This month, Ian Potter takes a look at where milk prices might realistically be going and urges family producers to get round the table to discuss the future of their business and what they want from it.
The recent announcement by the EU of a doubling of the intervention ceiling for SMP, plus the additional 40,000-tonne ceiling increase for butter, will be useful market management tools.
However, at an intervention farmgate equivalent price of around 14ppl or less this is unlikely to encourage many European dairy farmers to produce more milk but will help us get through the flush, hopefully avoiding distress milk returning under 10ppl. It’s a safety net which is significantly below any UK farm’s cost of production. Intervention buying for the Commission has previously proved to be very good business.
Last time it off-loaded its stocks it netted around a €1.5 billion profit and I hope it delivers similar winnings this time so they can be invested back in the sector at some stage. Meanwhile, the spring flush is rapidly approaching and our near neighbours in Southern Ireland have already declared it’s highly unlikely it will have sufficient processing capacity to handle all its milk and it will have to ship some to the UK.
The UK processing industry has calculated we too are unlikely to have sufficient capacity – hence the talk of distress milk at 6-8ppl. What a mess! Even the most efficient, sharp-eyed, cost conscious, non-aligned dairy farmers are struggling with a milk price under 19ppl. For most, continuing to produce milk at under 19ppl means more losses, which will simply take longer to recover from. And remember, come April, some farmers might be receiving only 11ppl!
On the back of a high milk price, a lot of dairy farmers found expensive ways to produce more milk. Sheds were erected and land rents and land values rocketed. It was a great party when prices were high, but we’ve one hell of a hangover now. On top of this, the more competitive milk producers in Ireland, Holland, Germany and Denmark are unlikely to pull back on production and will continue to grow their dairy businesses.
This leads me to conclude this crisis is more of a structural change in world dairying and not simply volatility. I believe we will eventually see a five-year ‘average’ non-aligned milk price to 2021 of around 25ppl. In fact it could be quite a bit less than 25ppl, having averaged 28ppl in the past five years. I don’t want to be negative,
I don’t want to be negative, but it is better to be a realist than a fantasist. The worst any commentator or analyst can do is to give dairy farmers false signals, to build up expectations that they can ride it out, and suggest a recovery to near 30ppl is down the line. It’s not any time soon! In fact I’d say farmgate milk prices have not reached the bottom yet and there is certainly more pain on the way especially in the cheese world.
However, slowly but surely, falling milk prices are starting to control supply. It’s going to take skill and guile to manage this situation at farm level and some different disciplines will come to the fore. In one instance I know of a bank which agreed an extra facility with a farmer to pay his silage contractor, but only if the bank paid him direct. A period of 12-18 months at under 20ppl will take several years to recover from.
It’s for this reason I have suggested to AHDB that as well as milk price league tables, what’s required is a tool farmers can use to calculate a worse case scenario. Call it a ‘what if and a milk price stress test’ which could give answers to questions such as ‘if I receive 18ppl for 18 months what average price do I need over the next four years to cover my average COP of Xppl?’
My last article triggered the most responses I have ever received in 25 years of writing. Several respondents were concerned some of the allied industry representatives, who are asked for help and advice, will shy away from suggesting that exiting the industry could be the best outcome for some farmers. Others aired concerns a delayed decision would seriously erode net worth, that family relationships would break down under the stress, and the feeling of failure would weigh strongly on individuals (or even worse there could be lives lost).
Most applauded the article’s questions which most dairy farmers, irrespective of size, would benefit from answering. Another said it would be more useful to dairy farmers in today’s harsh economic environment than some of the other ‘almost irrelevant information’ they receive. Husbands and wives emailed me (with some in their 40s and 50s) saying fathers, mothers and in-laws still dictate what happens in the business and exert pressure on the farming family. And I was delighted the overwhelming response was the recognition family, health and happiness must come before the cows, the farm and what parents might want.
Sitting down with the family is key, and having a third party involved in family meetings to me is essential because they bring a structure to the decision-making, and in their absence the likelihood of fur and feathers flying within 30 seconds of the start of any meeting is usually high. It doesn’t need to be a professional, and can be a trusted, unbiased family friend. How would I start if I had to do it? I would give family members a pen and a blank sheet of paper on which they write what they want to achieve in the next 10 years. Then I’d compare the lists, find common ground and pin the combined list up in the boardroom (the kitchen) and everyday work towards the delivery. Writing the list is step 1, step 2 is far harder to implement.
The crux is, though, that if some farmers don’t decide on their future, then their future might be decided for them. Many face the prospect they will be removed from the industry and going voluntarily might be less painful than being forced. To conclude, I leave you with the words of one reader: “There is life after cows. It might take a while to figure it out, but there is and, more often than not, it’s a happier life”.