Milk price cuts put income below cost of production

Farmgate milk prices are now below or close to many producers’ cost of production.

Price cuts of more than a penny by the big-four processors and smaller companies have this week taken many farmgate returns down to 27-28p/litre. This represents a cut of more than 6p/litre compared with prices in April.

The average cost of milk production was 36.65p/litre in the year to March 2014, according to a survey by accountant Old Mill.

Dairy farms surveyed made 3.41p/litre profit in 2014 compared with a 1.13p/litre loss a year earlier, not including unpaid family labour.

Falling feed, fertiliser and fuel costs will have trimmed production costs since the spring but in many cases not by enough to make up the gap created by farmgate price cuts.

Old Mill rural accountant Will Vincent said farmers should look at their costs to remain economically viable if prices remain suppressed over the winter. The most profitable businesses had much better control of spending on overheads like staff and power, as well as lower drawings and tax, he said.

“Given the uncertain market outlook it may be better to act now to protect your business rather than hoping for a rebound in milk price,” he said. “This is not always easy – many costs are semi-structural and may require further investment to bring them down.”

Last Friday (26 September) co-operative Arla issued a 1.67p/litre milk price drop for October, taking its member price to 28.55p/litre.

Earlier this week Dairy Crest cut by 1.3p/litre for November, Muller Wiseman reduced its price by 1.9p/litre and First Milk was to make an announcement as Farmers Weekly went to press on Wednesday.

Arla head of milk and member services Ash Amirahmadi said global milk output was 4-5% higher while demand was down 1-2%, on weak Chinese demand and Russia’s Western food import ban.

Dairy Crest group procurement director Mike Sheldon said global commodity markets had not improved and this had to be reflected in November’s price.

Muller Wiseman head of group milk supply Martin Armstrong said he shared the concern of dairy farmers anxious to see improvement in the volatile market.

UK milk production remains exceptionally strong and bucked the seasonal slide to rise 0.9% in the week ending 20 September.

British farmers are producing about 9.3% more milk than last year, 12.1% above the three-year average.