Crying Over Spilt Milk - A Dismal Outlook For The UK Dairy Industry

Author:Ms Susan Shaw
Profession:Smith & Williamson
 
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The dairy industry has been in the spotlight for a

while now - and for good reason. Rising input costs, high

prices and policy changes are squeezing farmers out of the

market.

UK milk production for the 2007/08 year looks set to be over

700m litres (adjusted for butterfat) below quota. This is a

record shortfall. It means production was some 5% below quota

or, put another way, short by 18 days' worth of

production.

The target for UK milk producers is disappearing even

further out of sight. In order to engineer a soft landing when

milk quotas are abolished in 2015, the EU is giving out extra

quota. The idea behind this is that once enough quota is

circulating and every member state has more than it needs,

quotas will cease to have any value or meaning.

As part of this, EU farm ministers agreed to raise milk

quotas by 2% from 1 April 2008. This will increase each

producer's quota by 2%, in addition to the 0.5% due this

year from the last Cap reform. Taking all of this into account,

the UK's quota will be approximately 14.7bn litres. But, if

this year's production is anything to go by, this will not

really affect the UK, at least in the short term.

It is unlikely that this spring will see a flush of milk.

The March figures put UK butterfat-adjusted production 80m

litres under target. With a late spring, high feed costs,

little forage (mostly of indifferent quality) and low stock

levels, the chances of a delayed surge are small. This, in

turn, is helping to keep milk prices firm.

Due to the shortage of raw materials, milk buyers have to

maintain or increase prices to stop producers defecting to

other processors. This is despite markets for most dairy

commodities weakening over the past few months. However, the

costs of production have increased tremendously, so current

prices are probably the bare minimum required to stop a further

wave of producer exits. Unfortunately, the bad news doesn't

stop there. The next hurdle on the horizon is the forthcoming

changes to the Nitrate Vulnerable...

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