Milk prices... why so low?

I was sad to learn that Mark Oliver, the chairman of the NFU’s South West dairy board has announced he is selling his herd and quitting agriculture.

Mr Oliver explained he could not see a future in the industry having seen his milk price drop from 33-34 pence per litre a year ago to 25 pence today with further cuts in prospect.

I suspect Mr Oliver will not be alone in making this decision in the coming months. With milk currently trading on the spot market at prices as low as 12 pence per litre, the future does not look great except for those on the most lucrative supermarket contracts where the annual average milk price is still in excess of 30 pence per litre.

The current crisis in the dairy sector is accentuating the huge breadth of performance in the industry. For example, the Milk Price League Table for April published by the Agriculture and Horticulture Development Board (AHDB) shows the top annual milk price is offered under the Muller Wiseman Dairies Tesco contract at 31.88 pence per litre while the lowest price under the First Milk Liquid A contract at 19.56 pence per litre.

Similarly there is a huge gap in performance between the best and the worst farms. Again figures published by AHDB show the full economic cost of production for the top 25 per cent of farmers is around 26.5 pence per litre with the bottom 25 per cent being around 36.2 pence.

Therefore, even on the very best milk contract, the worst performing dairy farmers will be losing more than four pence per litre and if they were on the worst contract they would be losing nearly 17 pence on every litre of milk they produce. There can be no long term future for such businesses.

In contrast farmers in the top 25 per cent will still be making money on the best milk contracts, although in most cases even these farmers will struggle to break even.

So, more than ever, dairy farmers need to keep a very close eye on their production costs and where possible get on to the best milk supply contracts. But sadly there will be no future for the bottom 25 per cent of dairy farmers unless they can seriously improve their technical performance.  

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk