VOLATILE PRICE FOR MILK MAKES PLAN FOR FUTURE VITAL
THIS year should see the fortunes of milk producers improve from the late 1990s low, but this good year must be used to set up businesses for a more volatile milk price in future.
Milk prices may have recovered in the past year and with quota prices falling it should see most producers making a profit, says ADAS head dairy consultant Nick Holt-Martyn.
"But milk price has risen because production is below demand. It is a supply and demand effect.
"Before that, milk price fell so much that producers were forced out of business. If milk prices hadnt risen last Oct, production would have continued to fall."
He believes milk price will rise again. "Then it will level out and at some point it will come down again as production recovers, but it is difficult to forecast when that will be."
It is also difficult to predict how far milk prices will fall. No one thought milk prices would fall as low in the 1990s. "We thought they would fall, but only by 10-20% at most, we didnt believe it could go as low as it did."
Quota not dear
Quota is also costing little this year, but that is unlikely to be repeated again, according to Mr Holt-Martyn.
"Quota price is even more volatile and leasing prices are directly related to milk price in a year when production meets quota nationally. Quota purchase price is directly related to leasing price."
Two years ago, milk price was 18p a litre and quota leasing 6p, but when milk price fell to 16p leasing cost was 4p. What milk buyers need to understand is that quota leasing is not optional, it is not a sign of profitability: No quota equals no revenue.
"Just as milk buyers use the spot raw milk market to optimise plant use, dairy producers use quota leasing to optimise their production process. This makes it possible to forecast a quota price based on the forecast milk price, in the years national quota is reached. So if we reach quota next year and milk price is 20p a litre, we can expect quota leasing to rise to 8p a litre and purchase price towards 40p."
But if purchase price increases, more producers will quit dairying to cash in their quota bringing more onto the market, keeping prices down, he adds. "We are well used to volatility in the quota market and must now get used to volatility in milk prices."
In the worst years for milk price the top 25% of dairy businesses stood still in business terms, keeping their cashflow barely positive. "But even these farms have not invested in buildings and equipment."
Now producers must understand that there will be price peaks and troughs. "Price volatility is a fact. It is common in the southern hemisphere and the US, although still remains alien in the UK and most of the EU."
Businesses must, therefore, be set up to cope with price fluctuations, he advises. "It is important to consider future bad times and plan for them.
"This planning must be based on reducing production costs in the business. One of the first factors to consider is the business scale. Top 25% businesses increased output by 10% last year, reducing costs by diluting them across more litres.
"Looking at the system operated and taking out costs should also be considered. This is not necessarily cutting costs, but reducing waste and adding value, such as by taking care of silage and ensuring it is of a high quality.
"Costs must be pegged down to a level where businesses can survive. Previous experience suggests that this is below 19p a litre. When milk price was above 19p a litre, producers responded by increasing output. Below that price, production was pulled back."
However, the rolling milk price fell to 16.9p a litre and it will be wise to reduce costs to near that level to be sure of beating future downturns, he says. *
• May fall again.
• Supply-demand based.
• Influence quota price.
ADASs forecasts on the future of milk prices, quota prices and milk production can be discussed at its Dairy Event stand in Exhibition Hall 2.
At some point milk prices will fall again, but it is difficult to forecast when that will be, says Nick Holt-Martyn (inset).