Organic sector faces crisis unless milk prices rise significantly

The UK organic livestock sector is on the verge of stagnation or even decline unless prices rise, says Chris Laycock of Kite Consulting.

Organic food prices must rise significantly and quickly if the sector is to head-off a looming domestic supply problem, with dairy farmers needing around 40p/litre to guarantee the sector’s stability.

Fuelling the necessary increases is the ending of the derogation at the end of 2007 that allowed some non-organic animal feed to be used for cattle and sheep. This has pushed up feed prices sharply.

Two years ago feed prices were £180/t. These have risen to well over £300/t in the latter part of 2007 due to rising demand for organic products and shortages of feeds.

The ending of the derogation could drive prices towards a projected £350-400/t for 2008 – but even with those increases some raw materials will still be in short supply or unavailable. Currently the sector is starved of organic proteins, and diets and milk output, will be affected.

The result is that few new farmers are converting to organic, and several that are currently organic are starting to revert back to conventional production because of the feed cost and profitability issue.

This is acknowledged by organic certification bodies, and OMSCo, the organic milk co-operative, is on record as stating that only half the dairy farmers required to satisfy market growth had turned organic.

In 2007 only 40m litres of new organic milk came forward, compared with the 60m-80m litres required, it says.

Our own analysis of the sector shows that milk prices need to increase by up to 5p/litre depending on seasonality with standard supplies at 35p/litre and level supplies hitting 40p/litre.

The premium between conventional and organic milk needs to be over 10p/litre or it isn’t worth farmers converting to, or staying in, organic. At current prices it is more profitable not to be organic.

Farmers are switching back to conventional, and unless the situation changes soon more will follow. It is certainly difficult to advise farmers to stay organic with current prices, although we appreciate that giving up organic status is a serious long-term decision.

The ending of the feed derogation couldn’t have come at a worse time for the £2bn organic industry. Last summer the UK was running out of raw materials even under the more relaxed derogation ruling, but fortunately a boat full of organic materials turned up at the right time to save the day.

Currently, though, luck has run out – stores of one organic raw material essential for milk production are empty. Milk production will be down this winter as a result.

Reliance on imports of animal feed is growing – including from far-flung places like China where traceability of supply has to be more questionable than domestic. In fact the UK’s self-sufficiency in organic grain supplies has fallen to under 50%. And that is a situation that is unlikely to change soon.

Despite organic arable farmers enjoying some of the highest prices they have had for years, they are still not high enough. If the normal price of cereals is £150/t the organic cereal price needs to be £400/t to make the same amount of money.

That’s because an organic cereal farmer needs to adopt a five-year rotation, while a conventional cereal farmer needs to adopt one of just two years. Like the dairymen it is far easier to grow conventional crops than it is to be organic.

Clearly organic food prices are going to have to increase, and in a major way.

But that could also affect consumption, especially as it coincides with an economic slump.

The organic sector has enjoyed growth of 26% a year for a decade, but this has been during an era where disposable incomes have been high. Now they are not. Mortgages, fuel prices, food inflation and the general rise in the cost of living are all eating away at the amount people have left to spend on food.

However, the Soil Association doesn’t think it will affect market growth or that consumers will change from organic. OMSCo agrees.

All of which means a continuing growth in organic consumption is coming at a time when domestic production is at best static and at worse set to fall dramatically.

Unless the UK organic sector as a whole – from arable farmer, through feed compounder to producer, to processor and retailer – work together to solve this conundrum then 2008 will see a return to significant imports of organic milk and meat, on top of the already growing imports in animal feed. It won’t be a particularly green story for an industry that wants to be the greenest.