2001

By FWi reporters

THE past year rekindled a sense of optimism among UK dairy farmers.

After four years of falling prices, from 25p/litre in 1996 to just under 17p/litre last year, the sector was in danger of collapse.

After intense farmer pressure, supermarkets raised their shop prices last autumn and again this spring, and processors decided to share some spoils from buoyant commodity prices.

Farm milk values rose by 2.8-3p/litre to levels not seen since 1997.

But this gain has already been eroded, and is in danger of being wiped out completely before long.

It is a marked turnaround. Until recently, the feeling was that prices could rise again.

The main catalyst was expected to be a milk shortage due to foot-and-mouth casualties. Many observers predicted a 5%, or bigger, decline in milk output, and processors geared up for this.

But, while output remains well below quota, there has been plenty of milk to go round.

With the best margin over quota ever, farmers retained older cows and milked them hard, and an open autumn helped to keep milk flowing.

While production has climbed, commodity prices have tumbled.

In the past six months, the value of skimmed milk powder has fallen by 20% to about 1300/t. Butter has fallen about 10% to 1800-1850/t.

To make matters worse, the European Commission cut export subsidies hard, making it difficult for EU exporters to compete on world markets.

At least UK values are unlikely to fall further. Butter is now at intervention levels, putting a floor in the market, and SMP support opens in March.

Consultant Michael Bessey believes world demand has fallen only modestly, but enough to persuade would-be buyers to wait for lower prices, pushing the market down further.

If that is true, prices may stage some recovery in the spring when stocks fall.

EU prices are already stabilising, and the commission also raised export refunds by a modest 100/t a month ago. The hope is that more will follow.

But mild Cheddar values have also suffered, falling about 300/t since June to about 2000/t.

And a big cheese make in Ireland and the UK (up 17% and 11% in the first nine months of 2000) is overhanging the market.

Commodity processors are already talking of farm-gate price cuts of 1-2p/litre next spring.

With SMP and butter accounting for 20% of the UKs raw milk, and cheese another 30%, that is bad enough. But such action could trigger cuts in the liquid milk sector, too.

Retail prices are likely to stay at or near present levels, but cut-throat competition by processors for market share is squeezing margins, and they are likely to seize any chance to reduce the damage.

Some companies have already cut prices this autumn, and it seems that milk producers would be wise to budget for further erosion from the spring.

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