Is the dairy industry’s future bright or bleak?
While we should not deny there are a number of challenges ahead, the future of the dairy industry is looking bright, with signs of growing confidence among dairy farmers, writes David Swales, market intelligence manager, DairyCo/AHDB.
The demand for dairy products is growing and the UK liquid milk market has grown by 1.5% over the past 12 months. On top of this the cheese market has grown by 5% and yogurt by 6%. Forecasts from Datamonitor suggest in the UK all dairy categories other than cream will grow for each of the next four years. Global forecasts are for even faster growth.
Supply is also increasing with deliveries to dairies up 3.6% over the first half of the milk year. Milk production should increase in 2010/11, and this will be the first time production has increased for six years. This growth should be sustained with data from DEFRA’s June survey showing a 10% increase in one to two year old heifers on-farm to 540,000.
This has been achieved because farmgate prices have been relatively good in the last three years, with the average prices fluctuating in a range between 23 pence/litre and 27 pence/litre. The DairyCo Farmer Intentions Survey found farmers’ confidence has grown, with more farmers looking to invest and a third planning to increase production over the next two years.
However, not all is rosy. Following the widely reported surge in grain prices, feed costs are once again rising quickly, reducing margins. The UK farmgate price is supported by the premiums paid in the liquid market and the presence of retailer aligned supply contracts, but a large number of farmers get a much lower price meaning making a profit is more difficult.
Even with these premiums, the current farmgate price is well below market prices. In August, the average farmgate price of 24.68 pence/litre was more than 5pence/litre below AMPE, a measure of the returns of processing a litre of milk into powder and butter. While time lags between increases (or decreases) in commodity markets and changes to the prices farms are paid are to be expected the current situation has prompted DairyCo to start an investigation into price transmission within the dairy industry.
Hopes are high among farming organisations that reform of contracts may be on the horizon following recommendations the EU High Level Experts group made earlier in the year.
The DairyCo Dairy Supply Chain Margins report highlights the power retailers now command. Despite marginal changes in retail prices, retailers increased gross margins last year. For example, retailers’ gross margins on liquid milk increased to 34% in 2009/10 up from 29% in the previous year, although they will of course have fallen in the past few months as retail prices have been cut. These figures are not a problem in themselves, but it is vital UK dairy farmers are able to make returns to enable them to invest for the future. When established the new Groceries Code Adjudicator has a remit to ensure trading relationships between supermarkets and suppliers, including indirect suppliers, are fair.
It is also important farmers ensure they remain competitive by operating in a sustainable and efficient manner. As an industry we need to invest in research to ensure we have knowledge of best practice and can keep up with international competitors. As a country our investment in research is lower than many of our competitors, something DairyCo aims to partly address with the new Research Partnerships announced in October.
