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

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

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