Summer milk price cuts hit producers hard

Milk processors have made big cuts to farmgate prices again.

First Milk has dropped its liquid milk price by 1.75p/litre to 28.75p/litre from August. Farmers on the co-op’s manufacturing contracts will see a price fall 1.25p/litre to 29.6p/litre.

The move followed Arla’s recent 1.23p/litre cut for July and drops from several smaller processors including Barbers, which lowered its price by a penny to 31.6p/litre. Arla’s move takes its July standard litre price to 32.52p/litre including its supplementary or 13th payment.

Muller Wiseman was the last of the big buyers to move on summer prices, confirming on Wednesday (2 July) that there would be no change for July but a cut of 1.2p/litre for August. Suppliers on non-aligned contracts will be paid 30.8p/litre from 3 August.

The firm’s head of group milk supply, Martin Armstrong, said market conditions remained challenging, with lower cream and butter returns but the company was determined to pay a leading price to dairy farmers who were not part of supermarket aligned groups.

Roddy Catto, the Muller Wiseman milk group board chairman representing producers, said he hoped the milk price corrections were behind us, as the UK had passed peak production and global commodities were stabilising.

“We share the company’s view that the dairy industry’s prospects look strong and while we are disappointed with any reduction in milk price, we remain optimistic for the future,” he said.

Dairy Crest is holding both its liquid and Davidstow manufacturing contracts for August, at 31.19p/litre for July non-aligned liquid contracts and 33.19p/litre for Davidstow suppliers.

First Milk chairman Sir Jim Paice said the co-op’s cuts were due to shrinking returns for dairy commodities and the ongoing effects of the big spring flush. It had reduced overheads considerably and would continue to do so, he said.

Arla’s head of milk and member services Ash Amirahmadi also cited “challenging global market conditions” that carried over from previous months.

All the major processors cut prices by at least 1p/litre in the spring, after milk production was running 15% up on the year in April.

Since then production has eased off, with British milk deliveries in May totalling 1.33bn litres – 8% higher than a year earlier and spot prices doubling in just a few weeks.

While world dairy commodity prices started to creep back up at the Global Dairy Trade auction two weeks ago, they fell on average by 4.9% at Tuesday’s auction (1 July).

AHDB/DairyCo analyst Luke Crossman said there had been a slight recovery in wholesale prices.

“In the UK it would appear prices did not fall as much as some thought, with supplies available for the market remaining fairly thin, keeping trade tight,” he said.

“Recently, interest in the market has picked up as UK milk production fell seasonally, providing some support to prices.

“Early indications would suggest a similar situation in global prices. A factor to bear in mind would be the threat of an El Nino weather event affecting the southern hemisphere.”

Mr Crossman agreed with Rabobank’s latest dairy report, which suggested there would no upward surge in prices until late 2014 or early 2015.

Dairy industry set for change

The world dairy industry will change beyond recognition in the next five years, analysts at a Dairy UK seminar said.

Rabobank senior analyst Kevin Bellamy said the UK dairy industry had already entered a new era, with far more ups and downs in prices.

“Interconnectivity of markets is leading to more complex price discovery, broader impact of market shocks and increased market volatility,” he said.

Benoit Rouyer from the French Dairy Inter-branch Organisation (CNIEL) said European dairy companies had led the world in investment and dairy herds were growing again in most European countries.

Of the €4.8bn (£3.8m) committed to build dried milk facilities in 2012 and 2013, €2.3bn (£1.8bn) was spent in Europe.

Milk production for the EU and the other six biggest exporting nations rose 6% in the first quarter of 2014, with Europe accounting for half of that growth.