies all their cheese to just one retailer, it will be difficult to ensure the higher price filters back to the farmer in full.

The plight of cheesemakers themselves was also brought in to focus by the news that Cricketer Farm near Bridgwater has announced it will halt production in early 2016 after more than 60 years.

Around 20 farmers used to supply this cheesemaker with milk and they will now be hunting for a new milk buyer which will not be easy in an oversupplied market.

Cricketer Farm blamed their plight on the turmoil created by global milk oversupply and the damaging effect of the strong pound on exports. They said: “Market volatility has forced the UK dairy market into a period of uncertainty and consolidation, which is reshaping the industry to be dominated by international dairy powerhouses, focused on global strategies.”


So the pain pervades the entire dairy supply chain and it is not just dairy farmers themselves who are facing difficult times.

Unless some form of price guarantee can be introduced, the whole dairy supply chain from farmers, through processors will look very different in a year’s time and I hope the supermarkets and government realise the consequences of this sooner rather than later.

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

Retailers to pay more for milk

Pressure is mounting on retailers who have started to offer to buy milk from processors at an increased price but it is unclear how much this will impact on the price paid by processors to farmers.

ASDA has committed to paying 28p/litre to their milk supplier Arla although because Arla is a co-operative I believe the increase in price will be pooled across all 13,500 farmer members throughout Europe, not just British farmers which would dilute the benefit of this rise here in the UK.

NFU president Meurig Raymond said: “The NFU has been lobbying tirelessly for Asda to recognise the plight of the dairy industry so we are pleased that Asda has moved to support farmers in their hour of need.

“It is clear from Asda that this commitment is to support the UK dairy industry at a time of crisis. It is now important that Arla ensures this is delivered to British farmers on the ground, with immediate effect.

Aldi and Lidl have also made new commitments to pay processors 28p/litre while Morrisons will pay 26p/litre for milk before processing costs.

The Morrisons move followed the retailer’s previous announcement that it was preparing to launch this new brand giving customers the option to pay an extra 10p/litre more for it on the basis the extra 10p/litre would go back to the farm.

Again the detail as to how these new pricing plans will work is not entirely clear. But it is certain that the pressure put on retailers by farmers taking direct action and by talks behind the scenes between farming leaders in the NFU and other organisations is having some effect on the liquid milk market at least.


However, liquid milk is only one part of the dairy market. About half the milk produced in this country is processed into other products such as butter and cheese and farmers supplying milk to cheese processors for example will be unaffected by these developments.

So there is much more work to be done to help our dairy farmers across all sectors but there is no magic bullet which can insulate UK dairy farmers from the disastrously low world dairy commodity markets which are showing no sign of improvement.

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

Milk prices continue to drop

As milk price continues to fall I was not surprised to learn that almost five per cent of dairy farmers in England and Wales have left the industry in the last 12 months leaving only 9,777 in production compared with 10,225 a year ago.

With little prospect of an increase in price on the horizon this trend is likely to continue, although I suspect the profile of the farmers leaving the industry will probably be closely correlated with the buyer to whom they are selling their milk.

This is because the gap between the price being paid on the best and worst milk contracts has widened vastly over the last year. Those farmers supplying milk to purchasers whose price reflects  the fall in world market prices have found the value of their milk plummet.  

In contrast those farmers who are lucky enough to have secured a contract with one of the big supermarkets, where the price being paid is usually linked in some way to the cost of production, have found their milk price has remained relatively firm.  For example the Dairy Crest Sainsbury contract is offering around 30.4p per litre in July compared with 19p from First Milk, a farmer owned co-op.

However, farmers on the premium supermarket contracts must not be complacent because Tesco has written to the 650 farmers in its Tesco Sustainable Dairy Group saying major industry changes have forced them to rethink their contracts.  Exactly what this will mean is not yet clear but it seems inevitable that Tesco will be looking to address the gap between the premium price they are paying for their milk and the cut price deals they are offering on the shelves as a result of fierce competition in the retail sector.

Other supermarkets which run similar programmes to Tesco such as Waitrose and Sainsbury’s have told Farmer’s Weekly that they have no plans to review their contracts.  Similarly, M&S have publicly announced their intention to continue with their Milk Pledge to pay a fair price to farmers covering their cost of production.

Tesco is feeling the pinch and looking to save costs wherever it can.  Reviewing their milk contract is an obvious target because they can secure milk from the wider market place at significantly less than they are currently paying their farmers.  


However, Tesco need to appreciate that they must treat their supply chain fairly and even if the contract is reviewed, it must still reward their suppliers appropriately for the high standards of welfare and hygiene Tesco demands, on which I am sure they will not want to compromise.

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

The abolition of Milk Quota

As I sit writing this article on April Fools Day, I cannot let the day pass without making mention of the abolition of Milk Quota.

It was introduced across the then EEC on April 2, 1984, some 31 years ago almost to the day as a mechanism to control milk production because of the “milk lakes” and “butter mountains” which were growing in intervention stores.

How times have changed: back in 1984, under the Common Agricultural Policy, famers received support not through direct payments but via the support of commodity markets. When a commodity fell in price, it was bought into intervention stores thereby supporting the market price, which not surprisingly encouraged overproduction.

Since 1984 intervention support has all but disappeared and farmers now receive support through direct area-related payments not linked to production and they then have to sell their produce at whatever price they can get.

Accordingly farmers are now exposed to world commodity prices which tend to be volatile and dairy farmers are currently facing very low milk prices due to an oversupply on global markets.

But back in1984 when quotas were introduced, it was not the price that was the problem, but the fact that without warning farmers were forced to cut their production to stay within the level of Milk Quota they were allocated.

Failure to do so would result in fines at the end of the year. As a result milk quota became very valuable because farmers could not expand without securing extra milk quota.

Milk Quota rather than milk price was the limiting factor.

I cut my teeth as a young surveyor back in the 1980s dealing in milk quota and I can remember trading quota at more than 80p a litre for sale and 22p/litre for lease.

These were crippling prices for some but in more recent years the UK has remained under quota and as a result the value of Milk Quota plummeted to a fraction of a penny and now has finally been scrapped altogether.

However, other European countries such as Germany, the Netherlands and Ireland have all been going over quota on a regular basis and it is assumed that without the constraint of Milk Quota, production there will rise.

It is estimated that across the EU the additional milk production following the lifting of quota is likely to be similar to the total production of Ireland and there are fears this will hinder the recovery of milk prices, particularly here in Europe.

So, although the passing of milk quota will not be mourned by many it does represent the end of an era of EU agricultural policy which encouraged production without heed to whether there was a market for the produce.

That era has now well and truly passed and dairy farmers currently find themselves all too exposed to the reality of “the market”.  

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