Prospects for prices?

9 October 1998

Prospects for prices?

Dairy farmers are depressed, with people drinking less

milk and dairy exports down. Sterling seems set to weaken,

though, and Milk Marques latest selling round

showed more encouraging results. Michael Bessey

kicks off our Business Milk Special, considering what

determines how much your milk will make.

Edited by Tim Relf

MILK Marques success in securing modest increases in their selling prices from October and the recent downward trend in sterling might suggest that producer prices are starting to turn the corner after dropping disastrously for three years.

But returns to farmers depend, ultimately, on what happens in the final markets. And here the storm clouds seem to be gathering.

Dairy markets in the UK and across Europe have shown a mixed picture up to September. Irish and Continental farmers have had a good spell with milk prices increasing in some countries for the first time for two or three years.

Butter values were about 2% higher in September than a year ago in countries where currency has been stable. And rises for cheese, though more variable, were mostly between 1% and 3%.

The picture was less happy with milk powders where skim prices have been depressed for months and were over 3% down in September. Whole milk powder values were slightly down in some countries and a little up in others.

These trends affect the UK because about 40% of our butter is exported and our cheese market also depends on both export prices and on the price of Cheddar and other varieties imported from Ireland and the Continent. Similarly in the case of powders, skim milk depends on the import/export equation, while whole milk powder is largely made in the UK for overseas buyers.

UK prices, therefore, depend partly on which direction the £ is moving in and partly what is happening with Continental market values, particularly for butter and skim powder.

In September, all the UK market prices for our main products were lower than a year ago – butter by about 6%, mild cheddar cheese by 9% and skim milk powder by 3% – mainly because of earlier increases in sterling.

Most analysts now expect the recent weakening in sterling to continue through the winter and this would help the home situation and returns to dairy farmers.

Market factors, though, look virtually certain to depress product prices this winter and possibly beyond.

Economic and political crises have recently been moving around the world, first hitting the Far East, then Russia and then Latin America. All of these countries are large buyers from the world dairy markets and their devalued currencies and economic turmoil are cutting back the volumes they can afford.

Russia, for example, took 30% of total EU cheese exports and 36% of butter exports in 1997 and reports in recent days indicate this trade is now largely at a standstill.

The general health of the EU dairy industry depends partly on its ability to trade with world markets. Last year, for example, EU exporters commanded about a quarter of the world market for butter and skim milk powder. In the case of cheese and whole-milk powder, the figure was 40% and 50% respectively. For condensed milk, it was two-thirds.

It now seems virtually certain that the EU, Australia and New Zealand – the main dairy exporters in the world – will not only see prices on the world market falling sharply but also see former growing markets drying up to a trickle.

For the EU, a drop in export volumes and prices will soon affect the internal markets and price pressure will mount on the butter and cheese markets as stocks build up. How long these difficulties will last is unknown but little relief is expected for at least a year.

UK markets will not escape these problems although our manufacturers are less directly dependent on third-country exports.

The UK liquid milk market, which takes nearly half our production, will not suffer directly from world economic problems but there are other pressures. Total liquid sales are still dropping by about 1% a year, doorstep sales are still moving to supermarkets, and pressure from the supermarkets continues to keep margins for dairies well below doorstep rates.

Overall it will soon be clear that, EU-wide, 1998 will divide into two parts.

The first nine months have seen steady or improving prices, with farmers getting slightly more (though not in the UK where the effect of high sterling values has taken its toll).

In contrast, the final quarter of 1998 looks certain to produce weaker markets and lower market prices generally in the EU which will spread to the UK unless a weaker £ comes to the rescue.

The best hope for UK dairy farmers over the next six to 12 months is that the £ will continue to sink and that this will be enough to offset or soften any depression in Continental prices.

In the pipeline…is the long-awaited upturn in milk prices just around the corner for farmers? Inset:Michael Bessey.


&#8226 Butter prices stable on Continent – down 6% in UK.

&#8226 European cheese values up 1-3%.

&#8226 UK mild cheddar fall of 9%.

&#8226 Skim milk price down 3% all round.

&#8226 Weaker £ would help UK values.

&#8226 But bearish world market signals.

&#8226 Rising stocks to pressure markets.

&#8226 Reduction in UK liquid sales to continue.

&#8226 Static or slightly higher farm price likely.

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