Arla milk price cut could set trend as production rises
© Tim Scrivener Arla’s decision to drop its milk price could signal further cuts by other processors, industry analysts warn.
The plummeting price of global skimmed milk powder (SMP) and yellow cheese, alongside the ramping up of milk production in the northern hemisphere in the approach to the spring seasonal flush, were the driving forces behind the 0.42p/litre cut announced on 23 March.
The full Arla reduction was 0.79p/litre but its impact was softened by the application of the co-op’s currency smoothing mechanism, leading to the actual drop of 0.42p/litre.
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The fall leaves Arla’s manufacturing standard litre price at 28.13p/litre, while the standard litre liquid price will fall to 27.03p/litre from 1 April.
The decision to reverse the trend following seven previous price increases for the co-op’s 2,500 members was the first by a major processor since farmgate prices began turning around in the second half of 2016.
Extremely disappointed
Johnnie Russell, Arla Foods amba board director, said the processor was extremely disappointed to have to reduce prices and the drop was unwelcome news.
The UK’s largest dairy co-op’s milk price is used as a reference by many other processors’ basket mechanisms, and would likely act as the catalyst for further milk price falls in the weeks ahead, said dairy market analyst Chris Walkland.
“The drop really wasn’t a shock; the only surprise was that they were the first processor to announce it,” he said.
“Milk prices are now coming under pressure and we’ll see others following the Arla fall.”
“The only exception may be Muller, which will want to get all of its producers signed up to its new contract by 1 May and won’t want it to happen on the premise of a milk price cut.
“I think Muller will hold its milk price for next month.”
Mr Walkland added that all the data was pointing towards a UK average milk price of 25p/litre for the middle of the summer.
“A milk price fall will have obvious implication for producers, many of whom need about 30p/litre to recover from the 15-20p/litre they were receiving during the last crisis.
Dent in morale
“The main impact on dairy farmers will be a massive dent in morale.
“Many will lose confidence in the market to deliver suitable returns for the demands on welfare and quality placed on producers from buyers.
Arla’s decision to drop its milk price drew strong criticism from the NFU’s chief dairy adviser, Sian Davies.
“It is extremely disappointing and comes as farmers are still recovering from the low prices seen in the past two years.
“We know processors are watching the wholesale market, which has come back slightly, and that they are concerned about the spring flush in production.
“But this cut has been made too quickly and goes against all the work the industry has been doing to reduce risk and volatility in the market.”
Farmgate milk price outlook clouded by rising production and falling wholesale markets
UK wholesale SMP prices for March, at £1,550/t, were 16% lower than at the start of the year and the lowest since July 2016, according to AHDB Dairy.
The SMP drop is mirrored across Europe, with prices falling 13% since the start of the year to £1,421/t last week.
In New Zealand, the 21 March GDT online auction saw SMP prices drop 10.1%, following a 15% decline a fortnight earlier, finishing at £1,554/t.
Recent farmgate prices have been reinforced by the relatively strong performance of butter and cream, said Patty Clayton, AHDB Dairy’s senior analyst.
“Butter is counteracting the big falls we’ve seen with SMP prices, which are currently on the floor, and in the week ending 19 March were just £1.70/t above intervention levels.
“Yellow cheese prices for Gouda and Emmental are also moving downwards due to plentiful supply, so markets on the Continent are tentatively operating on a short-term basis.
Ms Clayton believed the outlook for the next three-to-six months was not hugely positive as increased milk production due to the flush would only add to burgeoning stocks and further squeeze spot milk prices.
“Despite still being down on last year, milk production in the UK and the Continent are increasing and closing the gap on last year.
“The weather will be the determining factor as to whether this year’s flush will be a big one or a small one.”