Dairy production costs outstrip milk price rises

Farmgate milk prices need to reach at least 35p/litre to allow dairy farm business recovery after high production costs last winter, according to The Dairy Group.

Despite a flurry of milk price rise announcements from processors this week (see table below), many dairy farmers still face a gap between cost of production and farmgate milk price.

Average costs of production were still “pretty horrendous” at around 35p/litre and there was still a lot of financial damage on farm to be repaired, said consultant Nick Holt-Martyn from The Dairy Group.

“There is a dilution effect – milk production has risen but the actual bills and costs are probably no better than they were before,” he said.

The long-term outlook was for continued milk price rises, with farmers needing a farmgate price at or above cost of production, he added.

“At the moment things are looking fairly steady through to next spring. New Zealand production is playing catch up on where it was before and there is still demand, but EU production is recovering so in 2014 the market balance might start to shift,” explained Mr Holt-Martyn.

“The key to the UK is that the cheese market remains solid and while the powders [prices] are high, that all tends to restrict milk going into cheese. As long as the cheese market is firm then we can expect the high prices to continue for the next six months.”

The pressure was now on milk processors to deliver the highs of the market back to farmers, said NFU chief dairy adviser Rob Newbery.

“What frustrates farmers is cost of production or the market being used to drag the market down, but when it should be used to bring the milk price up, it gets stuck,” he said.

The industry needed to move on from a “cycle of excuses” for dropping or not rising the milk price, he said.

“Who knows what the market is going to do next spring but farmers will only be prepared for changes and volatility if they are getting the full value of the market,” said Mr Newbery.

For whatever reason, farmers were not getting the market highs they should be to help them cope with the market lows, he said.

Formula-based and cost of production-based contracts suggested the milk price needed to reach about 34p/litre, he added.

Muller Wiseman recently confirmed its formula contract price will increase by 2.28p/litre to 34.55p/litre from 1 October, while Sainsbury’s confirmed last week that its aligned cost of production-based contract price will rise by 1.97p to 34.15p/litre from 1 October.

More on this topic