UK milk production up, farm gate prices down

UK milk production remained remarkably strong over the summer, even as grass growth slowed due to dry weather. Supported by high farmgate prices and resilient yields, output in August rose sharply year-on-year, pushing cumulative volumes and milk solids to new highs. However, mounting feed dependence and looming processor price cuts signal tightening margins ahead.According to the Department for Environment, Food & Rural Affairs (Defra), milk production in the United Kingdom (UK) remained strong across the summer, with output reaching 1.26 billion liters in August. This marked a 5.44% increase compared to the previous year, an acceleration from the 5.13% observed in July.Overall, the cumulative production stands at 10.61 billion liters, a 4.5% increase over the previous year. The rising output also extended to the fat and protein content in milk, 4.21% (+0.04 percentual points) and 3.42% (+0.05 percentual points), respectively. This raised the cumulative availability of milk solids for the dairy industry by 5.87% year-over-year in the case of fat and 4.92% in protein as of August.Decline in forage productionNotably, this growth occurred despite a slowdown in grass production, particularly between May and September. In August, the UK Met Office reported sub-optimal weather conditions characterized by low soil moisture, limited rainfall, and alternating heatwaves, thunderstorms, and sporadic rain spells.Forage growth improved in the second half of September, supported by increased rainfall, which should provide additional feed availability for herds in the months ahead. Nevertheless, while the forage shortage has not yet had a significant impact on milk output, the industry’s reliance on purchased feed reduces the resilience of the production system. This dependence could heighten vulnerability as winter approaches, when forage availability typically declines further.Elevated milk prices under threatElevated farmgate milk prices have been a major driver of the expanding output. In August, farmgate prices averaged 45.62 pence per liter (ppl) (€52.37 per 100 liter), up 3.61% from the previous month and 9.66% from the same period last year. As such, the milk-to-feed price ratio is close to a 20-year high, reflecting the high profitability in the sector and supporting farmer investment in production.While the milk-to-feed price ratio is still increasing, incentivizing the rise in production, milk prices are also expected to fall as a response to the increasing availability of milk in the local and international markets. Global dairy production is increasing across the EU, the US, and New Zealand, which is beginning to weigh on UK prices. High production across these regions is not evenly matched by market demand, pressuring farmgate prices and wholesale dairy products.In September, significant monthly declines have been observed in Butter (-£500 per ton) and mild cheddar (£410 per ton). While the falling dairy prices will eventually transfer to milk production, announcements in Scotland can provide an idea of substantial and sudden drops in future milk prices. For November, significant declines have been reported by Parham Dairies (-8 ppl, €9.18 per 100 liter), Freshways (-6 ppl, €6.89 per 100 liter), Arla (-1.7 ppl, €1.95 per 100 liter), Müller (-1.25 ppl, €1.44 per 100 liter), and First Milk (-2ppl, €2.3 per 100 liter). These reductions would translate into financial strains for farmers, affecting investment, the permanence of farmers in the industry, or the sustainability of production.Long-term challengesAdditionally, the dairy industry faces long-term challenges linked to the contraction of the dairy herd and increasing labor costs. Labor costs remain a source of concern for the section, as weekly earnings in agriculture increased by 8.6% over the previous year in June. These places increased pressure on farm profitability, particularly in the light of potentially falling milk prices. Moreover, the shrinking dairy herd implies another restriction for milk production. In July, the size of the dairy herd reflected a decline of 0.6% compared to the previous year, reaching 1.6 million animals in July. Within this contraction, the largest decline was observed in heifers between 2 and 4 years, raising significant concerns about the sustainability of milk production. Younger animals are more efficient at converting forage and feed to milk, which would decline the overall production efficiency of the herd as its average age increases.