Commodity prices slump further amidst no let-up in milk surge

Dairy farmers and processors face a very challenging market correction as milk supplies further accelerated and commodity prices hemorraghed value in October. AHDB outlined the roots of the issue last month but since then the situation has grown worse. 

Milk supplies

Milk supplies have been running well ahead of the 5-year average since autumn 2024. For the milk year to date, GB milk supplies are 5.3% or 331 million litres up on last year. The whole of the UK is ahead by 6.0% or 455 million litres. October to date for GB (up until 18 October) is ahead by 7%. We need to bear in mind that we are now annualising against a period of growth. October 2024 was up by 2.6% on the previous year – a figure that now seems tame but represented strong growth by the standards of recent years. 

This milk growth situation is unprecedented in recent years but is the result of a 20-year high in the milk to feed price ratio. 

Unfortunately, global milk supplies are also now growing sharply. Latest figures for August published by Eucolait showed that the EU was up by 3.1%, the US by 3.2%, New Zealand 2.5% and Argentina 9.9%. Of the major exporters only Australia showed any decline of -3.0%. It is clear there is far too much milk for demand to cope with. 

Commodity prices

Surplus milk has led to surplus production of dairy products and prices are falling as a result. In the latest AHDB wholesale price survey for October, butter fell by £601/t to £4680; bulk cream fell by £143/t to £1986, mild cheddar was down £310/t to £3110 and SMP down a further £90/t to £1820. These price changes are pulling down the value of milk according to market indicators. AMPE now sits at 35.9ppl and MCVE at 34.6ppl. This puts the MMV at 34.9ppl. A change in the MMV of 1ppl is predictive of a fall in farmgate prices of approximately half that with a lag of about three months. The MMV has now fallen to 34.9ppl, a drop of 10ppl since the summer and 13.5ppl since October 2024.

Farmgate prices

This suggests that a fall in the average milk price of 7ppl since last year is now baked in. However, commodity prices are likely to fall further until milk production comes back under control which means farmgate prices will follow suit. The big question is how long that will take and how painful the cuts will need to be to drive a slowdown in production.

There will be “haves” and “have nots” in this situation. Those on aligned contracts will be spared the worse of price fluctuations and so far organic contracts have remained buoyant. Some processors have elected to cut harder and faster than others. However, many farmers will face a squeeze in margins. Many processors too will face difficulties from losing capital tied up in expensively-made product. There will also be processing capacity issues until milk slows down which could produce a difficult spring flush.

What can farmers do?

How can farmers protect their margins over the coming months? Market downturns are a good opportunity to take stock and tighten up farm businesses.

1) Re-examine your farm business and take action to reduce costs.

2) Learn from other farmers. AHDB have published evidence on what high performing farms do to be more profitable: Characteristics of top-performing farms 2024.

3) As a farmer you can’t control the value of dairy commodities, but you may be able to make changes to optimise the milk price within your contract. Milk price calculator.

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