Whilst not unexpected, dairy farmers will be concerned that farmgate prices are now seemingly headed downwards. The shift in market sentiment has been highlighted by the announcement from Muller that its 700 suppliers on the Muller Direct contract will face a 1.5ppl price cut from the 1st January. This will take the standard litre down to 29ppl. Muller blames the fall in wholesale cream and butter prices since the summer for the cut in prices.
Andersons has updated its Meadow Farm model. Meadow Farm is a notional 154 hectare (380 acre) lowland mixed beef and sheep business typical of many family-run livestock operations across Great Britain. The farm runs a 60 cow suckler herd and a 500 ewe mule sheep flock; in both cases finishing all progeny. There is also a small dairy-cross bull-beef enterprise and 32 hectares (80 acres) of feed wheat and feed barley is grown. The model is managed on a real-time basis and provides an accurate representation of business structures and changes in annual performance.
The table below shows the results for the last two years and an estimate for the current year, to the end of March 2018, plus a forecast for 2018/19. The 2016/17 year received a boost from the weakening of Sterling, following the UK’s decision to leave the EU. The current year is expected to see further improvement, following better than expected livestock values and improved crop prices and yields. In addition variable costs have not increased by as much as expected.
Support payments have increased for 2017/18 as the farm has entered into the Countryside Stewardship Scheme. Although some land has had to be taken out of production to achieve this, it has not greatly affected gross margins as it tended to be marginal areas that were put into the scheme. CSS incomes has helped boost profitability, but makes this farm even more reliant on support for profit than it has been in the past.
The situation is not forecast to be as good for the coming 2018/19 year. Both the livestock and the crops gross margin are budgeted to fall, due to lower prices and an increase in variable costs. The purchase of a new mower also increases the overheads, bringing the margin from production back to around 2016/17 levels. The €:£ exchange rate is forecast to remain in the region of 85p maintaining BPS payments at a similar rate in 2018/19.
| MEADOW FARM MODEL – Source: The Andersons Centre | ||||
| £ per Hectare | 2015/16 (Result) | 2016/17 (Result) | 2017/18 (Budget) | 2018/19 (Forecast) |
| Livestock Gross Margin* | 574 | 650 | 736 | 691 |
| Crops Gross Margin* | 520 | 641 | 653 | 643 |
| Gross Margin | 564 | 649 | 716 | 679 |
| Overheads | 491 | 480 | 496 | 506 |
| Rent, Finance & Drawings | 310 | 318 | 315 | 318 |
| Margin from Production | (238) | (148) | (95) | (146) |
| BPS (and ELS/CSS) | 194 | 213 | 247~ | 240 |
| Business Surplus | (44) | 65 | 152 | 95 |
| *on grass/cropped area; ~ incl. new CSS Agreement | ||||
The two GDT (Global Dairy Trade) auctions in November showed similar results, with the average index price falling 3.5% and 3.4% on the 7th and 21st November respectively. This leaves the index at $2,970 per tonne. This is the first time the price has dipped below $3,000 per tonne since October 2016. At that point, prices were firmly on the up. Now, there appears to be a downwards trend with prices falling for four auctions in a row. New Zealand is currently in its peak production period and, although output this year hasn’t been as good as in 2016, deliveries are expected to show some improvement as the weather conditions improve, which probably explains part of the reason for the decrease.
With commodity prices seemingly under pressure, UK farmgate price increases are starting to slow with the market. Arla has frozen its prices for November and the Muller direct November price is to remain the same for December. Many of the other increases for November have been for less than 1ppl (see last month’s article). Muller Tesco suppliers are the only ones to receive a price cut so far, decreasing by 0.13ppl.
If wholesale prices continue to fall, farmgate prices will inevitably decrease. However commodity prices seem to have fallen significantly without much of a change in market dynamics. Milk production is higher compared with last year, but the EU’s Milk Production Reduction Scheme commenced this time in 2016. In the UK, cumulative production for 2017/18 up to September stands at 7,323.6m litres. This is 174.7m litres more than 2015/16 but 296m litres less than in 2015/16 and 79.8m litres less than at the same time in 2014/15. Stocks, apart from SMP are also relatively stable and although they have fallen recently are still relatively high compared to historic levels. It does appear though that buyers have seen production rising and are now waiting to see if prices fall any further.
The latest GDT (Global Dairy Trade) results show the average price index has fallen for the third consecutive event in a row. At the auction on 7th November the price index fell by 3.5% to $3,105, this was mainly due to a 5.5% fall in WMP which made up over half of the product sold. Both the butter and cheddar indexes also recorded a decrease by -3.6% and -2.8% respectively. SMP bucked the trend, accounting for nearly a quarter of all product sold, its price index increased by 7.2%. New Zealand is currently in its peak production period and, although output this year hasn’t been as good as in 2016, deliveries are expected to show some improvement as the weather conditions improve, which probably explains part of the reason for the decrease.
With commodity prices seemingly under pressure, UK farmgate price increases are starting to slow with the market. Arla has frozen its prices for November and the Muller direct November price is to remain the same for December. Many of the other increases for November have been for less than 1ppl (see last month’s article). Muller Tesco suppliers are the only ones to receive a price cut so far, decreasing by 0.13ppl.
If wholesale prices continue to fall, farmgate prices will inevitably decrease. However commodity prices seem to have fallen significantly without much of a change in market dynamics. Milk production is higher compared with last year, but the EU’s Milk Production Reduction Scheme commenced this time in 2016. In the UK, cumulative production for 2017/18 up to September stands at 7,323.6m litres. This is 174.7m litres more than 2015/16 but 296m litres less than in 2015/16 and 79.8m litres less than at the same time in 2014/15. Stocks, apart from SMP are also relatively stable and although they have fallen recently are still relatively high compared to historic levels. It does appear though that buyers have seen production rising and are now waiting to see if prices fall any further.
The UK dairy supply chain needs to work together more closely if it is to prosper after Brexit. This is one the main findings of a report recently published into the future of the sector. Commissioned by the Trehane Trust, and produced by Mike Houghton of Andersons Midlands, the report, titled ‘Identifying a Strategy for the UK Dairy Industry Post-Brexit’, sets out a number of recommendations. Price volatility is seen a being an issue for the dairy sector with the need to develop new risk management tools. Part of the solution would also be better communication between processors and producers about milk supply and demand. The report states that the possible removal of direct support should not necessarily be seen as a negative – 40 years of subsidy have not helped the dairy sector improve productivity. One possibility is to replicate the success of Producer Organisations in the fruit and vegetable sectors in improving productivity. Also the network of monitor farms could be expanded to help producers understand production economics. The report estimates that the industry would save £60m each year if every cow could produce 3,000 litres from forage. Lastly, the dairy industry needs to improve its marketing, both domestically, and to generate new export opportunities. The full report can be accessed via – http://www.trehanetrust.org.uk/trehane-scholars/2017/10/18/tackling-longstanding-issues-could-make-brexit-good-for-dairy-farmers
Further consolidation is to take place in the poultry meat sector. Following 2 Sisters Food Group acquiring Grove Turkeys & Bernard Matthews, and US based Pilgrim’s Pride’s acquisition of Moy Park, Cargill & Faccenda Foods have announced plans to establish a Joint Venture (JV). The new company will be a standalone business, with Cargill and Faccenda taking an equal shareholding. The JV is subject to clearance by the relevant regulatory authorities; once the deal has been completed the JV will be named. Cargill (which used to trade under the ‘Sun Valley’ brand) and Faccenda are currently the third and fourth largest poultry processors in the UK. The new merged venture will stay in third place, behind 2 Sisters as the largest and Moy Park in second.
Finished cattle prices have continued to fall through October. The GB All Steers average deadweight price for the week ending 21st October stood at 361p per kg. At the beginning of September the price was 375p per kg, 24p per kg above year-earlier levels, this gap has narrowed to just 9p per kg. Demand is expected to increase as we head towards the Christmas procurement period, but over recent years prices have rather plateaued between now and Christmas.
The deadweight sheep market is now trading at a similar level to last year. After a significant price improvement in mid-May, the market traded above year-earlier levels throughout the summer but fell below those obtained in 2016 in mid-September. The average SQQ for the week ending 21st October is 386p per kg; just rising back above the equivalent week last year by 5p per kg. The market remains pretty directionless.
The GB pig price continues to decline. The EU-spec SPP has fallen for 9 consecutive weeks and for the week ending 21st October stands at 157p per kg, the lowest since April, although this is still 11p higher than year-earlier levels. Ample supplies and heavier carcase weights are affecting prices. Even so, UK prices have not fallen by as much as EU values, which have declined significantly over the last four weeks. In Euro terms this means the gap between the UK and EU reference price has grown over the last month to €25.50/100kg, the largest since the start of 2017.
There have been more milk price rise announcements (see below) over the month but there is a sense that the market is maybe peaking. However, a couple of recent announcements may prevent production going into to oversupply.
As key export regions showed signs of a recovery in production, the Global Dairy Trade (GDT) auction recorded a decrease in its average index of -2.4% and -1.0% to $3,204 in the last two auctions held on 3rd October and 17th October respectively. At the latest event, SMP was down -5.6%. Over half of the product sold was WMP and the price for this fell by -0.1% with butter and cheddar both seeing a decrease by -2,5% and 0.1% respectively.
According to the latest figures from the AHDB, milk production from the five key global exporting regions (EU-28, Argentina, Australia, New Zealand and the US) for August was 2.2% higher than last year. Estimated daily deliveries from the EU were up by 3.6% compared to year-earlier levels. France recorded growth for the first time this year and Germany is also starting to show signs of recovery. Poland, Ireland and Italy continue to demonstrate significant rises. Looking further afield, in the US, favourable weather conditions has seen higher production, Australia is expecting to see a recovery this year after a difficult 18 months and both Brazil and Argentina are experiencing higher production.
In contrast though, Fonterra has made a significant cut to its milk production forecast for New Zealand; from 3.2% growth down to 0.9% for its 2017/18 season (June to May). Poor weather conditions in August and September has seen production 2% lower than last year for each of these months. In addition, Chinese production forecasts have also been revised downwards and with increasing demand in China this should lead to a rise in imports. These latest announcements from New Zealand and China should provide some support for global markets and hopefully prevent a sudden change in direction for milk prices.
Recent UK milk price announcements as from 1st November include:
The AHDB is inviting applications from farmers to take part in a management training course. The ‘Professional Manager Development Scheme’ (PMDS) starts in January 2018 with applications needing top be submitted by 15th November. The course is run by Cedar Associates and leads to a formal qualification from the Institute of Leadership and Management (ILM). Fees for the programme are usually £3,950 (+ VAT), but due to AHDB support, levy-paying farmers will be charged £950. More details can be found via – https://dairy.ahdb.org.uk/news/news-articles/october-2017/ahdb-launches-management-training-scheme-for-farmers/#.We2VjGzmrcs
As from 1st November new bovine TB control measures will be introduced which will mean that ‘resolved’ Inconclusive Reactors (IRs) will have to remain on the holding where they were found for the remainder of their life. They will only be allowed off directly to slaughter or via an Approved Finishing Unit unless the owner pays for an interferon gamma blood test which returns negative. Inconclusive Reactors are when an animal shows a reaction to the ‘skin test’, but it is not strong enough to be classified as a reactor. An IR can be re-tested after 60 days. If it fails or is found to be inconclusive again, the animal is slaughtered. If it passes it is known as a resolved IR.
Studies in the Republic of Ireland, have shown that resolved IRs are 12 times more likely to be a reactor at the next test compared to other cattle in the national herd. In addition, between 11.8% and 21.4% of IRs slaughtered prior to re-test showed visible lesions associated with bovine TB, compared with less than 0.5% of non IR animals. The new rules aim to reduce the risk of spreading the disease via these animals.