Monday 14 March 2016

Supermarket contracts

I came away from the Andersons farm business consultants’ annual seminar on the outlook for UK agriculture with the gloomy message that things are very difficult for most sectors but most worrying is the plight of our dairy farmers.

Andersons predict little prospect of improvement for at least another year as milk prices continue to fall at an alarming rate for the 80 per cent of dairy farmers not on “supermarket-aligned contracts”.  

Some of these farmers are lucky that for one reason or another they have been able to secure one of the supermarket contracts where they are effectively paid a milk price related to the cost of production rather than one based on the market price.  

As a consequence the supermarket contracts are offering about 30p per litre but the other 80 per cent of farmers are receiving between 20 and 24p. The milk price being paid to these farmers is influenced by world milk commodity markets where supply exceeds demand.  

Of course the market will one day right itself but not before the fundamentals have rebalanced and that will inevitably mean yet more dairy farmers having to leave the industry.

This depressing picture was reinforced by a leading dairy analyst, Chris Walkland at an NFU conference in Birmingham where he warned of a “spring tsunami of milk bringing more price pain” and said: “It is going to be pretty horrendous over the next three months.”

Walkland went on to predict the spot price for milk is likely to drop to around 10p per litre later this spring/early summer and as a result the total income for milk in April, May and June this year is predicted to be down by approaching 40 per cent on the peak seen only two years ago.

So why would anyone want to continue dairy farming at all? The answer is that some farmers are still making money, particularly those on the supermarket contracts and if you look back over say five years most dairy farmers will have seen good profits at times. 

And this is perhaps how dairy farmers need to budget, looking at five years rather than just one year but at the same time recognising that the current crisis has to be survived.  If that is not possible, then difficult decisions need to be made sooner rather than later because milk prices are unlikely to fundamentally improve for at least a year.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells

T: 01749 683381
E: james.stephen@carterjonas.co.uk

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