To kick off our new series of Dairy Farmer guest speakers we have Mike Houghton, long-time partner on the Andersons advisory team, who gives us his take on where the industry stands.
The long-term fate of the UK dairy industry may well be decided in the next two or three weeks if our politicians can finally agree a way forward on Brexit.
If we do leave the Customs Union, the industry is likely to be exposed to world market competition and we can probably expect little assistance from Government, which will almost certainly continue with its cheap food policy, particularly given the industry contributes less than 1% to the country’s GDP.
Staying within the Union will inevitably provide more protection because, as I understand it, tariffs will have to remain in place.
Whatever the Brexit outcome, the industry continues on a rollercoaster. The recession of 2015-2017 is just about over for most producers, but it has been a tough winter, despite the higher milk price, because the 2018 forage season was difficult and cost inflation has been rampant.
Our Friesian Farm Model demonstrates the 2019/20 year looks set to be profitable with a cost of production of 28.6ppl leaving a margin of 2.2ppl which, when coupled with the 1.8ppl BPS, gives a business surplus of 4.0ppl.
The industry continues to change and we have lost 467 dairy farmers (5%) in the last year (now there are fewer than 9,000 in England & Wales) and yet milk production could well reach record levels for the 2019/20 year.
Farms will inevitably increase in size. However, milk is a commodity and commodities simply devalue over time. The real value of milk has reduced by over 50% in the last 40 years.
It will be supply and demand in the market that seals the fate of the dairy industry.
The UK is currently in the Top 20 of milk-consuming nations, consuming about 250kg in dairy products per person per year. The Scandinavians are the top dairy consumers, consuming 40% more than the UK, and we need to know what drives this level of consumption.
As regards structure, I expect an industry streamlined to 6,000 producers, with an average of 300 cows, within the next 5-10 years. The UK should be well placed to manage this change, as it already has a good farm structure. To put this into perspective, it is estimated the average debt per cow in the EU is somewhere in the region of €3,000.
Ireland and the UK have relatively modest debt per cow at €850 and €2,000 respectively. This compares with Denmark and Holland (approximately 10% of the EU dairy herd) where the average debt per cow is in excess of €10,000. Given their environmental challenges, will this be sustainable and could this significantly reduce milk output from this area of Europe?
In creating demand for milk, the industry must unite and become a great deal more proactive in explaining the value of naturally produced milk in a well balanced diet.
This has to start in schools, with a different emphasis on education, a focus on health – physical and mental – and diet. We as an industry should promote a Ministry of Food and Health, which could be a really powerful concept, lifting the value of food and reducing the cost of the nation’s health service.
This is particularly so as recent headlines suggest daily diet is a bigger killer than smoking and is involved in one in five deaths around the world. Will we ever show this level of leadership?
The other enormous challenge will be our food chain model. The current retail model has effectively decimated the value of liquid milk. Just 40 years ago, 70% of all milk sold was delivered to the doorstep every day; a concept a company like Amazon would die for today.
The retailers generally devalue liquid milk, which is evident from the inability of both Dairy Crest and Muller to generate a sustainable return from this sector.
The industry sends mixed messages, constantly encouraging farmers to find lower cost of production systems, yet actively discouraging spring calving on a grass-based system, which is the least expensive way to produce milk. All level supply producers will require more than 26p per litre to have a sustainable business model.
Technology will help, but any investment must deliver a return on capital. It is interesting to note that while most robot investment brings about a change in lifestyle, in many cases they predispose the business to a higher cost system of milk production.
The industry must focus on improving efficiency of grass utilisation, be it grazed or ensiled, as at present this is a hugely under-utilised resource. It may also be a function of having very few independent nutritionists, with nutrition advice always being provided by a seller of feed. Farmers need to change their philosophy to focus on profit, not output.
Looking to the future, dairy farmers need to have a clear business strategy with budgets and timelines and, above all, prioritise the points they can control and influence.