Failure to pass on better milk price could be costly

Processors who fail to pass on price benefits could face a backlash from farmers.
Processors who fail to pass on price benefits could face a backlash from farmers.
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Disgruntled dairy farmers will simply look to other processors at the end of their contracts, if they continue to receive unfair benefits as the sector enjoys early signs of an upturn, farm accountants have warned.

A fall in milk production internationally and the weakened value of sterling have seen wholesale milk returns increase by almost 68 per cent since April – to the equivalent of 26 pence per litre (ppl) in August.

But this is in sharp contrast to the average farmgate price, which in July was at 20.57ppl, compared to a cost of production of around 28ppl.

Old Mill accountants warned that dairy processors who are failing to pass on improved market returns to farmers could face a serious backlash and shortage in supplies in future as a result.

Mike Butler, chairman of the board at Old Mill, said: “The frustration being felt by milk producers is matched by their concern that milk buyers and processors are focusing on their own bottom lines rather than considering the health of the dairy industry as a whole.”

With global production dipping, now is the time when farmgate prices should be rising, Mr Butler said.

A prolonged period of low prices, caused by global oversupply of milk, has left many farmers in a loss-making position and one that has forced the European Commission to act.

Application forms for the Milk Production Reduction Scheme, along with details on how to apply, are now available on the Rural Payments Agency website.

The deadline for the first round of the Commission’s €500m support package for European dairy farmers is 11am on September 21.

The intervention and a changing European production trend has led the Commission to lower its forecast for total EU milk production this year, new provisional figures released this week show. It now expects volumes to end the year 0.9 per cent higher than in 2015, down from its previous estimate of 1.4 per cent.

Mr Butler said: “Global and domestic milk output has dropped and UK dairy farmers have no appetite to keep production levels up while milk is so undervalued.

“The weaker pound against the euro has also made imported dairy products more expensive, fuelling the increase in the spot price of domestic milk.”

UK spot milk prices typically track cream values, which in turn tend to follow currency movements, but while wholesale cream prices have jumped by 84 per cent since April, farmgate prices have failed to respond to this upward trend, showing only a three per cent rise between June and July.

Mr Butler warned processors that were failing to pass on price benefits that they are putting their own businesses at risk in the long-term.

“One thing is for sure, a milk processor will go out of business quicker than a farmer if they stop receiving milk from their producers.

“Those processors and milk buyers that ignorantly and perhaps arrogantly carry on taking advantage of the current market may well find that the honey they taste today may soon turn particularly bitter.”