As I write, the milk spot price is 22-24ppl and weakening, and we are still six weeks away from peak. We are producing too much milk in a weak market and I am extremely nervous where it will end.
We have insufficient processing in the UK and I can’t contemplate the effect if one of the Westbury driers, or a large French or Irish one, were to break down.
Dairy Crest took a beating in 2012 with its 2ppl price cuts and, for various reasons, it will be behind the front runners on price cuts this time. I say that knowing DC is currently off the pace even in its Cathedral City heartland. However, it has issued a statement saying it will be competitive – it just didn’t put a time scale on it. Even when price corrections are confirmed, many processors will be struggling to compete with Arla’s and Muller Wiseman’s milk price.
The falling market is not just a UK phenomenon but European and worldwide, with every dairy region producing more milk. Marry that to the fact UK cheese production has rocketed to record levels, demand from China and Russia has slackened and there’s a lethal cocktail.
Arla is odds on favourite to be the dam buster, announcing a May price correction – especially now Friesland Campina has cut. And even when that first correction is confirmed, a further correction is almost inevitable unless the global market stabilises. Oh, and when prices fall, don’t bother calling in the FFA team – it can’t beat market forces.
The long term solution is we don’t churn out heaps of milk until we have more processing capacity, with product destined for the world market. Arla’s target is for 40% of its revenue to come from outside the EU by 2020. If our retailers, corner shops, garages and food service businesses won’t pay for the milk we need to turn it into exportable products and bypass them. Woodcocks is building a drier, but we may still need more if milk volumes are to stay as they are. Please do not listen to the jokers who say ‘get on lads and produce two, three or even four billion litres of extra milk’ until we have the capacity to process it and have some serious marketing people who can capitalise on the world market opportunities.
But a price correction is not my main concern. It is more whether the drop will be retained by processors or whether some will be forced to hand it over to their customers and effectively kick start a downward spiral. We will never know who keeps the money and who hands it over. History tells us some processors are likely to knock on buyers’ doors and offer them the money on a plate to get more business.
Domestically, despite the devastating effects of TB, we have the heifers and cows in the system and even the low cost New Zealand-style producers are buying tonnes of feed to bump up production. On top of of feed to bump up production. On top of that we are still importing heifers from regions which are producing far too much milk and do not have farmers willing to pay the prices we are prepared to pay.
Milk purchasers are under pressure, and some farmers appear oblivious to what is happening. I recently heard of one farmer who was selling liquid milk on a threemonth contract who refused a May 1, 1p price drop, believing it should be a price increase. He changed buyer, convinced it was immune from the market place and will hold his price until autumn when prices will increase again. He, and many others, are in for a reality check.
Regrettably, some farmers have based their decision as to whom to sell their milk on either short-term false price promises or unsustainable headline prices. It never ceases to amaze me how little time some farmers spend examining the businesses they propose to sell their milk to. For some it is a case of let’s go for the headline price and be dammed. ‘Clowns to the left of me, jokers to the right.
Here I am stuck in the middle with you,’ as the song lyric goes.
When it comes to processors we have the honest, the smart, the sharp and the porkiepie tellers. One example of the latter comes in the form of those milk buyers who utilise basket pricing. For example, as from January 1, the old Arla AFMP price ceased to exist and some, such as Freshways, replaced the AFMP price with the Arla AMCO member price. This resulted in it paying its farmers more money. Top marks, therefore. Others have dodged the issue and declined to replace the lost AFMP price with either the Arla direct or AMCO price, so as to keep prices lower. At least one company is not tracked in these baskets. It is outrageous, and any so-called producer representatives who have agreed to this should hang their heads in shame. One example of a letter representatives should have clocked was from a company which gave suppliers the option to have a basket price with only Dairy Crest and Muller Wiseman prices in or, alternatively, to include Meadow Foods instead of Arla. I wonder why?
As intimated by me a few months ago, this year is heading to be a financial disaster for one or more processors. They can’t survive buying the quantity of milk they are and off-loading the surplus on the spot market at current prices. When the proverbial hits the fan, it will be farmers who will invariably cop it for several weeks of unpaid milk.
Now quota. Some processors are contemplating withholding milk cheques because of soaring production, and this has frightened producers. Banks are instructing some farmers to play safe and get quota cover. I would like to clarify a few myths. The super levy will be about 23ppl and the quota is the same as it was last year at 15.3 billion litres. This includes confiscated quota, which amounts to 537 million of wholesale plus 11m of direct sales.
The quota market is on fire, which can only be quelled by a combination of milk price reductions, weather, or production failing to get anywhere near to quota. Meeting quota will take some doing but you seem set to give it your best shot!
Ian is a specialist milk quota and entitlement broker. Comments please to firstname.lastname@example.org