Milk Into Cream

Low milk prices are causing all sorts of problems for British dairy farmers – so what can they do to survive and thrive in the future?

This summer, stricken by oversupply, the global price for whole milk powder fell to its lowest levels for 13 years, dropping to just £1,030 per tonne. At its peak eight years ago, it was £2,525.

In the UK, supermarkets found themselves facing direct action protests from farmers who were being paid less for their milk than it cost to produce it.

So what has happened to the milk industry to make prices fall so low?

"It has been the perfect storm," says Sian Davies, chief dairy adviser at the NFU. In 2013 there was a booming global demand for dairy products and farm gate prices were averaging 34.55 pence per litre. "Buyers were stockpiling product, until suddenly China – the world’s biggest buyer of milk powder – stopped buying overnight. It was a complete shock to the market.”

At the same time, producers around the world had been increasing milk production to meet the burgeoning demand. Then in 2014, Russia responded to the EU sanctions over the invasion of Ukraine by banning imports from the EU, which left European exporters competing to find alternative markets.

"On top of that, in the UK we’ve had a retailer price war, as big retailers try to draw customers back from the hard discounters," says Sian. Promotions have seen milk being sold for as little as 89 pence for four pints, with the average value at 98 pence. "The last time it was that low was 2003," says Sian.

"Farmers were so angry to see their milk devalued to a throwaway level that they felt compelled to protest," explains David Handley, chairman of Farmers for Action (FFA), which organised the protests against the supermarkets over the summer and attracted the attention of the mainstream media.

Following such protests, the EU pledged €500 million (£365 million) in aid and British retailers agreed to talks with the industry.

Many retailers have agreed to set a minimum price of 28 pence per litre, with others considering contracts based on the farmer’s costs of production. "We had over £100 million pledged back to farmers within five weeks," says David. "This provided a huge boost to farmers’ confidence and that of their bank lenders. However, there’s still a long way to go."

"The market isn’t going to improve until global supply and demand comes back into balance," says Sian. "And that doesn’t look like it will happen very fast, with farmers still increasing production in Ireland, America and New Zealand, in an attempt to compensate for lower milk prices."

So where does that leave British farmers?

According to William Neville, of Savills Food Industry Consultancy, the immediate options are fairly restricted, but there is plenty farmers can do in the longer term. "Costs of production are always worth looking at. The difference in total costs between the top and bottom 25 per cent of producers is a massive 11.7 pence per litre. That’s the difference between profit and loss," he says.

"The problem is many producers don’t actually know their true costs of production and establishing these is an essential first step. By doing so farmers can identify where savings can be made," says William. "However, if that doesn’t return the business to profitability then an alternative strategy should be considered."

Once milk prices improve again, farmers should consider whether their buyer is robust and suitable for their farm, the type of milk they produce and when they produce it. "They could also join a producer group to negotiate better contract terms,”William suggests.

Investing in new equipment and systems to improve efficiencies will yield dividends in the long run, and it may be worth setting aside money during the good times to provide a buffer during future downturns.

Another option is to diversify, either by adding value to one’s own milk, taking a second income or creating a new enterprise altogether, says William. "Make sure you have a niche and a route to market as well as the capital to set the business up – Defra has recently launched the latest Rural Development grants."

The NFU would also like a review of the UK’s processing capacity. “Global dairy consumption is increasing by two per cent a year, but most of that demand is for milk powders that we don’t traditionally produce in the UK,” says Sian. “We also need more timely official data on UK production and prices – at the moment it’s two-and-a-half months out of date. And we need improved contracts, with greater transparency and trust throughout the supply chain.

"It’s taken a crisis for retailers to understand the importance of paying a sustainable price to farmers," Sian adds. "But it seems that every time a crisis passes, things slip backwards again. There is still a lot of work to be done in the food service sector."

 

 
 

Key contacts

Philip Gready

Philip Gready

Executive Director
Rural, Energy & Projects Division

Savills Margaret Street

+44 (0) 20 7499 8644

+44 (0) 20 7499 8644

 
 

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