How much more pain before dairy farmers cream their rewards?
23 September 2014, Milk prices are falling fast in the face of a sharp decline in world market prices for a variety of dairy products - on the home front supermarket milk price wars are not helping either.
The big four milk processors have all announced milk price cuts for September and October which will see many farmers receiving less than 30p per litre with those supplying First Milk experiencing prices as low as 25.1p per litre.
Prices on the online Global Dairy Trade auction run by the New Zealand based co-op, Fonterra, fell again on September 2 by 6% which means that average price has dropped by 45% since the market peaked in February this year.
As prices fall, so too will world production as some farmers leave the industry while those that continue will probably not try to push their cows with expensive feed stuffs to produce that extra litre because the profit is not there.
As a consequence there will come a time when world supplies reach a level where demand will start to push prices back up but increasing milk production to meet that new demand is not that easy. Cows can be fed with concentrates but increasing cow numbers takes at least 2.5 years from birth to bring a heifer into the milking herd.
This is obviously a significant time lag and this lag is a contributory factor to the very unhelpful oscillation in dairy commodity prices because once the cows are in the herd producing milk they cannot be “turned off” which then contributes to the oversupply and downturn in milk prices a couple of years down the line.
There are many other contributory factors to world market prices but what seems inevitable at present is that milk prices are on the slide and our dairy farmers will have to brace themselves for some tougher months to come, no doubt with some farmers exiting the industry.
This is a sad but ongoing trend. Just looking back at the last two decades, in 1995 there were 28,093 producers in England and Wales but by the end of 2013 there were only 10,581. This represents a 62% fall in producer numbers over that period and it seems likely that with the latest round of milk price cuts the rate at which producers leave the industry will increase, at least in the short term.
As with many clouds, there may be a silver lining for those that survive because with an ever increasing share of the market there should be the prospect of making more money when the markets do return to more profitable levels. The big question is how long that will take and how much pain businesses are prepared to take in the interim.
James is a partner who splits his time between Wells and Oxford offices. He specialises in rural estate management, landlord and tenant matters, compulsory purchase and compensation, rural grant a...