Organic producers tough it out in uncertain times

Low premiums and high feed costs are forcing some organic milk producers back to conventional production. And according to The Dairy Group’s Mike Palacio, several producers have already left or are considering leaving the organic sector.

With high feed prices and a reducing premium in relation to conventional milk prices, organic dairy businesses are in a difficult position, says Mr Palacio. “The price has come down from 35p/litre in the past six months and for a herd producing 2m litres a year, that’s an £80,000 hit,” says Mr Palacio.

Two and a half years ago, the organic milk premium was about 10p/litre, when organic feed prices were nowhere near as high as they are now in relation to conventional feed costs. Currently organic feed costs between £360 and £425/t and the premium for organic milk is down to between 3p and 7p/litre.

Most recent converts have joined the Organic Entry Level Scheme, which pays £60/ha a year for five years, with an additional £175/ha grant for the initial two-year conversion period. Ironically, this support is making decisions on the future of their businesses more difficult as if they quit before the end of the grant period, they face having to repay the grant aid.

Organic milk supply has in the past suffered from too many converters moving in to the sector at a time of high premiums only to find by the time they have completed conversion, so many more have done the same that premiums are quickly eroded.

“We have no new dairy converters at present. Once the conventional milk price went back up to 25p/litre, the interest in organic conversion evaporated,” says Mr Palacio.

“The only farms where it might work are mixed-breed spring calvers with a lot of clover leys, who are forage focused with low concentrate feeding rates.”

There were just 5m litres of milk in conversion in 2008, says the Soil Association’s Phil Stocker. He suggests, with so few converters last year there will be opportunities for a limited number of conversions, so those producers may be ready to take advantage of an improvement in demand when the recession ends.

“Anyone considering conversion should plan carefully, especially the timing of their conversion,” he says. This should be arranged so that when the first fully organic milk is being sold, it is being produced as cheaply as possible off grass, rather than from expensive winter feeding. Conversion of the land takes two years, while converting the cows usually takes another six months once land is fully organic. There is no longer any price premium for in-conversion milk.

An important part of the business plan is to get a commitment from one of the organic milk buyers to take your produce once you become fully organic. However, in the current market, these are increasingly difficult to find.

“In the past, we have been able to give producers a firm commitment as they start conversion, but this is not the case at the moment,” says OMSCo chief operating officer Huw Bowles.

“Things are finely balanced. The long-term prospects should be good, but just now there’s uncertainty. Large stocks of cheese have put pressure on milk prices for cheesemaking. Liquid milk sales have remained fairly stable and with the retail price premium at only 5p/pint, there is little evidence of shoppers trading down,” he says.

For potential converters, Mr Bowles says producers’ approach and location is crucial. “Organic will always be a small sector of the industry and those producers located away from main processing areas will find it more difficult to market their milk centrally. I would urge particular caution to potential converters in these areas,” he says.

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