Still difficult times ahead...
The potential impact of milk price cuts, feed price
increases and adverse weather on dairy farm cash flow
in the current milk year
A discussion document
prepared by
Kite Consulting
UPDATED
September 2012
SEPTEMBER 2012
The potential impact of milk price cuts, feed price increases and adverse
weather on dairy farm cash flow in the current milk year
Introduction
Since we published our original discussion document ‘Difficult times ahead’ in July 2012 the market has moved on.
Successful lobbying by farmer groups resulted in the major retailers and milk processors overturning the milk price reductions that
were proposed for August 2012.
Farmer lobbying continues to try to overturn the milk price reductions put in place in the Spring and to address the price challenges
still being felt by those on non-aligned liquid contracts.
Whilst things have changed since July, two elements remain the same – feed costs are still increasing and the weather is still having
an impact on production, both at the current time and in respect of forage quality and quantity for the coming winter.
A third element is also coming to the fore. World dairy commodity stocks are tight and are unlikely to be replenished due to adverse
weather conditions in major milk producing countries. This is likely to result in a fairly rapid turnaround in world dairy commodity
prices, which will, in time, feed through into the UK market.
We, therefore, see that the market is currently segmented. Those on retailer contracts have seen their milk price stabilise. Those on
cheese and manufacturing contracts largely avoided the August cuts, although their prices were reduced in the spring, but they
should see prices strengthen as world commodity price changes influence the UK market. But those on non-aligned liquid contracts
remain in a difficult position. We see that the situation faced by these producers could result in a fairly tumultuous autumn, as these
producers consider their options for the future. This document updates the position we stated in July for those farmers in light of
these developments.
Notes
1) The document is entirely devoid of any emotional arguments related to milk prices. The document is being put into the public
domain for discussion. Email comments to [email protected]
2) The costs used to influence this analysis are from Kite’s costings service. This assesses the average performance and production
costs of hundreds of different dairy farmers across the UK. The document primarily covers farmers supplying into the liquid milk
market who are not on Cost of Production contracts.
Cashflow impact – how it has changed since July
In July we stated that we anticipated the average dairy farmer would be worse off by around 6.5ppl as a result of milk price cuts and
an increase in feed and other costs.
The situation has changed since then, and we now estimate that the current position is as follows:
•
•
•
Average of 2ppl price cut since April 2012
A rise in feed costs of 1.6ppl
A rise in general costs of 1ppl due to the impact of weather on productivity and increased housing costs
We therefore see the average impact as 4.6ppl overall.
www.kiteconsulting.com
Changes in milk price and costs and impact on cashflow in pence per litre (ppl) - Updated September 2012
2
ppl
1
0
-1
Cashflow Change
Weather Effect on Costs
Feed Costs
Milk Price
-2
-3
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
-5
Apr-12
-4
Months
Milk price to feed price ratio
The UK milk price to feed price ratio is now the worst it has ever been:
1.40
1.30
20
1.25
15
1.20
10
1.10
Jan-12
1.05
Jan-11
Jan-10
Jan-07
Jan-09
5
0
1.15
MP-FP Ratio
Milk Value
Feed Cost
Milk price - feed price ratio
1.35
25
Jan-08
Price per kg of feed or milk
30
1.00
This trend is the same in the USA, where feed prices have increased by more than 25 per cent as a result of the drought there, and in
Europe, where weak currency means that feed prices are 50 per cent higher than the peak prices seen in 2008.
This will undoubtedly put pressure on global dairy production in the coming months.
World commodity prices
Current world dairy prices average around 21 pence per litre and these are anticipated to increase by between 8-10 pence per litre
in the next 6-9 months as a result of tightening supply. We anticipate that this will influence UK milk prices, although there may be a
time lag and we will not get the full effect, as our prices have remained above world prices in recent months.
The question is – will the market fix the current negative impact on producer incomes?
We would anticipate that the improving market situation will have a bearing but it is impossible to tell how quickly this will occur
and to what extent.
Analysis
The real issue remains the short-term cash crisis faced by UK dairy farmers. If prices remain poor then farmer confidence will remain
low, milk production will inevitably fall and non-aligned producers will seek alternative contracts or production systems.
Whilst the retailers and processors should be congratulated for their recent initiatives, if farmers are forced to go through massive
negative cash flow in the coming months it will reduce the volume of milk available from the domestic market and, ultimately,
that reduces the potential competitiveness of the whole UK dairy sector. Whilst the market is moving in the right direction, any
improvements delivered through commodity price changes may prove to be too little, too late.
The short term pressure on cash flow could force the industry to reduce scale and move towards a more seasonal production pattern
from a smaller production base, which will drive inefficiency into the processing sector and is not, therefore, in the interests of
processors or customers. Massive volatility at farm level will reduce the chance of the UK sustaining and increasing dairy output and
will damage our long term competitiveness. It also means that the potential cost for the supply chain to re-incentivise UK production
will be even greater in the future.
We believe that the UK dairy industry can be more competitive in the long term if prices are more stable and farmers can cover costs.
Comments
Comments or discussion on this document are welcome. Please contact us at [email protected]
Kite Consulting
The Crown Buildings, Watling Street, Brewood, Staffordshire, ST19 9LL
Tel: 01902 851007 Fax: 01902 851058
[email protected]
www.kiteconsulting.com