Archive: Dairy enters down-cycle in 2014

Published 30 December 14

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Dairy market conditions are in complete contrast to this time last year, with markets having been on a downward trend for much of 2014. At the start of 2014, farmer confidence and optimism in the industry, as measured by the DairyCo Farmer Intentions Survey, was at its highest for a number of years. The timing of the survey, in December 2013, was likely crucial to this result as UK farmgate milk prices had reached record highs of more than 34ppl on average by the end of 2013. A year on and farmgate prices have dropped below the 30ppl mark – a level last seen in 2012.

The extent of farmgate price cuts since the start of the milk year has been very challenging, with some producers having had more than 20% wiped off their headline milk price in the nine months between March and November. On global dairy commodity markets, prices dropped by between 20% and 43% in the same nine-month period, with milk powders seeing the largest change.

Behind these steep price drops is the vast improvement in both domestic and global milk supplies during the year. This has left a surplus on the world markets as at the same time demand for dairy products, particularly from China, eased from the substantial volumes imported at the turn of the year. The start of the 12-month Russian embargo on agricultural products from Western countries in August only added further downward pressure to the situation, with EU cheese markets most directly affected and emergency support measures introduced by the EU Commission in response.

Closer to home, structural changes continue to affect the dynamics of the UK dairy market. Arla Foods extended its membership to include nearly a quarter of British dairy farmers following the extension of membership to former Arla Foods Milk Partnership (AFMP) farmers (now AMCo) and its ambitious recruitment campaign. This is likely to strengthen the link between global dairy market returns and UK prices. In November of this year, Dairy Crest agreed to sell its dairies operations to Müller Wiseman Dairies. Although it could take around a year to be approved, it could improve the ability of both companies to compete in the challenging market environment (see here for more).

The events of 2014 have reminded us that the UK dairy industry really does operate in a global market, one which is characterised by pricing cycles which appear to be getting more volatile. While dairy prices are not expected to see any significant recovery until the second half of 2015, the long-term outlook for the industry is still an optimistic, as global demand for dairy is set to outpace supply for at least the next ten years.