Did dairy farmers not see global price slump coming?

Earlier this summer, the received wisdom on the next flashpoint to hit the food sector was the threat of protests by farmers over low beef prices.

However, little more than three months later, the spotlight has swung towards the dairy market, with protest group Farmers for Action bemoaning a dramatic slump in milk prices and threatening direct action, and newspaper articles warning that financially stricken farmers are “in debt and despair.”

So how can a sector that was riding high with record milk prices at the tail end of 2013 have descended into its current turmoil? And should farmers take some of the responsibility?

All the main processors point to the Russian trade embargo and commodity price volatility, driven by a reduction in global dairy demand, as the main explanation for the drastic fall in dairy prices.

Responding to these trends, Arla announced the latest drop to its farmgate price last week to 30.38ppl, Müller dropped to 30.80ppl on 3 August, while Dairy Crest is cutting its price to 30.1ppl from 1 September.

But FFA chairman David Handley claims their explanations are a red herring. “It’s the excuse season, and everyone is blaming the global market again.”

Instead, he blames retailers and processors for driving down prices in search of better margins. “The question we want answered is why we are governed so much by a global market when we consume 80% of dairy production in the UK?”

But it seems the farmers are facing a prevailing wind of globalisation, with “the current situation an example of the sort of volatility that British dairy farmers will have to deal with in a free world market,” warns DairyCo director Duncan Pullar.

“All the leading analysts have predicted a more volatile market so this turn of events should not be a surprise,” he claims, while pledging to “work with farmers to help them adopt business approaches to help minimise the effects of volatility.”

While sympathising with FFA, Rich Clothier, MD of Wyke Farms, says the drop in dairy prices has been inevitable, and suggests farmers should have planned for this. With UK dairy production hitting a 20-year high in 2013/14, averaging 1.1 billion litres of milk a month [Rural Payments Agency], Clothier claims over-supply, coupled with China’s “disappearance from the market” and Russia’s sanctions, means the current situation “was not unexpected. We can’t escape the fact we are in a global market, and we take advantage of that when prices are up.”

And it seems some farmers have done better than others, “having invested wisely in more efficient, leaner systems,” while others have not, says one dairy industry insider. “When have you ever met a farmer who is happy with the money they are making?”

Russian woes

Yet there is no question the current climate is tough, with the Russian trade ban hitting the dairy sector hard. “The Russian embargo’s effect has been understated,” says Clothier. “You are talking between 200,000 and 250,000 tonnes of cheese, which now has to find a new home elsewhere in the EU.”

Dairy consultant John Allen adds: “This is a time when the European Commission should be stepping in to help. This slump has been caused in part by a political crisis, and needs a political solution.”

Indeed, the EC confirmed this week it was extending its compensation scheme, initially targeted at fresh produce, to the dairy sector.

However, it is not yet clear how much compensation will be offered to farmers.

In the meantime, it appears the sector will encounter more turmoil before a resolution is found. “What’s clear is that without resolution we could see a potentially lasting damage to the supply chain,” warns Allen, which could hinder any potential recovery for the sector in the longer term.