Five charts that explain the milk price crash

There’s trouble in dairy.

In the past fortnight all of the big four processors have cut milk prices by more than a penny.

The drops have come month-after-month since the spring, with procurement managers and chairmen of farmers’ boards reeling off the same claim of falling market returns.

For some, this dredges up unwelcome memories of 2012 and the SOS dairy campaign.

Dairy analysts say it’s just a question of supply and demand. But what forces are at work?

The following five charts help explain why so much pressure is being felt at the farmgate.

1. Bumper production

There is a lot of milk swilling around.

In the past 18 months there have been plenty of incentives for the world’s dairy farmers to step up production.

Better grass-growing weather and strong milk prices gave an instant confidence boost to businesses.

The promise of insatiable dairy demand in China, coupled with the prospect of European quota abolition, only added to the optimism.

EU production is up 5.1% in the first half of the year and major dairy exporter New Zealand has produced 16.3% more milk.

2. Global market pressure

A lot of milk means a lot of dairy commodities, which puts pressure on prices.

The quantities traded might not be huge but Fonterra’s Global Dairy Trade auction is a useful indicator for world trends.

It has fallen 40% from its all-time high in February, setting the tone for declining returns across the world.

Traders and analysts say the biggest factor has been buyers in key export destinations, particularly China, stepping away from the market.

3. UK feels the pain

World prices eventually impact the UK.

Half of British milk goes into liquid and four fifths of dairy products stay in the domestic market but that only gives so much protection.

To fight off foreign imports and battle for global trade, the UK has to stay competitive on price.

Also, with UK milk production 10.7% higher on the year since the start of 2014, there has been a lot of home-grown cheese, butter and cream around.

As a result, British wholesale prices are down between 10-30% since January.

4. The Russia effect

In mid-August, Russia decided to ban Western food imports for a year, in retaliation for economic sanctions over the tensions in Ukraine.

Dairy has been one of the most-affected sectors, as the EU exported £1.8bn of milk-based products to Russia in 2013.

The market accounted for 27% of the EU’s cheese trade and 19% of its butter, which will now have to find new destinations.

The European Commission is taking action – last week it opened private storage aid, paying companies to keep products off the market for three to seven months – but its effectiveness has already been questioned by traders and farming groups.

5. The feeling at the farmgate

Defra’s latest average UK milk price appears to offer some reassurance – but it only runs up to July.

The chart shows a decent gap between the 25-26p/litre crisis levels of 2012 and the 30p/litre-plus prices of this year.

But the statistics do not account for the heavy cuts for August, September and October.

For example, co-operative First Milk will pay its liquid farmers 25.1p/litre and manufacturing farmers 26.6p/litre, after announcing a 3p/litre drop.

Defra’s average will fall much lower.

DairyCo’s market indicators AMPE and MCVE, which estimate market returns for different dairy products, stand at 27.3p/litre and 30.9p/litre respectively.

How far the markets fall and whether the EU measures make a difference is uncertain.

What is more clear is every link in the dairy chain is under pressure from soaring supply and cooler demand.