Agricultural Bulletin A Briefing For Farmers And Land Agents

A Bullish Outlook For Dairy Farmers

Given the recent demand for dairy produce, we realise that Tesco's decision to offer an increased price to farmers in April wasn't without foresight. In this edition, we also discuss recent EU decisions regarding set-aside and the fruit and vegetable sector.

Warming Up The Milk

Due to increased demand for milk powder and butter, the fortunes of the dairy sector appear to have taken a sharp turn for the better.

In April, the outlook for the milk producer was grim: milk prices remained low with no indication of improvement, and feed costs rose sharply as cereal prices exploded on the back of tight global supplies.

But, since Easter, due to stock tonnages of dried milk powder and butter running low, the global demand for dairy produce has suddenly picked up.

The cows come home

This bull market for dairy products is reflected by the European Union (EU) recently removing all dairy export subsidies. Due to the new high world prices, European milk products are able to compete in global markets without the EU having to subsidise the price. World prices have effectively risen to match protected internal European prices. It is the first time in 40 years that such refunds have fallen to zero.

Back in April, Tesco rolled out a direct supply milk contract to farmers offering a price rise of approximately 5 pence per litre (ppl). We commented on this seemingly unbelievable price in such a bearish market, but now this 22ppl base price seems less remarkable; Tesco was clearly keeping a keen eye on the global stock position.

Dairy farmers are once again optimistic about business and expect farmgate prices to rise from sub-19ppl to 22-24ppl by the end of the milk year. This translates into a potential price rise of 33%, which is great news considering the current price (even though it will still be a penny below the 1996 average of 25ppl). However, the positive effects of this boom may take a while to trickle down to farmers.

Milk takes time to boil

Recent price hikes are being led by increased demand for butter and skimmed milk powder - the two components that make up the Actual Milk Price Equivalent. The UK has thus entered an unusual situation where the demand for milk to produce basic commodities is greater than the demand for 'added value' liquid and premium markets.

Unfortunately, dairies aren't always able to make an immediate switch from one process to another, so may not be able to tap into this price opportunity straight away. But, as some of the processing gradually switches to the higher-valued milk powder and butter, the supply of milk for cheeses, particularly the 'value' cheddars, will decrease, resulting in an increased milk price for these contracts.

Furthermore, a number of farmers and dairies have booked fixed-price contracts, which means that the price rise will filter through to farmers at varying speeds over a period of time.

Greener pastures ahead?

Although the headline milk price is looking much better, the prospects for some farmers are still uncertain. As a result of the wet weather, farms have been forced to take their cows inside...