31 October 1997

Prospects look better

Milk producers are currently seeing the worst prices

since market deregulation in 1994. But, with EU product

markets booming, prospects for UK farmers are also

slightly better, as Michael Bessey explains

WITH the catastrophic drop in milk prices in the UK in recent months, it might be hard to believe that EU dairy markets have been doing surprisingly well.

In simple terms, consumers across the EU are buying more milk and dairy products, stocks are low, exports are generally doing well and prices for most products have been moving upwards.

Some of this has rubbed off on UK markets and it is only the rise in the value of sterling which has so far prevented dairy farmers from seeing better milk prices.

To illustrate this, the intervention price for butter of £2055/t in the UK today compares with the 20% higher price of £2463/t in October last year. In Continental countries, with stable currencies, the intervention price has not moved at all in this period and actual market prices have moved up substantially.

So while UK producers have lost out what has been happening in the markets? Firstly, of course, milk output has hardly changed across the EU because of the quota system. At the same time, cheese consumption in 1996 and 1997 has gone up nearly 3%. Liquid milk sales are up slightly, while fresh products like yogurts and desserts are doing well. Even butter consumption is now rising.

All of these products need extra milk which can only be found by cutting exports. But, in parallel, EU export sales are mostly booming.

Intervention stocks of product are almost non-existent – enough butter for four days consumption and one months supply of skim milk powder. The cupboard is virtually bare.

For the next few months market prices for these products, which have been rising steadily, look like continuing very firm and it might not be until next spring that they ease back as milk supplies go up seasonally.

In the meantime, price rises this year in Germany and Holland, for example, of up to 13% for butter, 7% for cheese and 4% for whole milk powder are making it possible for dairies to pay more to farmers.

In the UK, with half the milk going to the liquid market, farm gate prices do not depend so much on these commodity changes. Even so, the growth of skimmed and semi-skimmed milk means that the average fat content of total UK liquid sales is now about 2.3%. So nearly half the natural fat content on average is removed and sold by the dairy as cream or butter for whatever they fetch.

Since August, the £ sterling has stopped its dizzy climb and has eased back a little against other EU currencies. Whilst future sterling changes are unpredictable, this latest trend is combining with the strong markets described to put some cheer back into even UK dairy returns.

English bulk butter, for example, is now selling at £2500/t compared with £2400/t a year ago and, at its lowest, £2230/t in July. Mild Cheddar is still worth 10% less than a year ago, but prices are starting to improve.

Proof that markets are looking better is seen from the higher prices dairies are now paying for spot and secondary milk supplies, which recently have been up to 25p/litre or more.

Farm gate prices reached their low point on Oct 1 for most producers. All the signs are that better markets should help to improve these depressed levels a little as the winter goes on.Contract prices from April next year should at least hold and might be up to 5% better – but only if sterling behaves itself in the interim.

&#8226 Michael Bessey is an independent consultant and a former managing director of Dairy Crest.