30 October 2014
Article written by Jack Goode, National Assembly for Wales Research Service
Over the summer, prices paid to dairy farmers for liquid milk have been decreasing. Arla lowered the price paid to farmers in April from 33.74 pence per litre (ppl) by 1.27 ppl or 3.8%. Since then, other purchasers have also announced reductions in the price paid to farmers. The price decreases to date are summarised in Table 1:
Table 1: Change in UK milk prices April-Nov 2014
The decrease in the price paid by First Milk is important to note as in Wales, 1 in 3 Welsh dairy farmers supply to First Milk. Milk purchasers and processors have stated that the declining price being paid to farmers is reflective of global market conditions. . In the last year, on the global market there has been a 51% fall in the price of milk from its all-time high of September 2013. Though the UK is partially shielded from the effects of the global market due to a highly internalised market, the economics of the situation have begun to have a significant impact on the UK dairy sector.
Since the unparalleled prices of 2013, UK farmers have achieved a higher yield of milk per cow, causing an increase in supply. Along with this increased supply the global demand has decreased, forcing prices to lower. One reason for the decrease in demand is the loss of trade with Russia. Following the situation in Ukraine in 2014 import bans were introduced by the European Union halting dairy exports to this market. Another reason for the decrease in demand is the reduced market activity from China, following stockpiling activities in 2013.
The Dairy Sector has previously seen sudden decreases in the price of milk; a particular example of this was in 2012. On this occasion a milk price crisis began as a result of a fall in global prices combined with aggressive supermarket contracts according to Dairy UK. As a consequence of the hardship faced by farmers and the effect on the UK dairy sector, a voluntary code of practice was developed to govern the contractual relationship between dairy producers and the processors they sell to.
The code applies to Wales, England and Scotland and as of March 2013, an estimated 85% of British milk was bound by the principles of the voluntary code. The code allows individual farmers to negotiate contracts and gives them the ability to leave contracts more easily if price changes occur.
Two years after introduction of the code, a review was undertaken to assess the effectiveness of the code. The report from this assessment was published 06 October 2014. The review found that where implemented fully the code had led to positive change but that wider adoption of the code across the sector is needed. Seven specific recommendations were made in the findings of the review including two clarifications to ensure that the current code was not misinterpreted. After its release, the Deputy Minister for Farming and Food announced the launch of an Independent review of the dairy industry in Wales. Terms of reference for the review have yet to be finalised. .
Further information on the Dairy Sector can be found in the Dairy Sector Research Note.