December 5, 2011

The further tightening of UK milk supplies is causing another 5,000 dairy farmers to quit the sector over the next decade but would create opportunities for those that remain, said Promar.

It predicts the number of UK dairy farmers will fall to 9,400 by 2020 and will be only partly offset by increased output from those that remain. The firm forecasts a 40% increase in the average herd size from 124 to 170 cows and an increase in average yields from 7,400 to 8,100 litres a cow a year by 2020.

But this will not be enough to stem the long-term decline in UK milk output, which has fallen from a recent peak of just over 14 billion litres in the 2003-04 season to 13.3 billion in 2010-11.

Promar's Andrew Thompson said last season's rise in UK milk production, which was up from 12.8 billion litres in 2009-10, was something of a one-off, due in part to favourable weather for milk production.

But he reckoned the tightening of long-term milk supply, combined with strong competition for milk among buyers, would help keep markets firm and create opportunities for efficient producers.

"Retailers need liquid milk on the shelves to get shoppers in and processors need the milk volume to run factories at full capacity to gain efficiency. If they're going to secure these supplies, they're going to have to pay for it."

But farms would have to improve efficiency to ensure a viable future, especially as market volatility would be here to stay, he warned. Next season could see some downward pressure on global commodity markets and there was unlikely to be a dramatic fall in production costs.

About 40% of the cost of milk production was due to feed, and while grain prices had come down from their peak, this did not necessarily mean feed costs would follow by the same headline figure, he said. A lot depended on how much compounder had bought forward and what inclusion rates of cereals were used in rations.

Most other farm costs were likely to continue increasing steadily, with the biggest contributors being labour, rent, veterinary and medicine and machinery costs, including depreciation, Mr Thompson said.

"A better milk price clearly helps, but costs have all increased at largely the same rate and it is those producers changing or improving their system that will benefit most. Money is still comparatively cheap to borrow, so there are some great opportunities out there for those who are able to borrow."