24 May 1996

Spot milk price drops are only a market blip

By Philip Clarke

RECENT falls in the price of milk sold by producer co-ops on the "spot" market are circumstantial, it is claimed, and do not point to a similar shrinkage in milk cheques.

The demise has been most marked in Northern Ireland. This week some 66m litres of June milk was auctioned by leading co-op United Dairy Farmers for 22p/litre, better than last months 20p, but well short of the 30p it was making in January.

According to finance director, Sam Lyons, three forces are at play:

&#8226 BSE has caused a "hiccough" in the export market, especially to the Irish Republic, swelling supplies of milk.

&#8226 Dairy products are currently worth less, equivalent to about 3p/litre off the milk price.

&#8226 Buyers have been rejecting milk under their "option" contracts, forcing a ten-fold increase in availability on the spot market.

Spot milk values have also been depressed on the GB mainland. But Milk Marque chief executive Andrew Dare says any downturn is artificial. "What it shows is what happens when we get a seasonal surplus of milk and some clever manipulation by buyers."

With most of Milk Marques milk sold on longer-term contracts – less than 5% goes spot – these short-term fluctuations have little impact on producer returns.

But dairy adviser to the UK Provision Trade Federation, Mike Bessey believes there is more to it than seasonality.

The BSE crisis has already meant more cows are being milked, boosting supply. It has also led to some "unofficial" bans on UK dairy products in countries such as Germany, forcing extra product onto the home market.

Basic commodity prices have been under pressure for some time anyway, due in part to falling world demand. For example, bulk butter has slumped from about £3000/t last Christmas to nearer £2500/t. The EU has recently opened intervention, with over 5500t accepted last week.

Skimmed milk powder is also at a five-year low, not helped by the lack of demand from a contracting Dutch veal industry.

To this list of woes, Dairy Industry Federation commercial director, Jim Begg adds the recent strengthening of sterling, which has cut export returns, and new GATT limits which are restricting export subsidies on cheese.

Both maintain that milk prices will need to come down.

But Mr Dare disagrees. "Ive been talking to a lot of retailers recently. They tell me the liquid milk market is stable and that fresh dairy products are also holding up well. Yes, commodity prices have suffered, but we are no longer major players in those markets.

"And looking at the raw material end, I dont see the likes of Unigate, Northern and MD Foods preparing to drop their prices. Its not all doom and gloom."

These sentiments are echoed by Anderson consultant, Mike Houghton. "BSE could even drive prices up, if a selective cull gets under way. There is underlying pressure from the commodity markets, but major buyers are still after farmers milk." He is predicting static prices for the year ahead.

Milk producers need not fear for milk prices, says Andrew Dare (inset), despite more cows being milked due to the continuing BSEcrisis.