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Small dairy farms in the UK are facing a serious challenge as the amount they are paid for milk falls below their production costs. The two largest dairy processors in Britain, Arla and Muller, have been cutting their “farmgate price” for five consecutive months. Arla kept the price at 35p per litre in June and July, down 29% from 49p in February, while Muller pays 38p per litre compared to 47p five months ago. This drop in prices is a result of oversupply and reduced demand for dairy products, as well as a global decline in agricultural commodity prices. However, farmers and industry bodies warn that this sustained drop is making it even more difficult for small dairy farms to survive, and that consumers may have to pay more for milk if farmers are to break even.
Chris Wood, a dairy farmer near Penrith, Cumbria, who supplies Arla, expressed his concern about the situation, saying, “We’re at the mercy of markets. Everybody is talking about food inflation, but we also have inflation. We have to make a living.” The UK government is also worried about the high rate of food price inflation, which stood at 18.3% in May. As milk is one of the few staples showing signs of deflation, there is hope that consumers will soon benefit from lower commodity prices.
However, cheaper milk in supermarkets does not offer any solace to farmers who are facing a decrease in income from dairy processors alongside historically high input prices. While fertiliser prices have halved, farmers are paying £310 per tonne for cattle feed, up from £214 before the Ukraine war. This situation is further exacerbated by the fact that dairy farmers benefited from surging milk prices last year, but supply has now recovered.
According to Susie Stannard, a dairy analyst at the Agriculture and Horticulture Development Board (AHDB), falling prices are being driven by a slight increase in global supply and a decrease in global demand, each of less than 1%. Ash Amirahmadi, Arla’s outgoing managing director, added that the current price being paid to farmers is below the costs of production. He explained that a proportion of the milk goes into globally traded commodity markets, which have crashed, leading to lower prices. He also mentioned that the prolonged dry spell and a tight labour market are adding to the pressure on the dairy sector.
Muller attributed its price reductions to market pressures and higher-than-expected supply. However, industry figures warn that if prices remain low, farmers will have little incentive to produce more milk, leading to a drop in volumes. There has already been a 4.8% reduction in the number of dairy farmers in Britain over the past year, leaving around 7,500 farms in April. Small and medium-sized farms are most at risk of closure or being absorbed by larger businesses, as they struggle to make efficiency savings due to limited funds for reinvestment.
Robert Craig, a partner in three farms across the north of England and vice chair of processor First Milk, explained that bigger farms are only just breaking even. He believes that the lack of sufficient rewards to keep things as they are will result in more intensive dairy farming and larger operations. Stannard believes that processors will ultimately have to pay more for milk in order to secure a steady supply as volumes decline. Allen predicts the emergence of a two-tier market, with processors paying more for agricultural products with better environmental credentials as food manufacturers take steps to reduce greenhouse gas emissions.
While some processors already offer premium prices to farmers, Craig says that farmers need surplus cash to become sustainable in the long term. He reflects on the decline in the number of farms over the years and questions whether this is a positive or negative trend for the industry.
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