Category: Dairy & Livestock

Defra has released its provisional results for livestock populations in the UK from the 2018 June Survey of Agriculture.  The final results are scheduled for publication on 20^th December.  The table below shows the key findings.

The total number of pigs is the only category to show an increase compared to 2017 numbers.  However after a couple of years of increasing, the breeding herd has now experienced a decline by 1.6%.  The rise in total pig numbers comes from the continued increase in fattening pigs, a further 1.3% for 2018,which suggests production per pig is rising.

UK JUNE CENSUS (LIVESTOCK)
NUMBERS – ‘000 Head	2015	2016	2017	2018	% Change 17-18
TOTAL CATTLE & CALVES	9,919	10,033	10,004	9,891	-1.1%
Of which      Total Breeding Herd	3,472	3,493	3,481	3,441	-1.1%
Dairy Herd	1,895	1,897	1,891	1,883	-0.5%
Beef Herd	1,576	1,596	1,589	1,558	-1.9%
TOTAL SHEEP & LAMBS	33,337	33,943	34,832	34,302	-1.5%
Of which      Breeding Flock	16,024	16,304	16,669	16,497	-1.0%
TOTAL PIGS	4,739	4,866	4,969	5,018	+2.0%
Of which      Breeding Herd Total	408	415	417	410	-1.6%
Source: DEFRA

The total number of cattle and calves has fallen back below 10 million head, although still higher than 2015 levels.  The breeding herd has declined by 1.1%, mainly due to a reduction in the beef breeding herd.  Further analysis of the figures shows an increase in female beef cattle of breeding age which appear not to be entering the breeding herd, suggesting these will be sold for consumption and therefore further reductions in the beef breeding herd are likely.  In the dairy herd, females aged between 1 and 2 years have seen a decline of 8%, this could see replacements difficult to source.

The total number of sheep and lambs and the sheep breeding flock, after recent year-on-year increases have both seen declines.  The difficult weather conditions at lambing time, saw higher than normal levels of ewe and lamb casualties.  Lambs under 1 year are down by 2.3%, but other sheep over 1 year are up by 11.7%.  The strong hogg trade, in spring and summer, saw some ewe lambs originally intended for breeding, being switched and slaughtered for sheepmeat.  Ewes intended for first time breeding recorded a 4.5% drop, suggesting further contraction of the breeding flock.  The full Survey results can be found at – https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/747210/structure-jun2018prov-UK-11oct18.pdf

Deadweight cattle prices have seen a strong increase since the middle of August.  The deadweight all steer price has increased by 15p per kg over this time.  It is now just 4p per kg below last year’s levels compared to a 15p per kg gap in mid-August.  The prime heifer price has seen a similar increase.  The deadweight average lamb price stabilised through to the end of August, having fallen sharply between the middle of June and the end of July.  However, with an increase in supply, the lamb price has now started to fall again.  The latest SQQ for the week ending 15th September was 412.8p per kg, although it is now back above last year’s price (+9.1p per kg) for the same week, having fallen below year-earlier levels from the middle of July to mid August.

There are mixed signals within the dairy markets at present and it is difficult to forecast which way domestic milk prices will go.  Farmgate prices have been rising, largely due to fears of a drought-induced shortfall in supply.  However, domestic output has not been affected by as much as seemed likely.  And the latest milk deliveries for the week ending 15th September show GB production is up 0.4% on the week and is now running at 1% above the same week last year.  But this could all change when cows are housed for the winter and put onto less-than-ideal winter rations.

However, European butter and cream prices have seen significant falls in recent weeks as processors take the view that milk production is not going to be affected as much by the drought across Europe as first thought.

On the global markets, the latest GDT auction recorded yet another decline in the average price index, down by 1.3% since the previous event held earlier in the month.  The index has been in decline since May and is now at its lowest since October 2016.  Whilst major milk production countries such as Australia and the EU have been affected by drought, production in New Zealand and Argentina remain ahead of last year.  Overall, global supplies are still higher than last year, but they have been slowing over recent months, with July recording the smallest year-on-year increase for 2018 at 1% growth, compared to 2.7% in January.

The summer drought is set to reduce dairy profits by around 3ppl on Andersons’ Friesian Farm model.  This is one of the results seen in the latest figures from Andersons’ Friesian Farm model.

Andersons have been using Friesian Farm to track the fortunes of dairy farming for well over a decade. It is a notional business, that has recently expanded to 200 cows (from 150) to keep track of changing trends within the sector.  It has a year-round calving pattern like 80% of the GB industry, but it is moving towards a more forage-based production system.  The farm comprises 130 hectares (of which 60 hectares are rented on an FBT).  The proprietor provides labour along with one full time worker (plus casual/relief).  The table below shows the farm’s performance for the previous milk year, based on actual returns and costs.  Two budgets are provided for the present 2018/19 year; one before the effects of the weather, and then a current one.  Finally, there is a forecast for 2019/20.

Friesian Farm Model – source The Andersons Centre
ppl           Milk Year –	2017/18	2018/19 (pre-drought)	2018/19 (current)	2019/20
Average Yield	7,850	7,770	7,650	7,700
Milk Price	29.0	28.5	29.1	28.5
Total Output	31.0	30.7	31.3	30.9
Variable Costs	12.8	12.1	15.3	12.3
Overhead Costs	9.3	9.3	9.6	9.9
Rent, Fin. & Drawings	6.4	6.3	6.4	6.3
Cost of Production	28.5	27.7	31.3	28.6
Farming Margin	2.4	3.0	0.0	2.3
Basic Payment	1.9	1.8	1.8	1.8
Business Surplus	4.3	4.8	1.8	4.1

Returns in 2017/18 were good, following losses from production in the previous two years due to the milk price slump.   Things were looking positive for profitability in the current 2018/19 year until the weather took over.  The current budget shows a sharp upturn in costs as a result of low forage stocks and a forecast reduction in yield.  This is only partially offset by better prices resulting in a break-even position before receipt of the Basic Payment.

Long-term forecasts are fraught with danger, but the prospects for 2019/20 currently look reasonable. Costs should (hopefully) return to a more normal basis, but milk prices could well weaken.  Overall the profitability forecast is quite solid – but this assumes an orderly Brexit.

A No-Deal Brexit is also still possible. This would cause chaos in many markets, including milk products, in the period up to and after ‘Brexit Day’ on the 29^th March 2019.  It should be remembered that the UK is a net importer of dairy products, so there might be opportunities for import substitution in the longer-term.  Prices might even rise in a protected domestic market.  But the UK processing sector would have to be re-orientated to adapt to these new demands

Following the publication of the Agriculture Bill (see other articles) we know that the BPS will continue largely unchanged for the 2019 and 2020 years – providing dairy farmers with some stability.   But, with the days of the BPS clearly numbered, producers will need to think about how they will replace this lost margin in their accounts.

DEFRA has released its final estimates of livestock numbers in England as at 1^st June 2018.  The dairy and beef breeding herds have both recorded declines by 0.6% and 1.3% respectively.  Perhaps of more significance is the fall in the number of dairy cattle in the categories aged 2 years or more, or between 1 and two years, which have seen a 6.6% and 7.6% declines respectively; this could have an impact on the number of cattle available for replacements.  After stabilising between 2016 and 2017, the pig breeding herd has seen a 2.2% fall over the year.  However, the number of fattening pigs has increased by 2.2% which would indicate better productivity.

The sheep breeding flock has remained stable at just under 7.4 million head.  Interestingly, the the number of ewes intended for first time breeding has fallen by 6.5%.  With the high prices being obtained for sheep meat earlier in the year, it was reported that a number of ewe lambs initially intended for breeding, actually ended up being slaughtered for meat.  The number of lambs under one year are down by 1.4% compared to 2017, reflecting the difficult lambing conditions.  The UK figures will be available on 11^th October and a fuller analysis will be given then.  For full details see –  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/740136/structure-june18-final-eng-13sep18.pdf

The Scottish Upland Sheep Support Scheme (SUSSS) opened for applications on 1st September and will close on 30th November.  The scheme is one of Scotland’s ‘coupled’ support schemes which it retained when the Basic Payment Scheme was introduced (the other being the Suckler Beef Support Scheme).  The scheme provides additional payments to upland farmers and crofters where 80% or more of their land is classified in BPS Payment Region 3 and they farm less than 200 Ha of land in Payment Region 1.  Payment can be claimed on each homebred ewe hogg kept on the farm or croft from October in the year of the claim until March the following year.  The rate is dependent on the total number of animals claimed each year.  The rate for 2017 was €70.67 per head.

Arla’s Board of Directors has agreed on the proposal to pay out the entire 2018 net profit to its farmers.  This could see a payment in the region of 2-2.2p per litre (2.3-2.5 EURc/kg milk) being made to each member.  The CEO of Arla Foods, Peder Tuborgh, has said that a significant improvement in the balance sheet over the last few years means the company is able to make this extra-ordinary pay out whilst still being able to continue its investment in future growth.  The proposal will be discussed when the Board of Directors meets again next month, with a final decision being made at a meeting held in February 2019 when the annual results are approved.  If approved, the payout will be made in March 2019.  The amount is subject to there being no material changes to the profit level or financial outlook at the year end.  The farmer-owned cooperative usually pays only part of its annual profit out to its farmers.  An exception is being made this year as the Board recognises that it has been a tough year for dairy farmers (as well as the business having the reserves to make a full payment).  

Muller has announced that it will leave the price it pays to its supplying farmers unchanged in October.  Its standard litre price therefor remains at 29.5ppl.  Many in the sector were hopeful that the momentum for further farmgate price rises would be kept up by Muller – not least to offset higher production costs.  However, with wholesale milk market indicators mixed, it appears that the company decided there was, as yet, no compelling case for an increase.

First Milk has announced that its September price will rise by 0.5ppl.  This takes its standard liquid price to 28.5ppl and a manufacturing litre to 29.5ppl.

According to the latest AHDB costings, margins for UK pig producers have almost disappeared.  Production costs for the second quarter of 2018 are estimated to have risen to an average of 150p per kg – the highest level since the start of 2014.  This has largely been driven by an increase in feed costs.  The average pig price for Q2 was 151p per kg, indicating minimal profitability for the average producer.  Since then, the pig price has continued to slip, dropping below 150p in August.  There seems the likelihood that feed prices will also continue to rise, given the uplift in cereals values in the last few months.  All this means the producers are likely to see a period of loss-making during the autumn.

Commodity Markets

The two GDT auctions in August showed that global demand for milk products is currently weak.  The event at the start of the month saw the price index of all products unchanged, and then the sale on the 21st August saw values drop by 3.6%.  There has been a consistent fall in prices throughout the summer.  The index, currently at $3,044 per tonne, is some 16% lower than it was at the end of May.  It seems that weak demand from milk importers, rather than a global surplus of supply, is the main reason for the slide. 

Domestic Prices

Product values closer to home are moving in a different direction to those on the world market.  Although UK milk volumes have not declined greatly (see below) traders appear to wanting to ‘stock up’ in anticipation of potential shortages ahead.  Demand is also strong from the rest of the EU which has experienced similar weather conditions to the UK.  Whilst firming product prices are part of the reason for farmgate milk price increases, there also seems an attempt by buyers to raise prices to offset higher on-farm costs and pre-empt future production declines.  The following selected price increases have been announced from 1st September;

• Muller – increase of 1.5ppl to take its standard litre to 29.5ppl
• Grahams Dairies – up 0.5ppl, also to 29.5ppl
• Meadow Foods – rise of 1ppl
• Dairy Crest – a 0.5ppl ‘extreme weather supplement’ to be reviewed monthly to help Davidstow suppliers cope with the drought conditions
• Arla is keeping its September price unchanged at 30.2ppl for liquid and 31.4ppl for manufacturing

Production and Profitability

UK milk output has remained surprisingly robust given the late spring followed, by the summer drought.  Looking at the daily milk deliveries for the first 18 days of August in Great Britain, the reduction for this year compared to 2017 is only 0.9%.  Looking at the three-year average production for the period, this year’s output is almost exactly the same.  Looking at the UK rather than just GB, milk output in the first half of August was actually higher than both last year and the 3-year average (+0.5% and +1.4% respectively).

For many dairy farmers maintaining output over the last couple of months has only been achieved by supplementary feeding – either silage, or concentrates, or both.  Although the drought has now broken for most, it seems unlikely that autumn grass growth will be sufficient to allow large enough cuts of silage to replenish that already used, and offset the low or non-existent second cuts from earlier in the year.  Therefore, current output may have been ‘purchased’ at the expense of production later in the year.  Producers will be looking at drying cows off earlier and culling harder to stretch limited forage stocks through the winter.  Animals that are being fed on ‘alternative’ forage sources (notably the large tonnages of straw that have been baled this year) may also not yield as well, even where rations are being balanced by the inclusion of higher quantities of (expensive) purchased feeds.  All this points to lower production through the winter.

The drought will inevitably have an affect on the profitability of dairy businesses in 2018/19.  Both through lower output, as discussed above, and higher costs for purchased feed.  We will use our Friesian Farm model to produce some figures showing the likely effects next month.

Company News

The ownership of Britain’s fourth-largest dairy processor has changed hands.  A majority stake in Meadow Foods was sold by its founding families to the US private equity company Paine and Partners in 2016.  This has now been purchased by a UK-based private equity firm, Exponent for an undisclosed sum.  The existing management team at Meadow Foods will stay in place.