Dairy farmers struggle with high costs in tricky market

Dairy farmers are struggling with high feed costs and low grass growth in a cold, dry spring and a disparate milk price landscape.

According to the AHDB, the latest seven-day rolling average milk production in Great Britain was 0.7% below forecast, down from +0.4% on 10 April.

This is a result of poorer grazing conditions from the unusual weather, with grass growth far below levels seen at the same point in the previous three years, said AHDB analyst Bronwyn Magee.

See also: Grain prices pushed higher as weather worries grow

Some producers have already taken their first cut of silage and are moving towards feeding it unless conditions improve.

Reducing margins

Rising feed costs are the main concern at the moment, said David Keiley of Kite Consulting. Most producers fixed their feed costs to March or April and are now having to book forward.

“Block-calvers have probably had to feed more this spring than ever before, reducing their margins, so that’s going to have a direct effect,” said Mr Keiley.

“Farmers are facing 1.5-2p/litre more in feed costs on last year. I’m advising clients not to purchase too far forward and instead look at the spot market. Wait until feed prices, hopefully, go down in the future as crops go in successfully and take some of that pressure off.”

As lockdown restrictions ease and the food service sector picks up, the increased demand should put some confidence back in the market, he said.

With global supply and demand looking well balanced, and both the actual milk price equivalent (AMPE) and the milk for cheese value equivalent (MCVE) looking strong, a market crash seems unlikely.

Mike Houghton, partner at farm business consultant Andersons, said: “There is no real reason why anyone in the UK should get a price lower than the AMPE [33.11p/litre for April 2021] because that’s meant to be the price of last resort, and yet some liquid prices are below that.”

Retailer grip on market

Finding enough staff to run dairy farms efficiently is also a big issue, said Mr Houghton.

The antisocial hours, conditions and pay can make recruitment challenging, and Brexit has made bringing foreign labour into the UK even more difficult, he said.

Arla’s recently announced 1.36p/litre increase for May takes its producer milk price to 32.79p/litre and marks the seventh month in a row that the co-op’s values were held or increased.

Fellow co-op First Milk has a May price of 29.43p/litre for a manufacturing standard litre with 4.2% butterfat and 3.4% protein.

However, with a heavy reliance on the liquid milk market, Muller’s standard litre price for the same month, including the Muller Direct Premium, was 27.25p/litre. This is a significant 4.3p/litre below Arla’s, and has been at the same level for seven months.

“The liquid market was seen as the crown jewels of dairying for quite some time and that’s no longer the case,” said Mr Houghton. “It shows the amazing grip the retailers now have on the liquid market, commanding 80-85% of all the liquid milk sold.

“They are not prepared to pay what the milk is worth because they are under pressure to keep food price inflation as low as possible, and they are very good at it. Muller is a really efficient, good company, but it is struggling to make money from liquid milk, which shows the price is simply too low.”

Rather than focusing on maximising output, producers should concentrate on attention to detail, efficiency and working at what is optimum for their specific business, he advised.

Market analysis

As overall milk production has increased, the proportion put into bottles of liquid milk has fallen, estimated at 44% in 2020, says the AHDB.

If this continues, by 2030 only about 38% of available milk is expected to be bottled.

In comparison, milk use for cheese has risen over the past 10 years. In 2020, 21% of milk was turned into cheddar and with the UK still a net importer of the product, further domestic growth is expected.

However, since Brexit, dairy exports to the EU have been at drastically low levels.

In February 2020, there were 76,500t of unprocessed milk shipped from the UK. This fell to just 131t in the same period in 2021.

Bulk cream (-55%), cheese (-75%), whey (-83%), milk powder (-86%) and butter (-89%) exports all suffered.

Buttermilk and yoghurt saw the biggest year-on-year drop, down 91% on February 2020.