Archive: Is it as bad as 2012?

Published 23 December 14

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GB dairy farmers have suffered numerous cuts to their milk prices in recent months which will be negatively impacting cash flows. Between May and December of this year, monthly farmgate prices have fallen by an average of 4.85ppl. This has led some farmers to ask the question, are things as bad as they were in 2012?

                       Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: AHDB/DairyCo
* Margin over concentrate using average monthly price of high energy dairy ration and average concentrate use per litre published by Promar milk minder and average GB farmgate price published by Defra.

 

Despite the cuts, the margin over concentrate, normally a key indicator of profitability, remains at a relatively high level, in historic terms (see graph). The answer to the question hence looks to be “not yet.” However, there a few reasons why the graph may paint an overly positive picture at the moment:

  • Farmgate milk prices are currently being boosted by positive seasonality payments. As we head towards the spring and seasonality payments are removed or change to penalties, the full effect of milk price cuts already announced will be felt on cash flows.
  •  The cost of some inputs have been falling. For example, the drop in prices of compound feeds is estimated to have led to around a 0.6ppl reduction in the cost of production since this time last year.  This has offset some of the effect of falling milk prices on margins.
  •   The margin over concentrate in the years leading up to 2008 was correlated with production falling over this period. Production only showed growth after this period, when the margin over concentrate has varied between 17 and 26ppl.

 Although declining steeply over the past twelve months, the margin over concentrate currently remains above the sub 20ppl levels seen during 2012. This may explain why there has not yet been the strength of reaction from dairy farmers as there was in the 2012 “summer of discontent.” However, with the full effect of existing milk price cuts yet to be seen, some milk buyers announcing additional price cuts for the new year and the price of some inputs beginning to increase, further pressure on margins is expected. There is thus a strong possibility that the pressure on margins will become as serious as it was in 2012.

On the factors affecting production, we all hope that the good weather will continue and feed prices will not rise significantly. AHDB/DairyCo believes global demand is the key to farmgate price recovery and that it is likely to be the second half of 2015 before this increases significantly. Therefore, the impact on margins could be longer-lasting than seen in 2012.