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Impact of COVID-19 on the Dairy Sector

7 April 2020

The impact of COVID-19 on the dairy sector is unprecedented.  While the retail demand for milk and dairy products increased with panic buying and retailers restricting purchases, the demand has eased off somewhat as stockpiling has reduced.  However, the supply of dairy products into the food service industry has collapsed since lockdown began and processors are struggling to deal with the volatility in retailer demand and find homes for surplus milk.

At a time when milk supplies are increasing with the spring flush, it is reassuring that some of the major milk buyers in Scotland have held their farmgate price for April and beyond.  This includes Arla, First Milk and Lactalis whose standard liquid litre price is currently  29.61ppl, 26.75ppl and 26.5ppl respectively.  First Milk have pledged to hold their price until 1st June and Lactalis until 1st July.  Müller are also standing on their March price for April, with a 1ppl increase announced for May, bringing their standard liquid litre up to 27.25ppl (which includes the 1ppl direct premium for those that qualify).  They stated strong consumer demand for milk, yogurts and butter and have therefore raised their output and expect demand to remain high.  On the other hand, Grahams Dairies have announced a 1ppl price cut as of 10th April, bringing their standard litre price back to 24.5ppl.  Their processing plants at Nairn and Bridge of Allan are at capacity and they have had to dispose of excess milk.  Yew Tree Dairies, which take approximately 10% of milk produced in Scotland are also reported to be at capacity.

Some supermarket aligned contracts are faring well since these are based on a cost of production model, with Müller Tesco and Co-op increasing their quarterly milk price from May by 0.33ppl (to 31.51ppl) and 0.43ppl (to 29.82ppl) respectively.  The Waitrose milk price is also up by 0.5ppl from April to 32.35ppl.

It will be interesting to see where milk prices head in May and into the summer months, if the current lockdown restrictions still apply.  One milk buyer has reported a significant drop in large cheese orders from the hospitality sector that is unlikely to be replaced by the retail sector.  The spot price of milk and cream will also influence farm-gate prices, and these have dropped significantly over the last three weeks.   As of mid-March, spot milk was trading at 30-31ppl delivered and by 3rd April, it was trading at only 5-10ppl delivered.  Bulk cream as of mid-March was £1.32/kg ex works but has now dropped to 85-90p/kg ex works, which will put liquid processors under more pressure.  There are also reports south of the border of loads of skim milk and cream going into AD plants and processors and farmers having to dump milk.  Given rising milk volumes at this time of year, it will be a big surprise if liquid, non-aligned farmgate prices remain at current levels.

Down south, while many processors are standing on their March milk prices for April and some further beyond, Freshways have dropped their price by 2ppl to 24ppl from 29th March.  They have also deferred payments to farmers by an extra month, so March deliveries will be paid on 15th May and not 15th April.  Meadow Foods also dropped their milk price by 2ppl for their Cumbrian farmers down to 24ppl but have held the price at 26ppl for their farmers in the Chester milk pool.

Medina recently announced a a 2ppl reduction from 1st May and a delay to milk payments by two weeks starting from 13th April.  Medina is a major supplier of fresh milk, dairy and bakery products to the retail and foodservice sectors.  Although there has been an uplift in retail sales, with the closure of pubs, coffee shops and restaurants, Medina’s food service sales have ‘reduced to almost zero’.

To put these milk prices in perspective, AHDB Dairy recently published figures on the cost of production for the 12-month period up to March 2019.  The full economic cost of production was at 26.7ppl for the top 25% and 36.6ppl for the bottom 25%.  The total cash cost of production was 24.3ppl for top 25% and 32.0ppl for the bottom 25%.

For farmers that are concerned about the sustainability of their business and want to assess the physical and financial performance of their enterprise and its future direction, carrying out an ILMP or integrated Land Management Plan would be a benefit.  100% grant funding (up to £1,000) is available for resilience planning – you can apply here or contact the FAS helpline 0300 323 0161.

Lorna MacPherson for the Farm Advisory Service

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