Milk Matters By Christine Pedersen
Senior Dairy Business Consultant The Dairy Group
www.thedairygroup.co.uk
Dairy Outlook One of the biggest challenges for dairy businesses is managing milk price volatility. The graph below covers the period from April 2015 to October 2018, which includes the price crash to 20 ppl in June 2016 and the drought in 2018. Despite the drought, UK milk production has been relatively stable at 14.7 billion litres since January 2018. Milk price volatility is highlighted in the graph, so whilst the rolling 5 year milk price is 27.4ppl, the range for this time period is an average farm gate milk price from 20ppl to 32ppl.
‘stress-tested’ for +/- 3ppl, volatility insurance may become a pre- requisite for some finance deals. However, it will only ever be a tool for managing risk and will not replace the continued drive to produce milk more efficiently at lower cost to maximise profitability. So how will dairy markets fare in 2019 and will milk prices fall
sufficiently to make insurance a useful protection? The Global Dairy Trade (GDT) has risen 10% in the last 2 months while the Milk Price Equivalent (MPE) has risen 1% in the last month and sits 3.6% above the last dip in January 2018. The MPE is calculated from the weighted actual wholesale prices for liquid milk, cheese, butter and powders after the normal processing costs. The MPE accounts for 90% of the United Kingdom market utilisation of milk and is therefore a reliable indicator of the wholesale value of milk and the likely market returns available to the UK dairy farmer. New Zealand production jumped 4% in December, but is now battling a heatwave and although the EU supply was flat going into the autumn, UK production is rising at 3.5%. 2019 is starting on a firm footing, but supply and an unknown Brexit outcome could derail all that and make insurance worth considering. Many farm businesses have March year ends so accounts analysis
and calculating cost of production is on our agendas at farm meetings in the Spring. As I said in my last column, we are forecasting the cost of production to increase by 2.8ppl (+9%) in the year to March 2019 which will mean a continued cost/price squeeze. The main cost increases will be feed, straw, fuel and fertiliser. As ever, grazed grass is the cheapest feed available on most dairy
Source: The Dairy Group and Defra As a dairy business management consultant, one of my roles
is to help producers develop strategies to manage risk. Historically, options open to producers to mitigate the risk of low milk prices have been limited to maximising output (both price and volume) and reducing production costs per litre. Muller and some regional milk buyers have had fixed volume or fixed price offers, but nothing like the fixed price, fixed volume schemes offered in Ireland. There is now a new option available called ‘Stable’, which will offer volatility insurance. Stable uses independent UK price indices from AHDB and Defra to calculate the premium and settle claims. Using indices instead of assessing the risk for each individual farm enables Stable to reduce the cost and automate the claims process. Dairy farmers will be able to insure as little as 10,000 litres of milk for up to 12 months ahead, with monthly premiums and flexibility to cancel and create new contracts as the market changes. Whilst volatility insurance will add a cost, it does mean that dairy farmers can effectively ‘fix’ a proportion of their milk sales at a known cost. However, as the insurance is based on the index (UK average) it is quite possible that the insurance would not pay out for an individual farmer if their milk price was below the index price. At a time when banks are asking for budgets for finance to be
PAGE 12 MARCH/APRIL 2019 FEED COMPOUNDER
units at around £60/t DM. The favourable late February temperatures have enabled some producers to beat their previous records for early turnout which has given temporary respite to concerns over forage stocks. Maximising milk from grazed grass could not be more poignant following a period of increased concentrate costs and in many cases, high forage costs too.
Producers are encouraged to follow a two-step approach to
increase milk from grazed grass. The first step is to maximise grass productivity through the targeted use of nutrients. The second step is having grown the grass, to maximise its utilisation. A rotational or paddock system is the most effective way of utilising grass as it ensures
Comment section is sponsored by Compound Feed Engineering Ltd
www.cfegroup.com
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