Dairy prospects

Dairy prospects

The global situation is relatively clear: increased profit margins and good weather conditions early this year, raised production at a time when the rate of growth in global demand declined.

USDA data published in July estimated a significant increase in production for 2014 – see table 1.

 

Table 1: Forcast milk production

Table 1 also demonstrates the importance of the EU in terms of global milk production. EU exports are large for example, EU exports of cheese make up nearly 50% of the tonnage exported which is double that exported by the US or New Zealand. According to the Rural Payments Agency (RPA) UK milk production from April to September this year was 8.1% higher than for the same period last year while eight EU countries are to pay super-levy for exceeding quota.

On top of this, Chinese demand has only slightly increased while Russian sanctions have had a large negative impact on demand; Russia accounts for a third of EU cheese exports.

Therefore it is hardly surprising prices have fallen as illustrated in graph 1 for  the Fonterra auction price for cheddar and UK wholesale cheddar prices reported by DairyCo.

 
Cheese prices

This is only half the story. Consumer demand varies little with changes in supply and it might be argued that there is consequently no reason to change the retail milk price and thus the price paid to farmers for its supply. However, the trouble is that there is a lot of milk looking for a buyer at any price and this can only continue the downward pressure on price.

There is hardly a seller of any product or service that does not feel the price for their goods should be higher while buyers invariably argue that the cost is too high. While our system thrives on obtaining the cheapest supplier for any purchase, the questions for any milk buyer are

1) is there a market premium to be obtained from a UK supply and, if so, is this available for the entire volume?

2) does damage to the industry now jeopardise valuable supply in the future (for example if a weaker exchange rate makes imports more expensive)?

Unfortunately for many supermarkets, the up and coming players are the discount supermarkets putting pressure on all retailers.

The problems are not just at the farming coal face, for example, Dairy Crest is closing its plant at Hanworth in London and its cream potting plant in Somerset with the loss of 260 jobs.

It would seem unlikely that there is a panacea for all producers through improvement along the supply chain and interaction with the consumer, although for a few there may be short or even long term gains to be obtained. However, the variation in profitability between farmers is large compared with other sectors and this provides the opportunity for some producers to improve profitability through detailed technical analysis and benchmarking.

 
 

Key contacts

Ashley Lilley

Ashley Lilley

Director
Food & Farming

Savills Cheltenham

+44 (0) 1242 548 012

+44 (0) 1242 548 012