Tuesday, 6 January, 1998

By FW reporters

MILK producers have been under the cosh during the past 12 months, battered by prices which fell about 5p/litre in response to pressure from Sterling and buyers.

Recent projections suggest the final drop in farm incomes for 1997 will be about 50% on many dairy units. And some recent reports suggest large numbers of dairy farmers will be forced to leave the industry.

But for those who survive, the bottom of the trough seems to have been reached and a limited recovery could be seen during 1998.

Given the built-in lag effect between manufacturer and producer returns, milk prices could start to firm after the buoyant dairy commodity market of the past six months.

Butter in particular has benefited from strong Russian buying. Continental prices have climbed and Dutch and German values have increased by 15%.

Although Sterlings strength initially hampered the domestic market, even UK butter prices have now moved 10% ahead of intervention values as demand has strengthened.

Bulk product is currently worth about £2,450/ t, compared with £2,200/ t last May.

Brussels recently imposed a five-point plan stop the market overheating, including a large cut in export subsidies, a similar reduction in subsidies on butter for food manufacturing and the sale of all remaining intervention stocks.

But analysts believe butter prices will soften only slightly in the months ahead. And the expectation is that the trade will benefit when Russian and East European buyers return to the market in the new year.

Skimmed milk powder is also expected to remain buoyant throughout 1998. Good export business to Mexico and improved profits for Continental veal producers continue to support the market.

Similarly, cheese manufacturers have reaped the benefit of strong demand. Many UK dairy companies say mature Cheddar was fundamental to their substantially improved profits in 1997. Farmhouse Cheddar is currently worth about £3,500/ t and has been at this level for over a year, following a gradual firming during 1996.

Although analysts suggest the bubble could burst some time in 1998, mild Cheddar prices are expected to reach £2,400/ t by the end of February.

All eyes are now waiting to see the effect of Milk Marques terms for its January selling round. The companys proposed 0.6ppl price rise will set the trend for producer prices for much of the year, say analysts.

Indicative of what might happen was a recent auction by United Dairy Farmers in Ulster. This showed a slight increase on prices achieved at its last sale in September, with 60m litres of milk sold on 12-month contracts averaging 21.56p/litre, compared with 21.24p/litre. Three-month contracts were up marginally at 22.29p/litre.

But Milk Marques attempt to get a bit more from the trade could result in buyers holding off and trying to force prices down again. That said, this may be of less relevance as Milk Marque is heading towards index-linked contracts – tying milk prices more strongly to currency.

Thus Sterling will play an even more important part in determining producer returns in 1998. But which way Sterling will go is anybodys guess.

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