Industry Eye: Rollercoaster ride goes on but outlook is brighter for milk producers

Although the 'rollercoaster' ride for milk producers continues (volatile milk prices and input costs), we at Andersons believe the prospects for producers are more positive than they have been for a number of years. Irrespective of one's views about proposed 'super-dairies', the commitment on investment is indicative of this more upbeat feeling.

The key drivers for improved milk prices are global demand and currency movements.

Commodity prices for milk products worldwide have risen by approximately one third since this time last year. Although there is some indication that demand has peaked, even if global markets and currency values were to shift in an unfavourable direction, there is no reason why UK farm milk prices should fall, as prices were very slow to rise on the back of improved world market prices.

There is an argument that prices should have risen sooner and higher than they have currently done and this is a question which milk buyers should be asked to address.

Andersons operate a 'model' dairy farm called Friesian Farm. It is based on 150 cows, selling on a liquid contract. Over the last year, the financial performance indicates a negative margin from production (milk income less all costs associated with producing milk). Only after the Single Payment and ELS has been added in was the business showing a positive return. For the milk year 2010/11 and 2011/12 we are projecting a margin from production returning to profit of 1.1ppl. and 1.7ppl respectively, before the inclusion of SPS/ELS. This is very encouraging.

Friesian Farm has the benefit of a liquid premium on its milk price, but, not all producers will be so fortunate. We have seen a huge variation between milk buyers since the demise of Dairy Farmers of Britain last year and a gap of as much as 4ppl. has been apparent throughout the year.

Clearly, the current year will be difficult for many producers with poor forage yields and expensive feed and straw costs. There seems to be significant local variations in this respect, with some producers having sufficient forage and others very short. Hopefully this is a one year problem only.

With improved prospects on milk price, we believe the opportunity to secure a profit from milk production is stronger than it has been for some time.

We at Andersons have noticed that there is significant variation between the best and worst producers in terms of financial performance. Although our model farm indicates a positive surplus from production going forward, this hides a massive variation between profit/loss on individual farms.

For those in the top quartile there is still a need to challenge production costs going forward, to maximise future profitability.

More importantly, for milk producers whose businesses fail to generate returns, even with better milk prices, there is a need to address the cost base within the business.

If you would like a copy of our Dairy and Livestock Outlook, produced to coincide with the event earlier this week, please call 0303 313 0001.

CW 11/9/10