Dairy Cow

As the milk price cycle progresses, there are more lessons dairy farmers can learn from their pig farming colleagues who have had to cope with volatility for years. Milk price volatility is probably here to stay.

Have you ever heard a pig farmer calling for the pig price to stop increasing when it is on the up? It is quite incredulous that some in and around the dairy industry are saying that the milk price increases to date are enough, and any more would be detrimental to the long-term success of UK dairy farmers.

No processors were heard to say that the milk price reductions were enough and that any more would be detrimental to their future success. The reality is that other than the retailer aligned contracts, we are now in a free market for milk with the main determinant of prices being global supply and demand. The market will not be influenced by UK supply and demand alone, and if the UK does not expand its production to meet a (short or long term) global demand, then a competing country surely will.

Milk Price Volatility

A more prudent approach to milk price volatility? 

Rather than call for an end to price increases, the more prudent approach would be to accept whatever the market delivers and make sure that the profits produced when milk price is above costs of production are used wisely to mitigate the inevitable periods when it is the other way around. Successful dairy farmers will be those who spend more time with their costs below milk price and recognise that such an equation is in their control because they can control their costs – as opposed to blaming their inability to control the milk price.

The UK pig sector had about one million breeding sows in the 1990s. Too many producers carried on in the horrendous mid-1990s price crash longer than they should have done in the misguided belief processors would have to pay more for their pigs because they had the processing capacity to fill. What was missed was the fact processors could not afford to pay more for pigs because global (as opposed to UK) supply and demand dictated prices. The result was UK pig processors closed factories and the producers, having ‘headed East for a sunset’ for too long, had to stop producing anyway because they ran out of cash – and now we have around only 400,000 breeding sows in the UK.

The same could easily happen to the dairy sector for all but the liquid milk and other fresh dairy product supply chains. So the lesson is to make the decision on whether to stay in milk production on what milk prices are and what your costs of production are – not what you think the processors will have to pay to fill their factories and not to try and affect a market over which you have no realistic influence.

Preparing for further milk price volatility 

Just as there seems to be a little bit of light at the end of the milk price tunnel, many are finding out that the light was just the bank manager with a torch. It is perfectly reasonable the banks will want the money back they loaned to dairy farmers to cover losses – but it shouldn’t need the bank to ask for such. A dairy farmer would be wise to repay all the extra debt associated with the downturn (in preference to nearly all other demands on cash) to make sure they are ready and able to fund the next downturn.

Once that extra debt has been repaid, hopefully, there will be a further period when profits will continue and other spending decisions can be made – but the one thing that must be done before the next downturn is the repayment of the extra debt taken on in the previous downturn. It is what the pig sector has become used to doing after many cycles of volatility.

Bank managers will hopefully be open and honest to customers about whether they are likely to fund the next downturn in the milk price volatility cycle, and any lack of appetite to lend money be clearly communicated when prices are good so that the borrower has choices and time to implement change.

The length and depth of the trough did surprise everyone this last time and so both parties will have learned some lessons for their respective businesses. The best way to mutually avoid any element of surprise next time is early, professional discussion while things are relatively good, like now.

If the bank manager doesn’t proactively communicate what the bank will do in the next downturn, the farmer should ask the awkward question – it’s the elephant in the room.

For practical, commercial advice please do not hesitate to contact Pat Tomlinson or any member of our expert agricultural accounting team.

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