8 October 1999

Which way prices now?

These are critical times for dairy farmers. Milk

prices have sunk to historic lows, and real

selling power seems as distant as ever. Our

Milk Special includes a look at two oft-cited

routes to recovery, processing and organics,

while dairy industry consultant

Michael Bessey starts by examining the

state of the milk market

PUT a group of dairy farmers together and it wont be long before talk turns to the dramatic fall in milk prices.

This drop, generally of over 25% in the past four years and probably more to come in the next few months, is regarded with deep suspicion that milk buyers have been taking advantage of the weakness of some dairy markets and inflicting unwarranted price cuts on farmers.

In fact, there are a number of reasons why milk prices have dropped so alarmingly and these warrant closer examination because they may give some clues as to how milk prices might move over the next year or two.

MAFF data on UK farmgate milk prices confirm the direction and scale of falling prices (see table).

In simple terms, these figures show that milk prices fell by over 22% from 1995 to 1998 and that they have fallen by a further 3% in the first half of 1999. This amounts to 6-7p/litre overall. And they are still dropping.

There are three basic reasons why milk prices have fallen:

&#8226 Poor markets in the EU and the world;

&#8226 The strength of the £ against the ecu and, from last January, the k;

&#8226 The poor negotiating strength of dairy farmers.

Looking at the first of these, world dairy prices have collapsed and export volumes shrunk because of the economic problems in 1997 and 1998 in Asia, Russia and South America.

From their peak in 1997/98, world market prices were down by June 1999 by over 30% for butter and skim milk powder and over 20% for cheese and whole milk powder.

Some 20% of EU milk is exported and these price falls, coupled with an even greater fall in export volumes, have caused havoc with EU domestic market prices. Even in the Euro-zone, butter prices dropped this year by 30%, cheese by 17% and other products by 5-10%.

On average, returns to Continental dairies have dropped by 10% or more and farm gate prices this year will probably be down between 5% and 10%. This poor market has also affected returns in the UK and, even with nearly half our milk going to the liquid market, average returns on UK milk would have dropped by about 1p/litre even if sterling had been steady.

Sadly for UK dairy farmers, sterling has been exceptionally strong against the k in 1999 and the best measure of this is to examine UK intervention prices (in £) for butter and skim milk powder.

Up to June 1999, these dropped from November 1995 by 32%, or from January 1997 by 24%, the equivalent of 6-8p/litre. In other words, the sterling problem has been far more important than the world market depression.

However, the sterling effect has little direct effect on the UK liquid market and this suggests that the average milk price drop that can be blamed on sterling is 3-4p/litre.

Against the total average milk price drop of 6-7p/litre, therefore, 4-5p can be blamed on market conditions and the strong £. The 2p/litre balance appears to be due to the ability of milk buyers to take advantage of their superior bargaining position.

Increasingly they have learned to force Milk Marque, in particular, into a corner and the effects of this have spread across all milk sellers. Buyers have won the support of the government in this process to the point where Milk Marque now believes it cannot operate satisfactorily on behalf of its members and is proposing a break up into three regional co-operatives from early in 2000. Until this happens it looks as if milk prices will fall by up to a further 1p/litre.

Looking ahead over the next year or so, the same three factors that have affected milk prices since 1996 will continue to be important. What are the prospects?

In terms of world and EU dairy markets, the position since June has shown some improvement. Economic recovery appears to be starting in many Asian countries, the position in South America appears at least to have stabilised and Russia is now buying at least a trickle of products. Some of these countries and others may also benefit from the rise in world oil prices this year.

World and EU market prices are again edging upwards. In Germany, for example, butter and cheese prices have risen by about 2% since July and skim powder prices were higher in September than in the same month in the past two years. No quick return to booming markets is expected, but the prospects for 2000 now look better than for some time.

Sterling looks likely to be the biggest single factor affecting UK milk prices and during September the position worsened. Even the short-term trend seems to be totally unpredictable, although many financial experts predict that the £ will eventually decline. It certainly needs to for the dairy farmer if there is to be any question of adopting the k and ending severe currency distortions.

Finally, the vexed question of the need to strengthen the farmers bargaining position with milk buyers remains unresolved. Assuming the three new co-ops proposed by Milk Marque are approved they will still face an uphill struggle to secure better returns.

If Milk Marque has proved a weak seller, partly due to government constraints, then the replacement of one by three sellers in the market seems unlikely to bring immediately higher returns. The reverse might even be true.

The new co-ops might, over time, benefit from the absence of the constraints placed on Milk Marque and the hope must be that they can gradually get milk price negotiations back on to a more level playing field.

Average UK milk prices

Year Average price Change in year

1995 24.94 ppl (up)

1996 25.02 ppl +0.08 ppl

1997 22.09 ppl -2.93 ppl

1998 19.36 ppl -0.73 ppl

Half year to June

1998 18.67 ppl (down)

1999 18.07 ppl -0.6 ppl