December dairy market review

GB milk production for the calendar year 2022 reached 12.4bn litres, 0.5% down on 2021. For most of the year, production was running below previous year levels but was boosted by high yields in the autumn.

By the end of the summer, milk prices were in the 50ppl region, and the return of milder weather with more normal rainfall patterns saw yields improve from the lows seen over the previous 12-18 months.

Despite a setback in deliveries early in December, milk production is estimated to total 1,033 million litres for GB. This is an increase of 2.2% (+22.5 million litres) from volumes recorded in 2021, although yields were depressed at that time. This year’s December production is roughly in line with the 5-year average.

At a global level, cumulative milk production for 2022 (to October) is 0.7% lower than a year ago. Almost all key dairying regions produced less through the year than in 2021, with the exception of the US and Argentina. Despite some signs of improved yields in the final quarter of 2022 in the northern hemisphere, only modest growth in production is expected for the first half of 2023 according to Rabobank predictions.

The combined impact of rising supplies and subdued demand has pushed down prices on UK wholesale markets. This was also the case in Europe, where increased production, plus year-end stock clearing by some companies, increased product availability. Weaker European markets added some additional downwards pressure on prices in the UK for some traders.

Lower wholesale prices meant AMPE and MCVE fell by 11% and 9% respectively. As a result, the equivalent milk market value (MMV) fell below 50ppl for the first time in ten months.

Processing costs for dairy products were subject to further inflationary pressures in the third quarter of 2022, further reducing market returns on butter, cheese and milk powders. After the slight pause in input price inflation in Q2, the average costs for gas jumped 6% on the quarter, while electricity costs moved up 28% on average.

According to Defra, the UK farmgate price averaged 50.4ppl in October, 54% higher than the October 2021 price. It's likely that prices will peak in the 50.5ppl region as only a few, small price increases were announced for the remainder of 2022, followed by cuts from the beginning of 2023.

For the first time in nearly two years, milk price cuts were announced in December. The cuts, to take effect in January and February, ranged in size from 0.23ppl to 3ppl. The larger cuts were on liquid milk contracts, where declining cream prices have pressured processor returns.

The weaker market returns in the latter part of the year will flow through into milk prices in time, suggesting further cuts as we move into the spring. 

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