Wednesday, 25 July 2012

UK Dairy farmers squeezed as the global market price for cream hits a new low, exacerbating local problems.

Tanking wholesale cream prices hit a $1020 low from their $1800 peak

Not many industries display the friction between global markets and local practices as plainly as the UK dairy market. Processing conglomerates and a small set of supermarkets purchase vast quantities of raw and pasteurised milk from a widely dispersed group of dairy farms. Arla foods, a milk processing firm, source raw milk supplies from over 1400 local providers.

British farms have become increasingly inefficient relative to American peers

This large but diffuse group of local farmers is now under stress from a menagerie of factors. Weak bargaining power, inefficient production methods and a tanking world market price for much of their produce has culminated in many British farmers losing out on every litre of milk produced. Dairy Co, a trade body, prices the cost of production at 30p a litre while the average price the farmer gets is thought to be nearer 25p.

The burden cannot squarely be placed on powerful buyers. The price of cream globally has plummeted from its high of $1800 in June 2011 to a new low of $1020 as recession weakens demand in previously buoyant emerging markets such as China.

Cream is particularly prescient for the dairy farming industry as the high demand for this more lucrative commodity allows farmers to offset losses from the falling price of milk. Due to the steep fall in cream prices, processing firms are keen to pass further losses down the supply chain to dairy farmers.

These global forces are exacerbated by local inefficiencies. Eastern European and US farms typically operate on a much larger scale. This allows them to benefit from economies of scale, better technology and greater bargaining power. By contrast, British farms operate on a much smaller scale making production inefficient relative to US farming behemoths. 

Changing industry dynamics favour consolidation as larger producers are more capable of dealing with increased market volatility, whereas smaller farms find it difficult to cope with even small falls in prices.

Yet there remain significant disagreements in Britain over how dairy farms should be structured. The agriculture secretary, Caroline Spellman, has made calls for a “fair price” for farmers. However with global prices falling it is unclear what this will mean.

British farms operating with a small herd of cows tend to produce at a cost level above what is now seen as globally efficient or profitable. This has been apparent in the number of small farmers leaving the industry. Over the last 10 years, the National Farmers Union (NFU) reckons that 40% of small dairy farms in the British Isles have become insolvent.

Milk prices will continue to be a sensitive issue as farmer protests in the UK tend to attract public sympathy in a way which is likely to spur jealously amongst passport control officials. With the Olympic opening ceremony due to commence Friday 27th, ministers will be hoping for a quick resolution to the latest milk price protest. 

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