30 August 2002

Raise milk price to ease supply

By FW reporters

MILK processors must pay farmers more for their milk or risk supply problems over the next few months, warns a leading dairy adviser.

Chris Laycock of Kite Consultancy told visitors on a recent farm walk in Devon that a milk price of 16p/litre before seasonality bonuses for the coming winter was not sustainable.

"If dairies dont want milk supplies thats fine. But they do need to think about it, and they need to think about when they want it. Reduced prices will inevitably mean more spring milk.

"People refer to the New Zealand system as a model for low-cost production. But even there the small proportion of total production needed for year-round town supplies gets about 18-19p/litre."

Mr Laycock said that as Dairy Crest had led the way in reducing milk prices this summer, it should now lead them back up again. He urged farmers to keep faith with co-ops and their leaders, and farmer-owned companies like United Milk.

He was "reasonably optimistic" that milk prices would rise by 1-2p/litre in the autumn and possibly a bit more in late winter/spring.

But unless producers could break even at 18-19p/litre after repayment of debt, they needed to take radical action or leave the industry, Mr Laycock warned. He reckoned the average breakeven production cost was about 19p/litre, with the bottom 25% on 22p/litre and the top 25% on 17p/litre. "A lot are struggling."

But some observers believe prospects for some dairy commodities, notably skimmed milk powder, could improve as rising world demand coincides with a supply trough.

Milk output and stocks in Australia and New Zealand are at a seasonal low, and NZ dairy company Fonterra claims Asian demand has improved significantly in recent weeks. Fonterra has even attempted to buy EU supplies to help meet its commitments, says independent consultant Michael Bessey.

Milk powder prices have halved in the past year, although intervention has protected EU markets to some extent. UK SMP is worth about £1275/t.

"This is the first chink of light Ive seen for some time," said Mr Bessey. The Pacific shortfall could open new markets to UK exporters, with some fresh business already reported. US authorities also seemed to be holding back from starting the subsidised export campaign, possibly in anticipation of improving prices, he said.

"If SMP prices went up quite substantially, that would push everything else up as well." A £100/t rise in SMP price should add 1p/litre to the liquid milk value.

Cheap SMP means that animal consumption is likely to have picked up, said Don Morris, chief executive of United Milk. "As we enter the winter, things should tighten up. The signs are reasonably positive."

Although butter and cheddar prices are relatively flat, currency moves have been favourable and there are some signs of a recovery in cream values, he added. But it is the SMP market that everyone is watching.

"I certainly dont think well see £1700/t for a while. But although it is difficult to predict, we will hopefully see it heading towards £1400/t in the course of the next 12 months."

Meanwhile, this months milk price table reflects a number of price cuts – and one increase.

The big three processors all cut their ex-farm prices by 1.25p/litre. Dairy Crest reduced the base price and butterfat and protein payments, while Express and Wiseman cut their base prices, leaving all three in a payment band of 16.6-17.02p/litre for daily collection.

But the biggest reduction, of 1.92p/litre, on butterfat and protein, was made by Meadow Foods (formerly Bodfari). South Caernarfon pulled constituent payments back by 0.5p/litre, and trimmed a further 0.12p/litre due to changes in transport costs.

United Milk has moved its milk prices up, increasing both the liquid and compositional contracts by about 1p/litre. &#42