Dairy prices

    Dairying - prices to rise?

    If you want to know which direction milk prices are likely to move, look at the milk auction price.

    The auction price is the purest indication of supply and demand; where prices are high  there is clearly a shortage of milk at the prevailing levels of dairy profitability. September 2012 was the first time since October 2011 when the auction price rose above the average farm-gate price.

    View the graph: United Dairy Farmers auction price and farm-gate price P/L

    On average farm-gate contracts respond slowly to a shortage or glut but if the auction price is sustained it is likely to indicate a rise in the contract price by the start of next year.

    Based on global traded dairy products reported in the FAO index and the Fonterra auction of milk products there has been a marked improvement in globally traded dairy prices since the long decline from March 2011 which ended in July 2012, also suggesting there is upward pressure on UK prices.

    View the graph: Fonterra wholesale auction prices for a basket of milk products ($/T)

    Most EU producers have suffered as a result of low prices and produced less milk than their national quotas for 2011/12 (see below). We also show the EU recorded farm-gate prices for 2011. 

    There is a weak  relationship between fulfilment of quota and price, although there is a very weak rise in price as percentage of quota is achieved, even allowing for the relatively high prices in Greece and Finland. The largest falls against quota are the two most recent EU entrants, Bulgaria and Romania, where competition following accession, and particularly cross border trade, is making production hard for traditional producers. 

    Similarly, there is not an obvious relationship with the system of subsidy payments – although all those countries closest to meeting quota above the EU 27 average, except Poland, receive the higher dairy related subsidy.  This was not available to those countries joining after the reference period and, of course, in England (but not Scotland or Wales) the decision was taken to create a uniform, non production-distorting payment, across all farms in the three areas. Around 17 countries also divert some additional subsidy to livestock or to specifically dairy producers, from arable farmers.

    View the graph: 2011/12 quota over or undershoot and milk price (€/100KG)

    A rise in price for milk does not necessarily indicate a rise in profitability.  A very crude indicator is the price of wheat against the monthly milk price.   To provide some semblance to the farm situation the graph shows the ratio between 0.3kg of concentrates against a litre of milk.  The higher bars indicate a higher margin over feed.

    View the graph: Ratio of milk price over wheat price

    In practice, concentrate price rises tend to lag wheat prices and cheaper alternatives may be available but the indication is that margin over concentrates is falling despite higher milk price and, given the rise in other costs, we are once again close to the doldrums of 18 months ago.

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973

     

    Steve Hollis

    Steve Hollis

    Director
    Food & Farming

    Savills Salisbury

    +44 (0) 1722 426 853

    +44 (0) 1722 426 853

     

    Keith Preston

    Keith Preston

    Director
    Food & Farming

    Savills Oxford

    +44 (0) 1865 269 170

    +44 (0) 1865 269 170

     

    Ashley Lilley

    Ashley Lilley

    Director
    Food & Farming

    Savills Cheltenham

    +44 (0) 1242 548 012

    +44 (0) 1242 548 012

     

    Giles Hanglin

    Giles Hanglin

    Director
    Rural Research

    Savills Margaret Street

    +44 (0) 207 016 3786

    +44 (0) 207 016 3786