Monday, July 23, 2012

Dairy farmers under pressure

The recent cuts in farm gate prices for milk have placed dairy farmers under real pressure and there is no doubt that many of them are not covering the cost of production. Blockades and evident consumer sympathy have stirred many supermarkets to increase the price they pay for liquid milk.

However, that is only part of the story. Half of all milk produced goes for manufacturing and that has always attracted a lower price (although the old Milk Marketing Board had a complicated system that varied the price according to the end use of the milk so more was paid if it was used for chocolate crumb than cheddar cheese).

Manufacturing prices are driven by global markets which are in turn affected by low cost mega dairies in California and elsewhere. There is hope that prices may firm up after the seasonal production peak in Europe. Prices in June were firmer for some products, particularly butter and cream, but average dairy commodity prices fell back by 5.9 per cent at Fonterra's latest Global Dairy Trade auction earlier this month, largely as a resut of increased supply. Prices may well remain stagnant until September.

Factors to take into account include whether product stocks will be sold before the next flush of milk begins in the southern hemisphere where countries including New Zealand, Argentina and Uruguay are efficient producers. The emerging economy growth rate is also an important consideration as it drives greater consumption of dairy products. The recession in Europe also has an impact and British deliveries in the two weeks to the end of June were down 2.1 per cent on the same period last year.

It is also worth bearing in mind that farmers are encountering these financial difficulties despite substantial EU subsidies.


F.L.R said...

Thank you for this, Wyn. Is this to say that is not necessarily the price paid for a pint of milk that is putting farmers out of pocket, but the other products which require milk as an added ingredient which result in lower prices paid?

Wyn Grant said...

Both are important given the approximate 50-50 balance in the market, but the media has tended to focus on the supermarket price. This does not, of course, account for all of the liquid market. There is a big 'third market' in catering (coffee shops for a start), convenience stores and petrol stations.