Dairy sector contraction – what is the true cost?
© Tim Scrivener The 5.8% decline in GB dairy farm numbers to 7,130 producers in the 12 months to April 2024 is at its highest level in the five years since the AHDB first collated the figures.
Farm numbers have consistently reduced throughout the period, but more typically at 2-4%.
David Swales, AHDB’s head of economics and analysis for livestock, says the quickening of the pace at which dairy farmers are exiting is a worrying development.
“We have seen a trend for many years of dairy farmers leaving the industry, which has been offset by an increase in average farm size. However, the rate of leavers in the past year is higher than normal and is a concern.”
See also: How three dairy farmers maintain high-yielding herds
While historically it has been milk producers in the bottom 25% on key performance indicators (KPIs) that have exited, those in the top quarter are now questioning their own future and making the decision to leave.
It likely reflects some of the big challenges UK dairy farmers are currently experiencing.
From increased environmental regulation and reduced government support, to higher input costs and difficulties recruiting labour, all have taken a toll on profitability over the past 12 months, as have weather extremes.
The cost of borrowing has remained stubbornly high too, and this presents a significant barrier to on-farm investment that dairy farmers need to make to maintain production or to meet new environmental regulations.
Sliding numbers of milk producers in GB |
|||
| Month | GB producers | Annual change | Annual % change |
| October 2019 | 8,720 | – | – |
| April 2020 | 8,380 | – | – |
| October 2020 | 8,310 | -410 | -4.7% |
| April 2021 | 8,040 | -340 | -4.1% |
| October 2021 | 8,000 | -310 | -3.7% |
| April 2022 | 7,880 | -160 | -2.0% |
| October 2022 | 7,850 | -150 | -1.9% |
| April 2023 | 7,570 | -310 | -3.9% |
| October 2023 | 7,500 | -350 | -4.5% |
| April 2024 | 7,130 | -440 | -5.8% |
| Source: AHDB | |||
Volatility
Although milk prices have been on an upward trajectory, market volatility has been a consistent feature in recent years.
Mr Swales says this creates a difficult backdrop when the nature of dairy farming requires operators to make costly, long-term investment decisions, such as upgrading slurry storage facilities.
“It’s likely that some farmers, particularly those without succession plans in place, will have decided to exit the industry, rather than making these long-term investments,” he suggests.
This was one of the principal issues raised by producers at the most recent meeting between AHDB, dairy farmers and industry experts.
“We speak to farmers quite regularly to produce a milk forecast every six months and at the last meeting, discussion was about regulation challenges being ramped up quite significantly in the last couple of years, with NVZ rules and slurry storage,” says Mr Swales.
“If farmers have invested and got this infrastructure in place, those farms are likely to continue producing. But if they are in a position where they have to make the farm compliant, and we are talking quite significant investment, they are questioning their future.”
Many are counting on interest rates falling to make that investment easier, but borrowing costs are a macro issue, and are not in the control of farmers.
Arguably, the cost of capital investments disproportionately affects smaller farms, but the challenges associated with finding the money and making those investments pay is not solely unique to them.
What are the impacts of dairy contraction?
To some extent, the reduction in producer and dairy cow numbers has been offset by the increases in milk yield and growing farm size, as those who remain get bigger.
But the past 12 months has seen a drop in overall milk output – and scaling up farm size cannot carry on indefinitely.
For reasons ranging from environmental concerns to limited labour availability, consolidating farms at the current rate is unworkable, say industry analysts.
It could also cause a kick-back from consumers who perhaps favour the image of smaller, family-run farms.
Maintaining those types of farms could be important for that reason alone, says David Swales.
“The imagery is of smaller farms, and we are at a point in time where we need the industry to be profitable to allow businesses of that scale to continue producing milk going forward.”
There is also the question of what a faster contraction might mean for processors.
According to independent dairy consultant Chris Walkland, milk producers could become a more powerful force in the supply chain if the rate of contraction continues – less confined to their traditional role of price takers.
“For those dairy farmers who are left and with milk in shorter supply, processors will need to look after their suppliers better, instead of the situation we have now where farmers feel they are taken for granted,” he says.
For evidence, processors need look no further than Ireland, where measures such as nitrates restrictions have led to a sharp decline in milk output, to see what a scaling back of supply could mean.
“Processors shouldn’t assume that their producers are going to be there unless they look after them,” says Mr Walkland.
“When producer numbers are low, farmers will have more power.’’
Mr Walkland says he is not surprised to see milk supply falling, pointing to the number of factors “conspiring against farmers and the industry”.
“The NVZ regulations in Wales, hassles with planning permission and farm labour, the next generation looking to do something else other than dairy farming, and the colossal amount of investment required to stand still, let alone grow, these are all feeding into this situation and the decline in dairy farmer numbers.’’
What is certain, though, is that processors need a stable and reliable supply source for their milk, and require their suppliers to be profitable to guarantee continuation from one month to the next.
Positive outlook
Despite all the challenges, NFU Dairy Board chairman Paul Tompkins, who produces milk from 400 dairy cows in the Vale of York, is still optimistic.
In particular, he points to investments by Muller, Arla and others in the past year, the recent strengthening of prices, and the encouraging outlook for dairy demand globally.
Price rises for many dairy commodities have helped balance some of the higher costs of production, he says, signalling a return to profitability for some.
And while he says he has seen the number of milk producers reduce throughout his working life, the amount of milk produced in the UK has held up remarkably well.
“We have a growing global population with growing demand for dairy, and Oceania and the EU are pulling back on supply, so the opportunities are out there,” says Mr Tompkins.
Paul Tompkins © NFU
“I genuinely see a positive outcome – if we are given the right apparatus to be able to harness it.”
The projection for milk production requirement is promising, he adds.
“The current ambitions of the sector are encouraging. Dairy farmers, processors and dairy commodity traders are optimistic about our capability to produce nutritious and safe food.
“The ducks are lined up, but the problem we have is that the UK supply base is facing so many pressures that there is a question mark over whether that supply base is in the right place to meet those ambitions.”
The numbers
- 5.8% Latest annual fall in GB milk producer numbers
- 7,130 Milk producers in GB
- 8,100 Litres average annual yield of UK dairy cow
- 1.84m Cows in national herd
- 0.4% Reduction in UK milk deliveries in year to April 2024