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Mooving Milk Prices

01 November 2016

The dairy industry, despite being reliant predominately on one key commodity (liquid milk), is a very complex category. Alastair Cupper, Procurement Manager at allmanhall, takes a closer look.

 

There are a number of demand and price factors to be taken into consideration when analysing this category.

 

(Source: AHDB)

 

The UK produces an average of circa 15billion tonnes of milk per year. It is almost a 50% split between the milk for liquid consumption and the milk used in further manufacturing processes.

 

The UK, similar to other major milk processing countries, is dominated by few major processing companies who impose a significant buying power on the farmers. There are 8 companies processing circa 70% of total liquid milk within the UK, this equates to 300 thousand tonnes per annum each. However, these processors are also strongly influenced by the top 5 supermarkets who control circa 70% of the liquid milk purchasing for the retail market (AHDB).

 

Pricing

The global over-supply of milk dominated the headlines in the dairy industry throughout 2015 and the start of 2016. Since the peaks of 2013, UK milk prices have depreciated. This is a result of global over-production and a decrease in demand.

 

During this period, processors reduced costs to ensure competitiveness within the market, resulting in significant reductions in farmgate prices. 

The costs of both dairy heifers and calves have reduced over the past 12 months. According to the Agriculture and Horticulture Development Board (AHDB), the British dairy herd has fallen by 2%, which is the largest annual drop in four years. However, with milk stocks low and rising prices, there is an increasing demand for dairy cows with 8% more dairy calves purchased in September 2016 than previous years. This demand has caused prices to increase by as much as 18% in the past 6 months (AHDB).  

 

Feed and forage contribute a significant amount to the overall costs to a farmer. Over the past month, the UK grain markets have risen, fuelled by the significant shift in currency.  October has already seen the Sterling hit historic lows against both the US Dollar and the Euro. The increase is likely to continue, with UK feed wheat futures hitting their highest point since December 2014. The futures market prices for this time next year are already 2.7% higher. (Farmers Weekly)

 

The AHDB have released the first estimates of UK 2016/17; early indication shows that supplies of wheat and barley are tighter this year in comparison to previous years (down 9%). The two main contributing factors are an estimated 12% lower production in the UK and a 5% higher consumption. (AHDB and DEFRA)

 

Despite low fuel prices at the beginning of 2016, the weakening of the Sterling has contributed to steady increases throughout the year. Red diesel prices have increased by 6% year on year. OPEC are predicting steady crude oil increases over the next 12 months and with uncertainty about the value of the Sterling, it is possible that oil prices could continue to increase in the foreseeable future. 

Wholesale market

The slowdown in milk production as a result of the downward trend in farmgate prices has contributed to short supplies in the market place. In October, milk production was 7.6% lower than the same period last year, at 35.8m litres per day. Production levels have fallen faster in the UK than mainland EU and further afield, which is enabling a premium to be charged for a UK origin product.

 

The UK’s decision to leave the EU also brings additional uncertainty to an already volatile dairy market. For UK producers, the weak Pound has made the export market a much more attractive proposition, and imports have become more expensive.

 

Spot milk prices have increased significantly and farmgate prices have also begun to rise for the first time since October 2015. The most recent figures released by DEFRA show farmgate prices have risen by 2.7% to 21.34ppl. However, this figure is still 8.5% lower in comparison to last year, and there will be an inevitable time lag before the rise in wholesale prices are reflected in farmgate prices. 


Over the last 6 months, the value of fat has increased rapidly, with the value of cream and butter increasing 93% and 74% respectively year on year. With continued increases and market shortages, many processors are reluctant to fix prices for any long period of time. Consequently, consumers will continue to see rises on these products in the future. 

 

 

The AHDB Forward Market Performs (a market indicator of future trends) indicates that prices will continue on an upward trend into the future with little indication of any ease in the market.

 

In times like this, it is more helpful than ever to have an expert procurement team managing suppliers and negotiating prices, on your behalf. 

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The Old Malthouse | Mill Lane | Box | Wiltshire | SN13 8PN