Higher milk prices will eventually encourage British dairy farmers to increase production and make up for the current glut in supply (see chart 1 below), according to independent dairy consultant, Michael Bessey.
Speaking at a Provision Trade Federation (PTF) briefing in London (19 June), he said milk prices had increased significantly since the lows of 17p per litre in 2003, but as yet there was no sign farmers had responded by increasing production.
“Rolling average deliveries have continued to fall, with May supplies down 9%, but I have faith in the British dairy farmer. Once they see prices stabilise or increase further, and the cost of production stops increasing, we will see some modest recovery in supply.
“We are still loosing 5-6% of farmers from the industry every year, but those that decide to stay in have to expand to continue.”
He reckoned the recent higher prices (see chart 2) would be sustainable, even with a 2-3% increase in production. “Any more and it will put pressure on prices.”
UK milk markets had become somewhat detached from those elsewhere in Europe, where low prices had prompted a number of demonstrations by angry farmers, Mr Bessey added. “The weak sterling theoretically increases the price of imports and makes our exports cheaper. There’s not enough milk about either, so everything combined means UK prices should rise, which they are doing.”
But if UK production failed to increase in response, he said there was a danger that UK milk supply would slip into a situation where it could only fulfil ‘local’ markets, such as liquid, fresh products and local cheese and butter.
“Commodity markets will shrink and become even more seasonal than they are now. Many plants will operate as a balancing operation and become uneconomic to run.”
Volatility would be an even more important feature of markets in the future, he said. “There are no more export subsidies, no more butter or skimmed milk powder subsidies and prices are unlikely to fall back to intervention levels. The European Commission is getting out of market management and EU exports and prices will have to follow what happens on world markets.”
Chart 1: Average milk production April 2003-08
Chart 2: Average milk prices Jan 1998-2008