Archive: The impact of global price movements on the UK dairy market

Published 3 September 14

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Current conditions in the global dairy market are impacting negatively on both UK wholesale prices and farmgate prices. As a region GB uses around 50% of milk produced for the home liquid sector and retains a lot of manufactured goods internally. Why then, should global market movements impact UK farmgate prices?

At present, prices appear to be only heading one way and have been since the beginning of 2014. Buyer demand is weak following anecdotal reports around buyers, such as China, forward-buying in 2013 leaving them distant from the market in 2014. This combined with an increase in global supply and the Russian ban, has been placing uncertainty on the global market.

Global market conditions, such as those at present, impact the UK due to trade competitiveness. Those products which are kept in the domestic market are under threat from imports while those products which are exported face competition from other exporting nations. This means UK processors will need to be price competitive or offer a product of sufficiently high quality to obtain a premium.

These pressures, in turn, feed back into UK farmgate prices. However, EU farmgate prices react to global wholesale price movements quicker and to a larger scale than UK prices because more EU milk is used for traded commodity products. This helps to eliminate some of the volatility from GB markets seen in global prices and is a benefit derived from having such a large liquid market.

However, farmers should expect the volatility in UK farmgate prices to increase over time. If UK milk production increases, the likelihood is that milk used for manufacturing will increase more than liquid, as explained in the AHDB/DairyCo Livestock show presentation. The increase in dairy products combined with only moderate growth in UK domestic demand means import substitution and/or exports will increase, thus increasing the UK’s links with the EU and global markets.

Despite not having control over global markets, GB farmers do have options that can maximise margins in both harder and more prosperous times. Although there will be some natural relief from lower feed prices, assessing farm efficiency, through benchmarking and/or discussion groups, will help to highlight any areas where costs can be reduced. Liaising with processors or farmer reps means farmers can push for more transparent contracts which should clearly state what milk a processor requires. With a contract that provides clarity, farmers will be able to maximise the milk price received by avoiding penalties and capitalising on bonuses, in a cost effective manner.

Overall, having an efficient and effective supply chain will help maximise the value of milk through harder times. It is therefore critical that the industry continues to work together, as demonstrated through the Leading the Way growth strategy. This will allow for all the different sides to achieve the goal they all share, getting the most value out of milk.