2 The present situation
Supply and
demand
Global conditions
5. Global milk production has been growing by approximately
5% a year while global milk demand has grown by about 2% a year,
resulting in a rise in global stocks and downward pressure on
worldwide prices.[4] This
has been exacerbated by China's demand being significantly lower
than expected in 2013-14 and by the import ban introduced by Russia
on EU dairy products in August. Since they, between them, account
for around 30% of globally traded dairy products, the sharp reduction
in demand at a time of high production is the most frequently
cited proximate cause for the current price levels. The Russian
ban, for example, has resulted in about 250,000 tonnes of cheese—that
is, about 2.5 billion litres of milk, equivalent to about a fifth
of UK annual milk production—not being traded into Russia.
Milk intended for that cheese has instead been processed into
milk powder and butter, with consequent effects on prices for
those products.[5] The
Royal Association of British Dairy Farmers "conservatively"
estimates that the ban has cost farmers 2 to 2.5 ppl, or about
£350 million for UK dairy farming.[6]
UK PRODUCTION AND PRICES
6. In June 2012 UK farm gate milk prices fell to
26 ppl.[7] A year later
they had risen to about 35p.[8]
This year they have returned to around 30p.[9]
The dairy industry has been on what the farming Minister, Mr Eustice,
calls "something of a rollercoaster ride".[10]
There is wide recognition that the strong prices obtained in 2013
resulted in a rise in UK milk production during the spring and
summer of 2014, and that these coincided with both the drop in
world demand and mild weather conditions that led to increased
production in most parts of the world.[11]
7. The NFU and its Scottish equivalent accept that
2013's price signals led farmers worldwide to raise production,
and that, allied with good weather conditions for growing and
grazing, led to overall milk supplies exceeding industry expectations.[12]
With input costs for feed, fertiliser and fuel also falling, the
NFU does not expect any short-term downturn in production, either:
"Milk production is still increasing year on year, the dairy
herd in England is 2.7% larger this year than last and the latest
calf registration figures are also higher than normal".[13]
Nor can the speed and variety of price changes in the dairy industry
be matched by equally quick change in production capacity: supply
reduction is usually too late as it is triggered by falling prices,
and increases in supply to take advantage of higher prices may
lag behind, as appears to be the case at present.
8. Price volatility of the type currently experienced
complicates financial planning and investment decisions and reduces
overall confidence in the dairy sector.[14]
Dairy Crest Direct cites heavily geared farms that invested during
the past two years to take advantage of rising global demand and
prices, but which now face difficulty.[15]
George Dunn of the Tenant Farmers Association noted the problems
for tenant farmers who had rents set when prices were good and
who must still pay them now.[16]
9. It is broadly accepted that fluctuations in milk
price are largely a matter of market forces: prices rise and prices
fall; they were higher than average last year, lower than average
this. What appear to cause significant disruption for farmers
are the volatility of the market, which means unusually frequent
shifts in prices, and the extremity of the price rises and drops.
The central issue arising, therefore, from our short inquiry into
the recent fluctuations in milk price appears to be how best producers—farmers—can
be protected, and can protect themselves, against what looks likely
to be continuing volatility in a long-term growing market that
none the less faces periodic short-term downturns.
4 Arla Foods UK (DAI0008) Back
5
Dairy Crest Direct (DAI0005) Back
6
Royal Association of British Dairy Farmers (DAI0007) Back
7
Q83 Back
8
Defra (DAI0016) Back
9
Defra (DAI0016) Back
10
Q83 Back
11
Royal Association of British Farmers (DAI0007) Back
12
National Farmers Union (DAI0009) and NFU Scotland (DAI0001) Back
13
National Farmers Union (DAI0009) Back
14
Farmers Union Wales (DAI0002) Back
15
Dairy Crest Direct (DAI0005) Back
16
Q3 Back
| 
