8 factors driving the dairy recovery 

Dairy prices are clambering up from the depths of the downturn. Farmers may not yet feel the recovery, but there are more positive noises around.

Dairy's cow full udder

©Global Warming Images/Rex Shutterstock

Here are areas to watch:

1. Milk supplies drying up, finally

The stats are striking. After two years of surging, UK daily production is running 3.2% down on the year.

On the continent, the European Commission has just revised its forecasts and now expects EU milk deliveries between April and December to drop 0.4%.

Countries with ambitious growth plans, like Ireland and the Netherlands, will slow down dramatically. The story is similar in New Zealand and Australia, though the USA is one place bucking the trend.

2. Low prices biting on farm

The UK average milk price was 21.59p/litre in April, with many expecting sub-20p/litre payouts over the summer.

First estimates peg the average EU price for May at 21p/litre. “The slowdown is not necessarily because of producers exiting,” says Kite Consulting managing partner John Allen.

“It is going to be a combination of cows being slaughtered and feeding the cows we have got less.”

3. Dark forecasts turning brighter

Most analysts think the market hit the bottom last month and their recovery forecasts are now more optimistic.

Futures trading suggests farmgate prices could start rising in the autumn. INTL FC Stone’s milk futures equivalent, which converts derivatives into UK prices for producer organisation Direct Milk, shows a 2p/litre gap between prices in June and November.

“We are seeing the market begin to balance out,” says Rabobank global dairy strategist Kevin Bellamy.

4. Spring overexcitement?

Dairy commodity values have picked up. In May, average European prices on all products saw encouraging rises.

On the Global Dairy Trade auction, prices stayed flat last week, after rising in the previous two sales.

But Mr Bellamy says these increases may reflect immediate trends, like the weak dollar drawing butter and cheese into the US and European milk’s seasonal lower fat content.

“People have been in the market to get hold of cream and for export commitments,” he says. “We will continue to see strong fat prices but they may drop off again over the summer.”

5. Long road back

There’s a way to go, with prices starting from a low base and a lag of several months before commodity trades feed into farmgate returns.

“People have to be very careful when talking about a recovery,” Kite’s Mr Allen says. “Actually farmers will not feel it is a recovery at present. We have to make up 4-5p/litre before an average operator can make a [profitable] return.”

6. The intervention albatross

The commission put a bottom in the markets by sticking with intervention buying. This year, commissioner Phil Hogan has twice increased the volumes available.

So far more than 200,000t of skim milk powder has been bought into stores. That has sucked up milk supplies but will weigh on prices when it is eventually released.

“It has not been a floodgate situation in the past,” says INTL FC Stone analyst John Lancaster. “I don’t see why that would change.”

7. China back to “normal”

The country’s dairy imports leapt 40% in the first quarter of the year, though Chinese buying has since cooled, with last week’s GDT auction showing more tepid interest.

But Rabobank’s Mr Bellamy says China’s tactics are changing. “China returned in the first half of the year in a more substantial way.

It has moved away from just buying on auction. They are finding ways to do this through traders, direct deals, long-term deals.”

8. Watch the “B” litres price

Several processors brought in “A” and “B” pricing schemes to discourage farmers’ from pumping out unprofitable litres.

That worked. But “B” prices are based on short-term market signals, so should very quickly reflect any commodity rebound.

“Are they being paid at market prices,” says Kite’s Mr Allen. “That is what farmers need to be asking their buyers. ‘B’ litres today need to be trading at the spot price of 20p/litre.”

See also: Six reasons not to miss the LIvestock Event

Farmers must invest cautiously

Farm debt levels in the UK are low compared with other top dairy nations.

This is an advantage British milk producers must protect as milk prices recover, says Kite Consulting managing partner John Allen.

This spring, on a European milk price of 20.2p/litre, British farmers carried 28p/litre of debt on average, against 155p/litre in Denmark. New Zealand farmers carried 55p/litre of debt, on a milk price of 15p/litre.

This means British farmers are not spending extra money on interest payments in a downturn. Many southern hemisphere farmers had invested heavily in land when prices were surging, says Mr Allen.

“We have relatively strong balance sheets in UK dairy. If we were to throw it away through borrowing a lot of money and not paying it off in the good times, that will be deleterious to UK competitiveness.

“We need to be cautious with farmers, as consultants and bankers, about falling in that trap.”

The current crash has shown British farms can learn to be more resilient, Mr Allen adds.

“Our most progressive clients, we help them with their own budgets and cash flows. The average farmer may not do that, but that is the way the world is going.”

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