February dairy market review

GB milk deliveries remained muted through February, with volumes estimated to be down 3.0% on year earlier levels. Seasonal growth is in line with last year, although the rise towards the spring flush is slightly slower than what we would normally see, based on the past 5 years.

In February, average GB daily deliveries were running 2.9% below previous year levels, and 1.6% below forecasted figures. Yields are said to be affected by poor silage quality, and possibly some reduction in milk frequency due to labour shortages.

Global milk delivieries saw a year on year drop in December of 1.3%, equivalent to a drop of 10.5m litres of milk per day. The drop in milk deliveries occurred primarily in the EU-27 and New Zealand, although US deliveries were also marginally down on the year. Little change was seen in January to this situation, and there are no signs it will improve before the northern hemisphere flush. Bad weather has been hampering production in Oceania and high input costs suppressing production growth in the EU-27, UK and US.

Prices on dairy wholesale markets have moved up steadily so far in 2022 in all key markets, and the expectation is this will continue, at least until later in the spring. The outlook for global milk supply is for minimal growth, despite higher farmgate prices as input costs pressure farmer margins.

In the UK, wholesale prices are at or near 5-year highs, pulling up both AMPE and MCVE closer to the 50ppl mark. Our Milk Market Value (MMV) indicator reached 46.4ppl in February, up 14.3ppl from last year, and 2.4ppl up on the month. The milk price equivalents do not yet reflect the full increase in processing costs, but their movement is accurately reflecting the rising market value of dairy products.

Market-related farmgate prices in GB continue to move up in response to the higher market returns, with processors announcing more increases for March and April. Since the beginning of the year, average prices paid on market related contracts (excluding aligned liquid) have increased by just under 5ppl based on announced prices to date[1]. Over the same period, prices paid on retailer aligned contracts did not move up at the same rate, shrinking the typical premium paid on these contracts. Due to the use of lagged cost trackers in setting prices on these contracts, it is expected further increases will be implemented later in the year.

While milk prices are helping to offset rising input costs, it is not yet clear how this will affect milk production through 2022. At the latest AHDB Milk Forecasting Forum, the general consensus was the uncertainty surrounding the impact of the war in Ukraine on input prices, along with changes to agricultural policy and labour shortages, will make farmers cautious. It remains to be seen if the higher milk prices will prompt higher milk production or whether the cost increases will make this unprofitable.

[1] Announced price changes to 09 Mar. 22 applied to the AHDB standard litre, excluding retailer aligned prices

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