Dairy companies cut price paid to farmers

Leading dairy companies Dairy Crest and Müller have announced a cut of 1.75ppl and 29.00ppl respectively for farmers on their milk contracts from the 1st of October, 2014.

First Milk will also be cutting the price for both its liquid and manufacturing pools by 3ppl from 1 October.

Dairy Crest said the price reductions reflect 'dramatic falls in global dairy markets over the past few weeks,' including the Russian trade ban on dairy products.

Müller said the reduction of 1.8ppl reflects a sustained decline in revenues generated from sales of butter and cream, commodities which are traded in global markets.

A series of key meetings involving European dairy industries, government bodies and the European Commission will be held in the next month to address the Russian import ban on dairy products.

The 17% reduction in the Global Dairy Trade auction price between July and August means that prices are now around 50% down from their peak at the start of 2014.

At the same time, UK cream prices have fallen back 15% this month alone and cheese stocks are at record high levels. With half of the butterfat supplied by our farmers being processed into butter and half being sold on the commodity cream market, these external market conditions have a very direct impact on the farmgate price of milk.

Last year Cathedral City sales increased by 9%, significantly ahead of the market.

In July, Dairy Crest announced that it has entered into a strategic partnership with Fonterra, the world’s leading dairy exporter to market and sell two products for the fast growing global infant formula market. Dairy Crest had previously announced a £45 million investment at Davidstow to manufacture demineralised whey powder. This is the base ingredient in infant formula.

For farmers on a Davidstow contract this takes the price to 30.34 ppl* for a standard litre from 1st October 2014.

The Liquid milk price for farmers with all or a proportion of their milk price on the company’s standard contract will be 28.34 ppl from 1st October 2014.

“As has been widely reported, global dairy markets have fallen dramatically over the past few weeks at an unprecedented speed and level," said Mike Sheldon, Dairy Crest Group Procurement Director.

"Unfortunately we have had to reflect this within our milk prices for October. I understand that this reduction will be really disappointing news for our farmers. However, having discussed our position at length with DCD, they recognise the severity of the situation.

“I recognise that price volatility is difficult for farmers and processors alike, which is why Dairy Crest and DCD pioneered the development of a Liquid Formula that helps to smooth out the peaks and troughs. We will be offering further volume to farmers from 1st October.

“I also urge farmers to take advantage of the full range of farm support services that Dairy Crest provides. These include our White Gold Service and individual Farm Business Review, which are designed to help farmers to earn the maximum benefit from their contract.”

Martin Armstrong, Head of Group Milk Supply for Müller UK & Ireland Group commented: “We will continue to invest heavily to add value to farm-gate milk, but we are not immune to the severity of the decline in the value of these globally traded commodities.

“Realisations from these products are now substantially lower and after a period of record milk prices, we have no option other than to reflect this in the farm gate milk price we offer.

“Despite the reduction, we believe that the price and proposition we offer non-aligned dairy farmers will continue to be one of the best available in the UK. Our standard price is ‘clean’ and not eroded by deductions for balancing, haulage, capital or membership levies.”

Roddy Catto, Chairman of the Müller Wiseman Milk Group, which represents dairy farmers who supply Müller said: “Whilst we are disappointed with the scale of the reduction in milk price, the board and the company debated hard to come to an agreement, with both sides moving a considerable amount following lengthy discussions.

“Unfortunately, it is a reality that milk supply hasn't eased and markets are in free fall. As a board we will continue to work with the company to have constructive dialogue and understanding that neither the board nor the company like the volatility of the market we find ourselves in.”

Chairman of First Milk Sir Jim Paice MP said: “Global and European markets have been falling since early spring, in some cases by almost 50%. Despite us making a number of price reductions since June, market prices for our core products have declined further and faster than our price cuts. We are well aware of the impact that this price cut will have on our members’ cash flow, but this latest move means that we now have our milk prices in line with our projected market returns.

“The reasons for falling market returns are well documented. While milk production here in the UK and in key milk producing regions like New Zealand and the US are well up year-on-year, demand from main importing markets has dropped back, and on top of that we now have Russia banning dairy imports from the EU. Given that most of our milk is manufactured into products like skimmed milk powder, cheese, butter and cream, which are traded globally, we are impacted directly or indirectly by all these market factors.

“Against this backdrop, we are taking actions in the business across a number of areas, although admittedly these have a limited impact in the face of such huge market drops. For example, we are maximising milk going into higher performing markets, winning increased listings for our added value brands, and taking costs out of every corner of our business.”

Recently, Farmers for Action said they expected dairy prices to fall by as much as 2ppl for October milk.

"This will be blamed on global markets, falls in power prices and cream prices," the organisation said.

"In our view there is only one sector to blame and that is dairy farmers. We need to stand up and stop the decline in our milk prices unless you all feel as dairy farmers you can produce milk 365 days a year at prices below 25p because believe us that is where we are heading and we will be brave enough to predict that by December, we will see at least another 3p off milk prices if we do not do anything."

FFA said according to their calculations feed prices would have to fall £100 per ton minimum for farmers to go through the winter producing milk at these prices.

Dialogue is continuing on a daily basis with a war of words but is not stopping processors cutting the prices, month in, month out. Therefore, whether you agree with it or not there has to be some form of direct peaceful action to let both retailers, processors and government know that UK milk producers are not going to accept prices below 2011. It is unsustainable even for the top 25% if they are honest, to continue producing milk 365 a days a year at these prices.

Rural accountants Old Mill said the likely impact of milk quotas being abolished next spring is still difficult to predict, with the potential for both increased imports from Ireland and greater export opportunities to the Asian market.

“With UK milk production running 5% ahead of last year, as well as strong production in the EU, US and New Zealand, global dairy commodity prices are already under pressure,” said head of rural services Andrew Vickery.

DairyCo’s Actual Milk Price Equivalent, based on a basket of commodity prices, was pegged at 30.9p/litre in July – 8.9p/litre down on the same time last year, he adds. “If this downward trend in commodity markets continues then there will no doubt be pressure on the processors to drop milk prices further.”

That in itself is not necessarily a bad thing, provided that costs can be reduced by at least the same level. “Feed prices should be lower this winter – and the good weather of recent months should help to keep dairy farmers’ costs down as well,” said Mr Vickery.

The effect of the strengthening pound in recent months will also have an effect on the market. “Imported commodities – notably proteins like soya - are likely to get cheaper, while putting further pressure on UK arable exports. However, there will equally be pressure on dairy exports, and imported dairy commodities will become more competitive.”