Dairy consultancy The Dairy Group has announced that prospects for dairy producers this summer look bleak. According to group spokesperson Nick Holt-Martyn, the recent slashes to producer prices by major processors Robert Wiseman and Dairy Crest were not entirely unforeseen.

Although the price cuts mean dairy farmers have not fully benefitted from recent increase in demand for milk products and improved retail prices, Holt-Martyn said, “While it is true to say that milk production around the world in on the up and demand growth has moderated to below 2per cent (OECD GDP growth), the market appears to be in a chronic oversupply situation.”

In the EU, USA and Australia, milk production has grown 4 per cent, with 12 per cent growth reported in New Zealand. However, the Dairy Group spokesperson continued that, as demand is rising slower than production is increasing, “A market tone that in most circumstances heralds a decline in market returns across the world irrespective of domestic issues.”

In its latest analysis, The Dairy Group presented a mixed picture for the UK, where the wettest April on record has stopped the spring flush in its tracks. Mr Hol-Martyn commented, “With the weather forecast indicating a continuation into May, a flat production peak is likely, which could help to dampen the market.”

There has been a decline in commodity returns over the last 6 months to a level not seen since August 2009, which has not been helped by the Pound rising to its highest level since October 2008. All this only serves to heap more pressure on the cheese sector, which to date has been resilient to a price decline due to the relatively low cheese supply. The Dairy Crest cut in the non-aligned liquid price by a massive 2 ppl is further evidence of the slim margins and cut throat competition in the once premium liquid sector.

Furthermore, production costs have risen dramatically in the sector. The latest report by the Dairy Group warned, “Production costs mean the room for farm gate prices to fall back is limited without serious consequences for UK dairy farmers.”

Currently, production costs in the UK are estimated to be around 30 pence per litre, though this is expected to increase over the coming year. However, despite high production costs, the UK still languishes 13th in the EU milk price league table. Holt-Martyn stated, “It is little wonder that producers favour pricing mechanisms based on production costs instead of market returns, as there is little confidence or even evidence that markets can deliver sustainable milk prices.”

Although fertiliser prices have fallen back somewhat in recent months, feed prices have risen by around £90 per cow since the beginning of the year. Over the past year, diesel prices have risen ten per cent and other dairy costs are projected to rise by at least the cost of inflation.

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