Scope for further milk price increases as output continues to shrink

Milk prices could reach 30p/litre this autumn as overall UK milk production continues to shrink, despite new figures from the Rural Payments Agency showing July’s production increased slightly on the same month last year.

Dairy farmers delivered 1.114bn litres to milk buyers in July, 13m litres down on June’s output. Adjusted for butterfat at an average of 3.87%, this increases to 1.118bn litres, nearly 11% below the Charles Holt/Farmers Weekly quota profile for the month and about the same figure below quota for the year to date.

Although arable farmers whose combines have yet to move will scarcely credit it, the main driver behind the extra 15.7m litres produced this July seems to be that this July’s weather has not been as cold or wet as last year.

Charles Holt of the Farm Consultancy Group said the drop from June to July was more in line with 2006. “Milk production fell about 20m litres from June-July 2006, so this year’s 13m litres is not quite as much. But June-July 2007 output fell about 50m litres.

Against this background of sliding output, some in the industry believe it is increasingly likely that processors will have to increase farmgate prices to maintain security of supply, while dairy farmers will need to meet further increases in their costs of production.

Neil Blackburn, of dairy adviser Kite Consulting, said it was expected that milk prices on some retailer-linked liquid milk contracts could breach the 30p/litre mark by Christmas. “When there were surpluses of 0.5-1bn litres only 12 or 18 months ago it was a buyers’ market. It’s now much more of a sellers’ market.

“I think producers feel that more now at ground level. And there are people moving away from supplying retailers directly to supplying milk brokering groups.”

A substantially weaker sterling exchange rate against the euro had helped British dairy farmers by 2-3p/litre as imports were more expensive, he said.

Milk output had fallen by 116m litres in the first three months of this quota year and although recent easing of feed and fuel prices could have an effect on output this winter, milk supplies would continue to decline this autumn, Mr Blackburn said.

“And 3p/litre has been talked about as being needed to cover dairy farmers’ increased costs. Cheese prices have increased by £300/t and the expectation is that liquid prices could follow.”

Mr Blackburn said it was possible most liquid farmgate milk prices could be about 29-30p/litre by the end of the year.