Farmgate prices stronger despite commodity falls

Falling commodity prices could put pressure on EU dairy markets. Global and EU commodity prices have continued to fall and are now in some cases below the levels seen before the rapid rises of 2007. At last week’s Fonterra auction, whole milk powder (WMP) prices continued their monthly decline and were down 12% compared with last month.

At the EU level, both butter and skimmed milk powder (SMP) prices are getting close to intervention buying-in levels, but with intervention not available until next March, there could be further downward pressure on the EU markets.

EU butter prices are close to their lowest level for 10 years and with world butter prices a further 12% below the EU, and processors looking to sell their Private Storage Aid (PSA) stocks, many commentators predict that, in the short-term, prices will continue to fall.

When we take a closer look at the UK, a very different picture emerges. At present, little butter or powder is being made, and this, when combined with the currently low milk production level, is helping to “isolate” the UK market. As widely reported, we are seeing up to 1m litres a day of milk being imported from Northern Ireland, where milk prices have already dropped due to their greater exposure to the falling commodity markets.

dairy prices

UK milk production in the second week of September fell to below 32.5m litres a day, equivalent to a 7.6% decline on the three-year average. This low production, primarily the result of poor weather and low cow numbers, is likely to put considerable pressure on processors in the coming months.

In recent weeks we have seen a number of domestic processors announce farmgate price increases, presumably reluctant to risk losing their already dwindling milk supplies.

This is likely to add to the pressure processors will receive from their retail customers as cheap parcels of imported product appear on our markets as the cost of milk in competing countries falls.

Robert Wiseman Dairies has stated it has asked its retailer customers for a price increase for its liquid milk. This, alongside positive initiatives, such as the new packaging and advertising campaign for Dairy Crest’s Country Life butter, may aid progress on the road to British retailers and consumers being prepared to pay more for quality British dairy products. This will help further isolate the British dairy farmer from the worrying volatility of the commodity markets and prevent cuts in farmgate prices, at least in the short-term.

However, it remains to be seen how long domestic processors will evade being undercut by cheaper imported products, as we are already beginning to see in the cheese markets, which, in turn, will begin to put pressure on farmgate prices if the commodity markets remain depressed.

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