6 September 2007

5 minute read

Europe

The commodity price paid internationally for Skimmed Milk Powder has soared in recent months, forcing up the price paid to dairy farmers for their milk, thereby offsetting some of the 20% increase in costs they have absorbed in the last two years and slowing the exodus from the industry.

At the same time, the extremely wet summer has reduced milk yields and pushed up dairy farmers' costs. Some supermarkets have also recognised the need to pay higher prices for milk and dairy products.

The report, commissioned by Britain's largest farmer-owned dairy business, First Milk and carried out by respected agri-business consultancy, Promar International, is a comprehensive study of current international dairy market trends and indicates that higher prices are here to stay for the next three to four years at least.

Richard Greenhalgh, Chairman of First Milk says: The extraordinary turnaround in the dairy market has happened in just a few short months and caught many in the industry by surprise. But it could not have come at a better time for the British dairy industry, which has seen declining milk volumes and a thousand farmers a year deciding to leave.

It is evident that international demand for Skimmed Milk Powder will impact on the UK for some years. As a result, the price paid to dairy farmers will have to rise if a sustainable supply of liquid milk and cheese for the home market is to be ensured.

John Giles of Promar International, who authored the report, says: There are a number of factors at play here and while none on their own explains the sharp rise in prices paid for Skimmed Milk Powder we have seen of late, it is the combined effect of all of them that makes for this highly unusual situation.

Pulling together data from across the world, the report's key conclusions are:

• World production, supply and demand are changing: While the EU is forecast to remain the largest milk producer in the world, the US, Russia, India and Brazil will see much greater increases in production volumes in the next five years;
• International demand is building: The emerging markets of Latin America, North Africa and Asia will all see continued growth of imports of dairy products such as Skimmed Milk Powder. And while China is often cited as the root cause of high prices it is just one of a number of significant developing markets;
• The international market is highly competitive: World exports of dairy products are dominated by a New Zealand, the EU, Australia and the US. However, the high prices seen at present attract a huge number of other potential suppliers to the market, fuelling frenzied commodity product buying;
• International supply is constrained: In countries where production would normally be expected to increase to meet demand, there are constraints a continuing drought in Australia, financial pressures in New Zealand, industry re-structuring in the US, the end of intervention stocks in the EU and competition in terms of demand for land everywhere;
• Prices will remain high: Prices of dairy products have actually been increasing steadily since 2002, though the recent sharp increases have been caused by an unusual combination of events around the world. In view of the constraints on gearing up supply in the short term, the current round of high prices could be sustained for another three to four years;
• The impacts will be felt across the UK supply chain: UK dairy farmers will be exposed to higher prices and this will slow the exodus from the industry and allow them to make much needed investment in their businesses; food processors will be forced to pay more for raw materials; food retailers will need to recognise that world dairy prices are genuinely high at the moment and may increase further in the short to medium term, and will need stable relationships with trusted suppliers.

Implications for UK dairy farmers

While British dairy farming has been saved by this combination of international factors, the report draws some conclusions about the future. It says that to survive in the future, dairy farmers will need to:

• Get bigger and be involved in stronger marketing groups
• Buy smarter
• Continue to farm efficiently and invest
• Strive to be in the top 20%

Richard Greenhalgh says: The report also highlights the need for the British dairy industry to build strong, balanced supply chain relationships in order to compete internationally and supply the dairy products demanded by the public, from domestic resources.

There has never been a better time than now to achieve the consolidation required, when some confidence is returning to the dairy industry and farmers are beginning to see a sustainable future through profitable returns which allow them to invest in their businesses. Such a move must be farmer-led, as it has been by our successful rivals in the EU, the US and New Zealand, who have been supported in this by their governments. We must grasp the opportunity while it is here.

A sustainable future

While rising commodity prices have flowed back to the price paid to dairy farmers for their milk, the recent flooding shows how quickly those increases can be absorbed.

Roger Evans is a dairy farmer in Shropshire. He says: The recent heavy rain and flooding has a double impact on dairy farmers. Cows that would normally be grazing on rich summer pasture have been unable to do so in the wet weather and milk yield is around 10% down as a result. The rain has meant the sugars in the grass are down, so cows that should be eating more to compensate have been sheltering under the trees and hedgerows or have had to be brought indoors. Apart from the lower yield, we have had to buy in silage.

But the second impact is likely to be even worse and will hit even those whose pastures were not flooded. In the winter not only will we will have to buy in silage, but we will have to pay a lot more for feed, which has gone up by £30-40 a tonne, or £60 a cow. So the recent price increases we have received have already been swallowed up, he says.

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