Archive: Will GB dairy farmers benefit from reducing milk supply?

Published 30 September 14

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Recently there has been discussion in the industry regarding the idea of GB farmers producing less milk to reduce overall supply in order to alleviate some of the current pressure on prices. But how practical is this idea?

If it could be achieved, reducing milk supply by a relatively small amount to tighten the market would, in reality, just result in us giving up some of our sales to Irish and other farmer neighbours who are prepared to grow their milk supply.  The UK is part of the EU free-trade area - a region that currently has ample milk supply and thus any small UK supply gaps that are created by the action are likely be rapidly filled by other EU countries. This reduces the potential for UK farmgate prices to increase in anything other than the short term if domestic supply was to suddenly fall.

Another supply management route could be that farmers just produce enough to satisfy the liquid and added value markets, which are subject to less competition due to transport costs or premium values in consumer’s eyes. This would insulate our prices from commodity market changes. However, with the current liquid and added value market size, if we were to stop producing the billions of litres of milk involved in commodities, thousands of farmers would either need to leave the industry or agree to significantly reduce herd size, which would seem very unlikely.

Neither option looks practical and potentially both breach competition law, so what can the industry do?  In short, be more efficient than anyone else in the world. Without market controls, volatility will always be part of global dairy commodity markets. There is good evidence to support the view that there will be relatively steady long term demand growth but in the short term there will be variable weather-fuelled supply levels and coupled with the time lag involved in adjusting to producing more or less to meet market demand (see here and here for more), we can expect this pattern to continue.

The UK market is part of this commodity market “rollercoaster” because we trade (buy and sell) with the rest of the world and coping with the size and length of the dips, like the one being experienced now, as well as making the most of the peaks, like that experienced a year ago, is key to success. This requires the whole supply chain to be as efficient as possible and to be pro-active at exploiting value-added market opportunities in order to achieve a premium over standard commodity prices where possible. If we are as competitive as possible we will be some of the last ones to move into a loss and the first ones back into profit during the dips in the rollercoaster.