Substantial investments have been made in UK dairying, but farmers have extended credit
and used up reserves

Locked-in inflation and the opportunities for dairy farmers are two of the topics that Edward Lott at Kite Consulting considers as he looks towards to autumn/winter.

Milk prices have been difficult across the autumn and winter for many dairy producers. Commodity values were at low levels and while liquid prices remained steady, many UK dairy farmers were in a negative cash flow situation over the winter. While we were seeing the average cost of production sitting at around 40ppl, for many milk prices were well below this.

During this period, we saw farmers extending their creditors and using up reserves built up during the higher milk prices of 2022. We’ve seen a reduction in the investments dairy farmers are making; both in terms of improving business efficiency and in renewing and upgrading infrastructure to help meet new legislation and manage business risk.

Milk price
This spring, we’ve seen a steady upward trend in terms of milk price, but not to the extent that farmers have been able to claw back anything on their cash flow positions.

This spring has been one of the most challenging in recent history, with the constant wet weather adding another layer of cost and stress to milk production.

Cows were housed for longer than normal this winter, which has reduced forage carry-over stocks for many. Spring work was delayed and farmers struggled to get slurry on to wet fields, so made later first cuts or took cuts on time but with lower protein levels. Many winter cereal crops and maize didn’t go in on time, so we could see yields reduced substantially. Unless we have an exceptional growing and harvesting year, forage stocks will be down for the winter.

While peak costs look like they are coming down, for many the lower feed prices cannot be accessed yet. And when it comes to power, there is a big spread of electricity contracts out there, with some locked into very high tariffs for a considerable period of time. Many farmers renewing are still seeing much higher electricity costs than three years ago.

Costs of feed, fertiliser and fuel have fallen from their peak and now appear to be operating in a narrower range. But feed stocks are tight and there is continued risk of volatility in the market. It’s a case of inflation being locked into the day-to-day costs of dairy production. While headline inflation stands at 2% (and remember that means prices are still increasing by 2%), service inflation stands at 5.7%. And farmers are seeing these cost increases in repairs, contractors and labour; in fact anyone coming onto the farm to offer a service.

The combination of underlying operational cost inflation and volatility in the feed markets is keeping the cost of production firm. There are opportunities here. Volatility means potential upside as well as down.

“The UK is fundamentally a good place to produce milk.”

I’d urge you to keep a close eye and take cover well forward at low points. Risk management strategies are important to building a long-term viable business able to invest, both for its licence to operate and sustainable financial returns.

Global milk production is increasing by about 1% a month, with demand sitting somewhere near that figure. The Far East and China have seen softer demand, while the EU; particularly Ireland and Holland, have had closer to 0% growth in milk production. We have seen the milk price more recently rebased to around the 38-40ppl level for a standard litre, with manufacturing contracts being over 40ppl in most cases. And the market suggests it might have 1-2ppl left in it. But this is a finely balanced situation. If the impact of this spring’s poor weather feeds through to lower autumn milk production, then prices could strengthen further.

Massive investments
Remember, the UK is fundamentally a good place to produce milk. The country’s two biggest milk buyers are making massive investments in UK dairy – we can be confident in the future of dairy here.

Make sure your business is fit for what this future demands, by working towards your milk buyer’s net zero requirements, investing for environmental compliance, business efficiency and futureproofing.

The impact of the spring is likely to continue to feed in throughout the summer and early autumn, keeping supply under pressure. Then attention will switch to the performance of autumn-calving cows on winter forages as to whether this supply pressure continues.

Edward Lott at Kite Consulting