Analysis: Is time right to ramp up milk production?
© Tim Scrivener When the boss of one of the EU’s biggest dairies warned last week of a looming butter and cream shortage, the NFU dismissed the comments as “scaremongering”.
Peder Tuborgh, chief executive of dairy farming co-operative Arla, whose brands include Anchor and Cravendale, says not enough milk is being supplied by farmers.
The slowdown in milk production began in 2016 when farmers “put the brakes on”, he adds, and consumers could, therefore, see a shortage of these products this Christmas.
See also: Experts caution against expansion as prices rise
His comments sent national media into overdrive. The Sun carried the story on its front page on 7 July, with the headline: “I can’t believe there’s no butter.”
The tabloid reported wholesale butter prices had “risen 88% in a year” and it carried quotes from unnamed farmers suggesting Britain was on course for its worst butter shortage since rationing during the Second World War.
For dairy farmers, how the national press handled the story added further confusion to an already muddling picture.
But how should they respond to recent signs of a recovery in markets – especially on the back of a severe and prolonged downturn?
Improving picture
Dairy analyst Chris Walkland says several global matters out of farmers’ control are working in their favour.
These include:
- Increased demand for UK and EU dairy exports – especially cheese – from countries such as China
- Drought impacting milk production in countries such as New Zealand and the US
- A fall in production in Germany and France
- The EU’s decision to pay producers to limit production.
“Agriculture is such a weather-dependent industry and it’s always very hard to predict the vagaries of production,” says Mr Walkland.
“This year was always going to be a weather-driven market. Back in the spring, the buyers thought prices would come down because there would be a lot of milk about.
“Milk volumes were lower than people expected, but they weren’t terrible. But then the demand picked up significantly and we are where we are now.”
Furthermore, a number of studies reporting the health benefits of dairy products, including butter and cheese, have increased consumer demand.
The “Brexit effect” has also triggered uncertainty over trade and retailers have been focusing on buying more British, again shortening supplies, says Mr Walkland.
“They (retailers) have been trying to mop up what they can. Import figures for Ireland show there is less Irish cheddar being imported this year than last,” he adds.
Market transparency
Michael Oakes, NFU national dairy board chairman, says there needs to be greater focus on processors’ intentions.
He would like Defra to introduce a mandatory price reporting system for dairy prices such as the one introduced by the US Department of Agriculture.
This system sees pricing information on different classes of dairy product published every fortnight, which allows farmers to study trends, assess the market and whether to forward-sell milk.
“If we had more genuine, real-time market information, the processors wouldn’t be able to resist when the market was moving forward,” he explains. “They could not hide behind misinformation.”
Only in March, Arla UK was asking its farmers to produce more milk, but the market price was going down.
At the same time, Mr Tuborgh was telling farmers in Denmark there was too much milk in Europe, the market was cooling – and then the milk price dropped.
“Literally, we have gone from him [Tuborgh] saying there was too much milk in March, to him saying at the beginning of July we have a massive shortage of butter and cream because there is not enough milk,” says Mr Oakes.
“We need better market information than that. As farmers, we cannot react that quickly. Many farmers’ balances are still suffering from the downturn. They are not in the right financial situation to do it.”
Producer response
But how are UK farmers positioned to respond to the increased demand?
On the one hand, producers are well placed to boost output.
Edward Lott, a partner at dairy business consultancy Kite Consulting, says: “We have had good conditions for grass utilisation. Maize, in general, has been established well – that will come later in the autumn.
“There have been some negatives recently with the heat, especially in East Anglia. That has knocked production. But cows that we see are generally in good condition.
“Silage quality that has been made from the first cuts is some of the best they have ever seen. A lot of the building blocks are in place for cows to produce more milk.”
Despite this, the NFU says dairy farmer confidence is “at an all-time low”.
Farmers who may be looking to expand are cautious about putting on more cows. Prices are rising at auctions and the devalued sterling means buying in cows from the EU is expensive.
But with prices improving, Mr Lott says there may be an incentive to put more feed into cows now.
The ratio of feed price to milk price has “moved into positive territory”, especially for the milk price increases for July, he says (see ‘Milk to feed price ratio is at its highest since 2014’).
“For putting another kilo of feed in, you’re going to get an economic response back,” he adds.
Mr Lott says the processors could introduce incentive schemes for farmers to produce more milk. “In the past, processors put on 2-4p/litre extra above the previous year’s production. We haven’t seen those yet.”
Producers need to work closely with processors to determine whether they want extra milk and if so, how much, he adds.
“The key thing is farmers need to be in line with what their processors need. If the processor wants more milk, that’s fine. We should be in a place to respond,” says Mr Lott.
“But farmers need to be wary of throwing on more milk without clear reasoning. We don’t want to chase the current issue of butter prices, if it’s going to damage the future of the industry.”
30p/litre price rises on the way – AHDB Dairy
The AHDB has predicted dairy farmers will enjoy strong milk prices this summer and into the autumn amid warnings by Arla of a butter and cream shortage this Christmas.
Chris Gooderham, an AHDB Dairy analyst, said a number of farmgate milk prices were still in the 25-28p/litre range, which looked poor compared with buoyant commodity market returns.
Arla has announced a 1.44p/litre price increase from July, while Muller is increasing its milk price by 1.5p/litre for August. This will bring their prices to within the 27-28p/litre range.
According to Mr Gooderham, latest actual milk price equivalent (AMPE) and milk for cheese value equivalent (MCVE) – which track the basic wholesale commodity prices for butter, skimmed milk powder, mild cheese and cheese by-products – are sitting above 36p/litre at the factory, reflecting the value of spot sales of butter/powder and mild cheddar in June.
Farmgate milk prices are only just starting to reflect the increased value of dairy markets, but further rises are imminent.
“The increases are significant, with AMPE up nearly 9p/litre since April, and MCVE rising more than 5p/litre over the same period,” he says.
“Only a handful of other milk buyers have announced increases so far, with the majority still not moving.
“This will change over the coming weeks though, as a number of milk buyers set prices based on a basket of other milk buyers, and many of these will include Arla and/or Muller.”
By June, the fat element accounted for two-thirds of the total return for AMPE, and fat “continues to be the dominant factor behind overall market rises” he adds.
However, latest milk compositional data shows butterfat levels in the UK continue to run down year-on-year.
With markets now showing signs of recovery, the prices that were most heavily influenced by markets on the downturn should show the most rapid increase on the upturn, he adds.
As ever, Mr Gooderham says the challenge for the industry will be how to balance reaction to market prices with delivering some price stability.
The UK milk price to feed price ratio (MFPR) tracker gives an indication of the balance between milk income and feed costs. However, it is not a replacement for analysis on the full costs of production.
The ratio, provided by Kite Consulting, shows there has been a steady recovery since April. The ratio is projected to rise to 1.35 by August, up 0.57 since July 2016.
Edward Lott, a dairy analyst at Kite Consulting, says with prices improving, some dairy farmers may decide there is an incentive to increase production.
“The milk price to feed price ratio has definitely moved into positive territory,” he explains. “A ratio of about 1.2 is seen as the balance – neither an incentive or disincentive to produce milk.
“But we are now moving into ratios with current feed costs and the milk price increases for July, getting into the 1.3 range, which is an incentive for milk production.”
One-quarter to increase milk production, Farmers Weekly poll finds
A snap online poll of Farmers Weekly readers suggests more than one-quarter of farmers (26%) plan to react to rising prices by increasing milk production.
Nine percent said they would increase production by 1.3%, 4% said by 3-6% and a further 4% said by 6-9%.
More than one-third (35%) said they did not plan to increase production. And 21% said they were undecided.
One hundred people responded to the poll, which was carried out on fwi.co.uk over the weekend 70-9 July.
The findings were revealed as the head of Scotland’s largest independent dairy called for farmers to increase domestic milk production ahead of Brexit.
Robert Graham, managing director of Graham’s the Family Dairy, told the Press & Journal that Scotland needs to “think big” and increase its domestic production capacity “to develop and sell more home-grown products and support businesses.”
But Graeme Kilpatrick, who milks 360 cows at Craigie Mains Farm, in Kilmarnock, Ayrshire, supplying Graham’s, says farmers needed better indicators that increasing production will deliver a margin.
“The majority of producers had lost a substantial amount of money over the last two years,” he says. “Producers cannot to any great extent change production patterns overnight.
“Processors must work more collaboratively with farmers and particularly with producer groups to offer greater clarity on short and long-term requirements.”