Milk shortages similar to those seen on egg shelves are likely in the second half of 2023, retailers have been warned, if there is any further fall in farmgate prices.
Experts including AHDB, Rabobank and Kite Consulting believe dairy commodity prices will slip back this year, amid a slump in global demand, allied to forecast production growth in Europe and the US.
This has already translated to big falls in forward milk futures prices, now in the region of 35ppl for the second half of the year, suggested Kite Consulting managing partner John Allen.
Leading milk processors such as Freshways, Arla and many others have already cut farmgate milk prices for the start of the year by as much as 3ppl to 47ppl (in Freshways’ case) in response to this negative market sentiment, while Müller announced last week it would drop its price by 1ppl to 47ppl for those farmers in its Müller Advantage farming scheme.
As a result, The Grocer understands some retail buyers are already looking to cut the price they pay for their milk and other dairy products, and to pass on the savings to shoppers.
But with the cost of production set to stay around 45p per litre this year due to continued high cost inputs on feed and fuel, Allen warned any big farmgate price cuts could potentially collapse the milk market by disincentivising farmers from producing milk by the second half of the year.
“We’ve never seen the gap between the cost of production and commodity levels as large as they are now,” he pointed out.
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“If you were to drop farmgate prices down to that 35ppl commodity level, there would probably be a shortage of milk in Q3 and Q4. That’s the risk and retailers need to get appraised of this market,” he added, and ensuring security of supply in such a volatile commodity landscape would be a key challenge for the sector in 2023.
“Making knee-jerk reactions [by cutting prices now] could be painful later on, as we’ve just seen in eggs.”
In reaction to growing market volatility, Müller also announced plans to introduce new milk contracts with farmers just before Christmas, due to roll out this spring, which will place less of an emphasis on global commodity volatility, said Müller’s head of head of agriculture Richard Collins, and offer farmers “greater levels of certainty, stability and transparency”.
Farmgate milk prices hit record levels in 2022 due to soaring costs and sluggish volumes, with Defra data showing the UK average milk price for October hit 50.44p per litre, up 54.4% year on year and 59.1% above the five-year average.
These increases drove big retail price hikes across the dairy category (in milk in particular) last year, with the average price of an own-label pint of milk in the mults rising by 72.7% year on year to 95p, and four pints climbing by 43.5% [Assosia].
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