Milk in a bulk tank© Tim Scrivener

With producers seeking to capitalise on the rising milk prices by increasing output, Anderson’s Tony Evans urges producers not to get carried away.

As the milk price rises, it brings great relief for all milk producers. However, I would suggest we need to be very careful about how we react.

The main reason for the decline in the milk price and profit over the past two years will be the straightforward economic phenomenon of supply and demand (see “UK cumulative milk supply”).

Tony Evans
Tony Evans is head of business consultancy at the Andersons Centre.

The reason for the milk price rising now is that, cumulatively from April to September in the UK we are below the same periods for the past two years.

With milk production in major exporting countries slowing down and exchange rates making imports more expensive, there is great reason for a milk price increase to stay in place.

However, if volumes go up too high, the price will fall. Don’t get carried away.

I have heard marketing speak that our industry needs to be efficient and sustainable. These words mean less to me than resilient and rewarding.

See also: More milk price articles

UK cumulative milk supply (not butterfat adjusted)

(million litres)

2012-13

2013-14

2014-15

2015-16

2016-17

April

1,204

1,112

1,279

1,293

1,251

May

2,456

2,346

2,613

2,672

2,572

June

3,642

3,523

3,853

3,975

3,781

July

4,758

4,667

5,078

5,242

4,946

August

5,821

5,783

6,256

6,453

6,071

September

6,818

6,845

7,404

7,619

7,125

October

7,812

7,934

8,560

8,823

 

November

8,786

9,001

9,681

9,986

 

December

9,825

10,144

10,837

11,196

 

January

10,884

11,323

12,031

12,421

 

February

11,862

12,423

13,132

13,569

 

March

12,974

13,680

14,394

14,829

 

Source: AHDB

Need for resilience

We simply have to accept that as we become more exposed to market forces, we need resilience to be able to withstand or recover quickly from adverse conditions.

Such conditions will be economic (income and expenses) along with physical (for example, poor weather conditions).

Rewarding is about enjoyment and finance for both the current generation and the next.

It is simply not good enough to just get from one high price to the next, because the effect of the lower returns means you need the highs just to recover from the lows. There is not much reward in this.

With a historic profile of milk prices cycling every four to five years (the last average including 2016 is 24.8p/litre), it is wise to build a business based on such a milk price?

And if such a price does not match your business demands, there could also be a few challenges ahead for your milk buyer.

No matter what dataset the industry uses, it would appear the system with the highest cost of production is where herds calve year round. The lowest cost for many will be spring calving and  autumn calving is between the two.

There are, of course, many other aspects that determine costs of production, including business drivers, cows, farm resources topography and scale/size.

In the end, lifestyle and return on costs count the most when it comes to resilience and reward.

Level milk supply needed

Recent research by AHDB Dairy has identified that if our dairy processing industry needs a level supply to maintain optimum use of its plant, resources and consumer demand, there is a need for 60% of the volume to be based on an autumn-calving profile, with 40% calving in the spring.

If processors want a resilient year-round supply from those that calve year-round, it is essential to have an aligned cost-of-production reward mechanism.

Recent behaviour by those processors demanding a level supply, but paying low prices will result in them losing supplies when more suitable contracts become available – this is already happening.

It is not difficult to achieve – it’s about mindset, management and good communication.

Resilience – must give a realistic return and adequate depreciation for the business to be able to rebuild when the assets are worn out, while also giving a return to the business owners to avoid them putting their capital elsewhere.

Rewarding – must deliver not just financial success to fund a realistic lifestyle, but also give those who work on the farm good conditions, adequate time off and confidence and inclusion.

Recent discussions with dairy farmers at Entrepreneurs in Dairying courses across the country has highlighted the wide range of capital employed for every cow.

When this data is recalculated and based on a per-litre basis (adjusted for solids), the findings are as follows:

Capital employed a cow

Cows and heifers

Machinery  a cow (spread over four years)

Average plant and equipment a cow (spread over 25 years)

Total

Litres a cow

Capital

Annual depreciation

£1,200

£170

£1,800

£2,270

5,600

41p/litre

2.1p/litre

£1,300

£400

£4,000

£3,700

9,000

41p/litre

2.9p/litre

Return on investment

5,600 litres a cow

5.38p/litre (3.28p + 2.1p)

Difference = 0.8p/litre

 

9,000 litres/cow

6.18p/litre (3.28p +2.9p)

Calculated at 8% plus depreciation costs

This difference on its own is not sufficient to determine what production system to follow, but is just one of many factors an excellent business manager must consider to produce UK milk for a customer wanting our product.