What is behind the sharp drops in farmgate prices?

Wednesday, 1 April 2020

By Patty Clayton

The shift in consumer purchases from foodservice to retail has created a huge divide in the dairy industry, particularly the liquid milk sector. In less than 10 days since government restrictions were put in place, we have seen cuts to farmgate prices and deferred payments by some processors at the same time that prices have been increased by others.

Questions are being asked about why prices are dropping on some liquid milk contracts when retail demand has increased. While best estimates suggest less than 10% of all fresh milk is sold into the foodservice sector as liquid milk, the reliance on this market is much higher for some individual businesses.

The rapid loss of a significant number of customers, and delayed or cancelled payments for previously shipped orders, will have seriously affected cash flows for these businesses. While some of these businesses will have been able to divert the milk to other markets or storable products, this will not have been the case for all.

Not all liquid processors will have access to retail buyers, nor is it a straight forward process to move milk from one use into another. Issues with having the right type of processing, packaging and labelling will have hampered any immediate shift in usage.

While it would appear that those liquid milk manufacturers servicing retail markets would be in need of more milk, seasonally rising milk delivieries will have helped to service the extra demand. They may also have had milk previously sold to foodservice customers.

The contrasting changes to farmgate milk prices are short-term reactions to the shock of the sudden and severe change in our markets. In time, milk supplies will be reallocated to where they are needed. However, for the time being balancing will be taking place through spot milk sales, putting the pressure of rising milk volumes onto a few processors who find themselves with no demand but continuing milk deliveries.

While some of the milk will be sold into retail markets, the excess is likely to be used to produce storable products (i.e. milk powders, butter and cheese). Processor margins are likely to remain under pressure, with cashflow challenges and potentially rising storage costs if demand remains limited for an extended period of time.

Patty Clayton

Lead Analyst - Dairy

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