Dairy producers should maintain feed levels and output through the winter so they are in a position to benefit from better conditions next year, says Kite consultant John Allen.

UK milk production dropped 4% year on year during the summer and this season looks like producing 1-2% less milk than the previous year. Demand is growing and there is the prospect of more price rises.

Most UK producers should not be planning to cut output unless this was part of a long-term strategy such as moving to a pasture-based system, advised Mr Allen.

Cutting output risked a downward spiral of lower output with rising costs per litre linked to other problems such as poorer fertility.

“With the expectation of rising milk prices through the winter they would be better planning to try and hold on to output. We recognise how difficult this will be on many farms because of the poor-quality forages.

Key factors in milk prices and supply

  • World dairy markets extremely sensitive to over and undersupply, operating on extremely low stock levels, currently about 0.2% of output
  • Keen competition for milk at farm level and further price rises
  • Recovery in world dairy markets expected in 2013 has been brought forward by nine to 12 months by US drought
  • No major recessionary restraint on growth although threat of a slow-down in Chinese economy
  • Retailer resistance to increases in dairy prices for cheese and other products
  • Further squeeze on UK supply chain, more consolidation among processors
  • US drought and consequent high feed costs are expected to hit milk production in the USA and elsewhere this winter

“However, as the milk price:feed price ratio improves then we should see profits held and the dairy business should be in a better place to take advantages of opportunities in 2013.”

The milk price:feed price ratio recently came down to less than one (1 litre of milk buys 1kg of feed). “At these levels then there is little incentive to feed, especially on higher output systems such as those we see in the US and much of the EU.”

Recent UK milk price rises had been more rapid than elsewhere in Europe, where prices in many countries were still 24-25p/litre. With many UK producers set to be paid more than 29p/litre from next month, this would help improve the ratio to 1:1.1 but this was still not high enough to incentivise supply, said Mr Allen.

“For most producers, unless they are well covered for future feeds or unless they are self-sufficient then the milk price increases we expect to see through the winter will come in one door and go out of the other.

“Pasture-based operators should benefit through the spring since they have low purchased-feed usage and in the short term higher milk prices will benefit pasture-based systems.

“In the long run we would expect to see their costs rise as competition for land increases land costs.”

For most milk producers, if feed costs fell away in the second half of 2013 then there was the prospect of improving profits.

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