Organic milk prices must increase to secure supply

Organic milk prices must increase if the sector is to maintain supplies and meet an expected 100m litres increase in demand by 2010.


That’s one of the main conclusions of the Organic Milk Cooperative’s (OMSCO) 2008 organic milk market report, which found that the number of farms entering conversion during 2007/08 fell by half compared with the previous year.


Better conventional milk prices and a hike in organic feed costs were the main reasons behind the lack of new converters, OMSCO executive chairman Nicolas Saphir said. “Feed prices used to run at a 30% premium over conventional, but now that’s nearer 80% and I think they’ll take a lot longer to settle down than conventional prices.”


Dairy cows


Higher feed costs and better conventional prices have dissuaded dairy farmers from converting to organic


At the same time, the price gap between conventional and organic milk had narrowed to 7-8p/litre, making conversion even less attractive, he said. “It’s a real issue and means we’re seeing static, and in net terms, even slightly declining production. Really we need a 12-14p/litre premium to make people think about converting.”


Mr Saphir was concerned that the lack of supply growth was limiting the ability to supply emerging markets, such as raw milk exports to Belgium, France and Holland, but he was optimistic a price increase would happen. “Either the market will recognise the need for higher prices and respond, or we’ll end up with a significant deficit in supply and basic market forces will take over.” Organic milk production across Europe faced similar shortages, so the UK could not rely on imports to bolster supply, he added.


The publicity around higher food costs was unlikely to knock consumer demand for organic milk products. But Mr Saphir acknowledged some “occasional purchasers” may be turned off if prices rose. “In 1997 the retail price premium for organic milk was 45%. Now it’s back down to 15%. Logically, there is an extremely powerful argument that prices have to go up. If not, it wouldn’t take a lot to push production down.”



















































Organic milk market


 


05/06


06/07


07/08


08/09*


09/10*


10/11*


Total market growth


44%


20%


10%


11%


11%


9%


Total demand (m litres raw milk)


312


375


412


461


511


556


New entrants



40


25


50


60


25


Total supply, inc imports (m litres)


297


377


417


451


527


562


*Forecast


Source: OMSCO


* To attract more producers and expand organic dairy supply, Arla Foods has announced that from 1 July 2008 it will increase the payments to its co-op members in Denmark and Sweden by 10 and 28.4 Danish oere (0.01 and 0.03 euro) per kg, respectively. The company hopes this will help increase annual organic milk production in Denmark to 375m kg (30% increase) and 266m kg in Sweden (100% increase) by 2011.


An Arla spokesperson said there were no plans to give UK producers new financial incentives, although she said Arla’s organic milk price was already one of the leading prices in the market.