Warning against spring milk price cut
As competition for UK milk supplies hots up, producer representatives are warning against a spring price cut.
Don’t send the wrong signal to producers on 1 April or we will be back where we were 18 months ago, warned NFU dairy board chairman Mansel Raymond after this week’s European Commission Dairy Advisory meeting in Brussels.
Farmers now have options and will not accept price cuts. Producers are being courted by buyers keen to recruit new suppliers as investment and expansion plans take shape and to replace the 2% of producers leaving milk each year.
But there was no money in the system for processors to pay to make it very attractive to move, said Nick Holt-Martyn of The Dairy Group. Because margins are so thin, they need plant to operate efficiently – the more milk they can process the better.
The relative stability in UK prices over the last few months looked set to continue until the spring, but then global factors were likely to increase pressure on prices, said Mr Holt-Martyn in his latest market report.
Supply and demand are tilted towards supply which explains the weaker commodity pricing over the last six months. With little changing in the medium term, commodity pricing is likely to put downward pressure on the dairy market.
However, production cost inflation means that there is little room for farmgate prices to reduce before profitability is jeopardised and production falls as a result, he warned.
Farmgate prices will eventually follow markets, but are unlikely to begin easing until April in the commodity sector with the cheese sector three to six months later. If the Eurozone sees an improvement in economic activity then domestic demand may slow the impact of lower commodity returns on the farm gate price.
However, Mr Holt-Martyn thought that milk contract terms would evolve so that notice periods would come down to give producers more flexibility.
“Processors had been undercutting each other for too long in order to win business, said Mr Raymond. ÒThe two administrations [Farmright and Rock Farm] show the problems that are there in the marketplace,” he said.
“The money is there in the chain but it needs to come from the top down to make things work from the bottom up.
“The past 18 months had seen a £1bn shortfall in milk income on UK farms – both the foodservice sector and retailers needed to take responsibility for what was happening in the dairy sector,” he said.
Kite Consulting figures commissioned by Dairy Crest Direct show a break-even milk price of 29.33p/litre for the year to March 2012. The latest Defra average farmgate milk price for January was 28.84p/litre, which showed farmers were still being forced to produce at a loss, said Mr Raymond.
DAIRY EXPANSION AND INVESTMENT
Arla: new £150m Aylesbury dairy due July 2013 – 1.3bn-litre capacity. Also plans 40% expansion at Lockerbie dairy
Milk Link: Lockerbie upgrade to increase cheese capacity 50%; extra 120m litres needed. Upgrades at Oswestry, Llandyrnog and Taw Valley
Wiseman: £100m Bridgwater dairy
First Milk: redeveloping Maelor cheese packing site and Campbeltown creamery
Glanbia Cheese: expansion of north Wales site