Milk cost of production heads for 40p/litre and higher

The cost of milk production is heading for 40p/litre, jeopardising the security of milk supply as farmer confidence is threatened.

Breakeven milk prices are likely to exceed 40p/litre later this year, said Kite Consulting.

This is a total cost of production figure, less stock sales, other dairy income, valuation change and subsidy incomes, to arrive at a retained profit breakeven figure.

Milk supply will come under significant pressure unless buyers maintain price increases ahead of the inflationary curve caused by feed, fuel, fertiliser and labour cost rises, said Kite.

See also: CFAs need new approach in light of BPS phase out

This week saw supplier NWF add £30/t across the board to feed prices, following increases of 30-70% in commodities including cereals, soya, rapemeal and distillers’ grain.

John Allen, Kite Consulting managing partner, said the conflict in Ukraine was transforming an environment of modest cost inflation to one of exponential cost increases, as well as introducing considerable volatility.

“Our analysis suggests that as well as cost increases, productivity will fall by a further 1.3%, and that’s from a base that is already below 2021 production. For many farms, cashflow will be negative in the months ahead, as costs are increasing faster than milk prices,” said Mr Allen.

GB milk deliveries to processors in the week ending 5 March, the most recent week for which figures are available, were down 4.4% (1.54m litres) on the same week last year. 

This week, Ash Amirahmadi, Arla Foods managing director, warned in The Times that if retailers do not stump up with higher milk prices, May or June could see a shortfall of 4-5% and shops could run out of milk.

Mr Allen told Farmers Weekly production was behind where it should be: “We fed 6% less through the winter when we should have been feeding 6% more,” he said.

“The cost of production has a lag – a lot of people are at 35-36p/litre today. It will be 40p/litre in midsummer and the information needs to be out there.”