UK Dairy Sector: What Lies Ahead In 2009?

Farmgate milk prices in the UK have risen throughout 2008, and the rolling 12 month average should reach 26p/litre by March 2009. But dairy farmers’ costs of production have also been rising just as fast, warns farm business consultant Andersons.

"However, the 2007/08 and 2008/09 milk years should return the sector to a reasonable level of profitability that gives producers some return on capital," says the firm's head of business research Francis Mordaunt.

"The continued upward movement in prices is somewhat against the EU and world trends. A continued lack of supply in the UK, as producers have left the sector, has helped insulate the remaining farmers from falls in dairy commodity prices elsewhere, and the link with cost of production established by some retailers for the liquid market will have helped those producers who signed up.

"The recent 2p/litre cut in milk price by Dairy Farmers of Britain, although driven by business restructuring, may be the start of other price cuts. The retailer tracker schemes will pick up the cost reductions from March 2009, and these price cuts will certainly be followed by other milk buyers, particularly those sourcing for commodity processing, who have not already cut prices," says Mr Mordaunt.

Other factors will continue to drive producers out of milk production. Age or retirement, historic under-investment, the need to respond to NVZ regulations and a lack of optimism in all parts of the industry are likely to contribute.

The livestock industry as a whole was faced with sharply higher feed costs during 2008. Not simply from the headline rises in cereal prices, but also from rapid increases in the price of the proteins like soya. For 2009, producers can look forward to some costs reducing, although for some it may take time before these to feed through to farm margins, says Mr Mordaunt.

"Any production systems relying on grass are likely to see costs moving in the opposite direction. Most fertiliser for the 2009 season has already been contracted at far higher prices than were paid in 2008. If fertiliser prices have permanently shifted to a different level, then there will be increased interest in the targeted use of livestock manures to replace at least part of the purchased fertiliser requirement. Although the new NVZ regulations are obviously unwelcome in terms of the increased costs they impose on farmers, it may be possible to make the best of a bad job and use stored manures effectively."