Milk price changes fast-tracked as cash flows squeezed

In normal times, farmgate milk prices are adjusted roughly three to four months after market returns to processors change. These are anything but ‘normal times’ however, and changes in milk prices are being implemented at a much quicker pace since the beginning of the year.

High feed costs dampened yields which led to reduced milk production from the summer of 2021, with milk prices failing to keep pace until more recently. Despite a good start to the season, the 2021/22 milk year finished down 1.5% year on year, a drop of 186m litres.

The continued inflation in key input costs, combined with the uncertainty of the impact of policy changes on farm profitability, has not provided much encouragement for farmers to increase production. As such, expectations for the current milk year are a further drop of anywhere from 0.8% to 5.3%, depending on the degree to which higher input costs are offset by rising milk prices.

For processors, the prospect of further drops in milk production will be fast-tracking milk price increases. And this will be necessary, particularly for processors operating in fresh product markets who aren’t able to rely on reserve stocks. For these buyers, there is perhaps a greater need to pay a price which makes sure farmers have enough cash to continue operations and incentivise production amid high costs.

This marks a change in how the price cycle is working, with many buyers adjusting milk prices in response to on-farm cost changes, then looking to recover appropriate returns from the market. This is likely to remain the case while markets remain volatile and agricultural input costs continue to put pressure farmers’ cash flows.

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