Cows in a dairy parlour© Tim Scrivener

Dairy farmers face a challenging winter, suffering unsustainable milk prices along with soaring dairy commodity markets.

The NFU has identified a £200m gap between what UK producers have been paid in the past four months and what a fair price, reflective of the market and cost of production, would be.

This is the equivalent of about £15,000 for every producer.

Meanwhile, consultants are helping more farmers plan their exit as losses mount.

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Nosedive

NFU dairy board chairman Michael Oakes criticised processor rhetoric on competitive pricing and the time lag between rises in commodity and farmgate prices.

“The only way milk buyers can pull the dairy sector out of this nosedive is to quickly pay them a profitable price for their milk,” he said.

The most recent average UK farmgate milk price for August was 21.24p/litre, according to AHDB Dairy.

This is 2p/litre lower than it was 12 months ago and nearly 10p/litre below 2014 levels.

However, market indicators AMPE and MCVE, which broadly equate to the value of milk after processing costs, are 26p/litre and 28p/litre respectively, up 67% and 60% over the past 12 months.

Commodity prices

Dairy commodity prices have shot up, with butter at its second highest price since records began, up 73.2% compared with 12 months ago.

Bulk cream and skimmed milk powder prices have seen rises of 78.1% and 33.6% respectively over the same period.

Spot milk prices are about 40p/litre and are expected to hit 50p/litre next month.

Feed and housing costs

Producers will need more than the recent 1-1.5p/litre rises to get through winter, when increased feed and housing costs will push the cost of production even higher.

Improved efficiency is the key focus in the minds of many milk producers and should remain so even as milk prices increase, rather than pushing production Mike Houghton, Andersons

Figures produced by accountant Old Mill and The Farm Consultancy Group put the cost of production at 29.05p/litre for 2015-16 and 29.31p/litre for 2016-17.

This means producers are set to lose 2.81p/litre in the current milk year. When non-milk income – for example, from calf and cow sales – is included, this produces a small profit of 1.08p/litre.

These figures do not include basic payment, rent, interest, drawings or tax, but do include depreciation and an imputed charge of £28,000 a person for unpaid labour, said Andrew Vickery, head of rural services at Old Mill.

Consultant Anderson’s Friesian Farm model shows a 1p/litre loss before BPS payments this year, with a recovery to a positive margin of 2.1p/litre in the 2017-18 milk year.

“Many producers remain strapped for cash and the milk price increases will take time to filter through,” said partner Mike Houghton.

“Many have culled out inefficient cows, and with beef insemination up significantly, additional heifers will take at least three years to work through the system.

“Improved efficiency is the key focus in the minds of many milk producers and should remain so even as milk prices increase, rather than pushing production.

“All of this perhaps highlights that the best policy is to limit supply, concentrate on efficiency and improve profitability.”