December 28, 2009

UK dairy farmgate prices likely to improve in 2010

Average UK farmgate milk prices shrank by 3p/litre in 2009 but there are signs of a reversal in fortunes.

Northern Ireland co-op United Dairy Farmers' recent auction saw prices climb for the fifth month in a row, and dairy commodity prices have been strengthening this autumn.

European SMP prices have risen from EUR$2,600 (US$3,743)/tonne to over EUR$3,000 (US$4,319)/tonne in the last three months. In the UK, the average spot price for butter grew 25% to GBP3300 (US$5,268)/tonne in between September and December. Other dairy products prices have also increased substantially. This strengthening in underlying commodity values indicate good bearings for farmgate milk prices in 2010.

Market indicators have also risen. Prices appear to be on an upward movement with increased demand for dairy products from the Far East and a reduction in supply due to major reductions in output in both the US and New Zealand, said Andersons' dairy specialist Tony Evans.

These price increases should start to come through in 2010 to allow a reverse of the 2009 downward trend in farmgate prices, he said.

Milk producers' production costs remain significant, despite an easing in some input prices like fertiliser and feed. But many dairy units are still operating with production costs at 28p/litre, said Evans.

However, enhanced calf, cull cow and single payment income, on top of a liquid contract, can deliver acceptable profits. Nevertheless, the sector continues to shrink. Within the last five years, over one billion litres of UK production has disappeared as producers quit milk.

Without renewed confidence in the industry, production could fall close to 10 billion litres over the next five years. This is against a UK quota increasing to nearly 15 billion litres in 2011-12, said Evans.