'Milk could soon be in short supply'

MOST dairy farmers are receiving at least 30 per cent more at the farm gate for their milk than they were 12 months ago, but this increase may not be enough to stem a major exodus from the sector.

Consumers regard milk as a "must buy" commodity that they pick up at the local shop or in the nearest supermarket: the cost of producing that litre never enters the typical shopping decision.

A report published yesterday – The Real Price of Milk commissioned by First Milk, the largest farmer-owned dairy business in the UK with 2,800 members who collectively produce 1.8 billion litres a year – provides a realistic analysis of the mood down on the farm.

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The report, the result of an in-depth survey by the leading consultancy Promar International, pulls no punches and suggests that unless there is a major upturn in the fortunes of dairy farmers, milk could soon be in short supply for the first time in over 70 years.

Most dairy farmers are now being paid in the region of 27p a litre. But the variable costs of each litre – feed, labour and veterinary bills – amount to at least 13p per litre. That may sound reasonable, but overhead charges such as rent and interest on bank borrowings soon add up. The projected cumulative production cost of 26.64p per litre for 2008-9 leaves virtually nothing for profit, far less scope for capital reinvestment.

Peter Humphreys, chief executive of First Milk, said: "For many farmers, we are at a pivotal moment. While the price paid for their milk has risen significantly, further costs increases are inevitable and extensive investment is needed. These factors must be recognised in the prices paid for farmers' milk.

"But I believe there is a common will in the supply chain to achieve a sustainable dairy industry in the UK. This report is aimed at generating a wider debate in reaching this objective."

The fine detail does not make for comfortable reading. The number of dairy cows in the UK has declined by 250,000 over the past five years. The individual cow now tends to be a highly productive animal, with average yields at 7,000 litres – about 50 per cent higher than 30 years ago. But gross output within the UK has fallen by more than 800 million litres during the past five years.

The UK has a theoretical quota limit of 13 billion litres under EU legislation, but there is no danger of farmers being penalised for exceeding that figure. The scenario was very different as little as a decade ago.

The number of dairy farmers has been falling by 6.5 per cent each year as older producers decide to quit while would-be successors opt for alternative enterprises. The younger generation are no longer willing to endure the drudgery of milking cows twice each day of the year for minimal reward.

Scotland has the largest average herd size in the EU, at over 140 cows per unit – indeed there are a handful of farms with over 500 cows – but size does not always guarantee success. The farming press is currently full of adverts intimating herd dispersals.

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The lack of suitably trained labour is another problem, even with top staff being rewarded with packages amounting to close on 30,000 a year.

Scotland's 1,300 remaining dairy farmers are all too aware that the cost of fertiliser has more than doubled since last spring, while feed costs are soaring by a similar margin.

The latest income figures from the Scottish Government state that the typical dairy farm enjoyed a profit of close on 30,000, but it seems certain that this will not be repeated in the current trading year.

Producers would appear to have a justifiable cause for complaint in that during 2007 the world price of butter and cheddar cheese almost doubled, while the value of skimmed milk powder increased by over 60 per cent. Commodity values may have eased recently, but there is no escaping the fact that global demand for dairy products is expanding rapidly.

That much was made clear in January at the annual Semex dairy conference in Glasgow by Gwyn Jones, the chairman of the national dairy board of the NFU of England and Wales, who runs a herd of 700 cows.

Jones said: "In the longer term the dairy market looks solid. Worldwide, consumption is growing at 2.8 per cent every year, fuelled by economic and population growth. At the same time, milk supply has been growing by less than 2 per cent annually.

"Of course, demand cannot permanently grow faster than dairy farmers can supply the milk, but so long as the world's population gets bigger and richer, then the prognosis for milk is good."