Prices paid to dairy farmers for liquid milk have been decreasing since last summer. 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 between April and November 2014 are summarised in Table 1:
The decrease in the price paid by First Milk is important to note as in Wales, 1 in 3 Welsh dairy farmers supplies to First Milk. On 9 January First Milk announced it would be delaying its next milk payments to farmers by two weeks as well as increasing farmers’ levy contributions. First Milk took these actions in an attempt to remove its £10 million cash deficit, which it says was a result of volatility in the global dairy industry. First Milk stated:
These moves will deliver a cash injection into the business and play an integral role in putting our finances and our business on a stronger platform as we approach the spring flush.
The Deputy Minister for Farming and Food announced that she has requested a meeting with First Milk to discuss their recent announcement to cut and delay payments. She has also requested urgent input from the Welsh Government’s Dairy Task Force on this matter.
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 are having a significant impact on the UK dairy sector.
Producer numbers in Wales have been in decline over the last decade. The number of producers currently stands at 1,831, whilst in January 2014 there were 1,872 dairy producers (a 2.2% fall in the last year).
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.
Voluntary code of practice
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. First Milk has signed up to the voluntary code.
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 on 6 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.
Article by Katy Orford and Jack Goode, National Assembly for Wales Research Service.