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Mark Allen in FT- "It is a better time to be in dairy than for many years"

14/03/2014

Dairy farmers milk rising prices and falling costs
By Kate Burgess

“The Farmer will never be happy again; He carries his heart in his boots; For either the rain is destroying his grain Or the drought is destroying his roots.”

AP Herbert, English satirist, novelist, law reform activist and independent member of parliament for Oxford university, has been mostly right ever since he penned the verse in 1922.

Farmers perennially moan about the miseries of agriculture. Dairy farmers have been among the most vociferous.

Not recently, though.

Mark Allen, chief executive of Dairy Crest, one of Britain’s biggest milk processors and maker of Cathedral City cheddar, says:

“It is a much better time to be in dairy than for many years”.

Milk producers are luxuriating in a rare combination of rising prices and falling costs, and improving terms of trade between them and the supermarkets and processors.

Even though three large supermarket groups – Tesco, J Sainsbury and Co-operative Food – cut the retail price of 2 litres of milk to £1 this month, it is not the farmers being squeezed this time. Changes to farming contracts, and an improved relationship between producers and retailers, mean the supermarkets are more likely to take the margin hit.

According to research by DairyCo, the industry-funded part of the Agriculture & Horticulture Development Board, dairy farmers are more sanguine about their future today than they have been for three years.

It was only a year ago that they spoke of cutting production and of abandoning farming altogether. Now, they talk of increasing their herds, and expanding production when EU quotas are lifted next year. Just 4 per cent of farmers questioned by DairyCo plan to quit farming within the next two years, against 9 per cent last year and 13 per cent three years ago.

A rise in the numbers of agriculture students at the University of Reading and the Royal Agricultural University at Cirencester is telling of the change in outlook.

Reading says the number of undergraduates studying agriculture has tripled in five years to about 30 a year. Cirencester says applications to its courses rose 40 per cent in 2013 alone.

Farmers’ P&Ls are looking a lot better,” says Richard Whiting, chief executive of NWF, which provides ruminant feed as well as fuel and logistics services to farmers.

For the first time in decades, a litre of milk costs less to produce than to sell at the farmgate: about 30p to make and 34p to sell, according to the National Farmers’ Union.

Feed costs have come down markedly since 2012, when British dairy farmers threatened to pour milk down the drain rather than sell it at a loss to British supermarkets. A lush summer last year and a bumper crop of silage means that UK cows are producing more and better quality milk, too, which has boosted margins.

A positive global economic outlook is another source of confidence, says Mr Whiting. As the world’s population continues to grow – and as emerging economies in Africa and Asia, and particularly China, become more affluent – they will eat more protein and adopt a more Western diet of meat and dairy, he argues.

Dairy Crest has recently invested £45m in its cheese plant in Cornwall to increase production of whey powder for export to Asia. Arla, the Danish co-operative that makes Lurpak butter, and is the UK’s largest dairy operation, has created the world’s biggest fresh milk processing plant in Aylesbury. And Müller Wiseman, another of Britain’s major milk processors, has spent £17m on a butter plant in Shropshire.
These investments all have a dual aim: to boost British exports; and to reduce the amounts of butter, yoghurt and high-margin dairy products imported into the UK.

Ultimately, the objective is to make Britain self-sufficient and eliminate the UK’s £1.3bn dairy trade deficit. To achieve this, DairyCo calculates that UK farmers will have to churn out between 3bn and 5bn more litres of milk each year than the 14bn produced today.

All the UK processors are banking on global demand outstripping production – even production from the world’s biggest dairy exporters, such as New Zealand – and recurrent concerns over food safety and security. They hope the latter will drive consumers into the arms of British farmers, as they seek the reassurance of quality products and clear labelling.

The NFU forecasts that global demand for dairy will grow at 2.3 per cent a year for the next decade – providing farmers in the developed world with “amazing opportunities,” it says. Having already invested the capital in processing, distribution and economies of scale, they are best placed to cater for this rise in demand, claims Rob Newbery, the NFU’s dairy adviser.

Nonetheless, British farmers’ stress levels are unlikely to abate entirely. There are still sufficient variables – weather, politics, global supply, disease and currency fluctuations – over which they have no control. But, just in case a happier few forget the effect of rain on their grain, the NFU helpfully suggests they “brace themselves for volatility”.