Milk margins: Challenging time for the dairy industry

It’s part of a total £300m investment across its plants in the UK, with Taw Valley in Devon getting the bulk of it with a £179m investment in mozzarella.

Modern, well-invested factories are essential everywhere, of course, but more so in Scotland where the processing outlets and options for farmers are more limited. Alas, though, it doesn’t look as if Arla is looking for additional milk to go with its investments at the moment, but I’d never rule it out.

Investment in plants is expensive to begin with, but more so if the plants aren’t kept full of milk and Arla does say that its investment ‘will allow the site to expand and grow over the coming years’.

READ MORE | Arla make further investment at Lockerbie location

Milk volumes

The investment challenges that are coming down the line for dairy farmers on slurry and silage clamps in particular will mean a faster exit rate for farmers than we have previously seen I think, and the farms that are the best invested, and more environmentally efficient should – in theory at least – become more attractive to buyers as – or if – milk supply tightens.

My last article back in March talked about the awful weather, and commented that at that time it wasn’t having a material effect on milk volumes, or prices. Not now, though. The latest data shows that the UK is tracking well down on last year and previous years still, with the latest weekly UK total being 309m litres, which is down 6.0m litres and 1.90% on the same week last year, and down 7.3m litres and 2.31% on two years ago.

The maximum we have produced in this week is 321m litres in 2021, which means we are filling the equivalent of 60 reload tankers less a day compared to that. Compared to the average amount of milk we have produced in the week over the last few years we are filling 40 fewer tankers a day. It’s a lot of milk!

But if we factor in Ireland, then the volume situation is worse (and the market situation better).

Irish milk volumes in March were 753.8m litres, which is down 47.60m and 5.9% compared to last year. Cumulative volumes for the calendar year are now 1,232.7m litres, which is down 8.9% on last year if the leap year is factored out. It means that the combined UK and Irish milk volumes for the first quarter of 2024 are 4,930m litres, which is down 153m and 3% on last year, to the lowest since 2019.

This is hugely significant for the market because it means that Ireland is effectively out of the cheese sector at the moment because it has produced very little cheddar over the winter, and a lot less butter – a total of 85,000 tonnes between October and March, which is the lowest since 2017/18. The same is true for the UK – which produced 88,800 tonnes of butter in the same period – the lowest since 2019/20.

The net result of all of this is that you can all breathe a huge sigh of relief – there is no question that if milk production and product manufacture had not been as they have been, then most of you wouldn’t have got price increases, and you might have ended up with decreases as commodity prices would almost certainly have fallen.

As it is the prices are OK, but not brilliant – aside from butter. But now we are at or passed peak there is a good chance of prices creeping up – at least for butter and cheese if not for SMP, which is still in the doldrums.

The market is tough. China is still standing well back still and not buying, and the latest GDT event saw some of the weakest Chinese buying in years. Nevertheless the last event increased by 1.8% which is better than a drop.

For commodity-based farm gate prices to increases significantly we need the SMP price to surge, but there seems to be no chance of that happening at the moment. SMP could only manage a pitiful 0.4% rise on the auction, and Arla’s SMP settled out up just £10 on the previous one to £1985 – a pretty awful price, I’m afraid.

But there is some better news on butter, and this week I’ve seen a trade for over €6200 – which I haven’t seen for a long time. In fact we’ve got to back as far as November 2022 to see Dutch butter at this sort of a level. It isn’t there yet, mind – but this week it settled at over €6000 after an increase of €160 in a week.

The butter futures are supporting this level, though, with the highest price on butter now just over €6,450 for October. EU SMP futures are peaking at €2,650 for September. On this numbers the AMPE farmgate price converts to the mid to high 30p zone depending on milk quality, and after transport, a processor margin and current supply chain costs, (as calculated by Steven Bradley). From this there looks to be something better on the horizon for those on ingredients contracts, therefore – although not before Q3 or Q4 probably.

In the UK cream has picked up on the back of butter to around £2.15/kg. It isn’t a terrible price for the time of year, and would undoubtedly have been lower were it not for the reduced milk volumes. The price is in fact, one of the highest for April / May in recent years.

Despite cheesemakers paying milk prices above the traded price mild cheddar seems stuck on £3400, with seemingly a few if not several cheesemakers happy to offload it cheaply. Cheese futures from Stone X are about the same, too, at the moment.

Thus the market is moving in the right direction for butter, and for SMP on the futures if not on the real market – yet. If milk volumes stay as bad as they are then I think we can look forward to better prices soon, which will ultimately be reflected in your milk cheques, hopefully starting with those lowest down the milk price league table first.