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Dairy commodity prices climb sharply

By Neil Merrett , 02-Apr-2008

Dairy commodity costs have surged in the space of just one month to cap off huge rises in the prices being paid out by processors over the last year, according to recently published data by DIN Consultancy.

The statistics could indicate further pricing difficulties ahead for manufacturers, who have struggled to cope with the increased material costs over the last year. By March of this year, the price of butter was up to $3,700 (€2,363) per tonne from $3,400 (€2,171) per tonne in February, an increase of $1,600 (€1,000) from the price paid in March 2007, the findings found.


Over the same month-long period, the per tonne price for skimmed milk powder (SMP) rose by $400 (€255) to $3,400 (€2,171), while whole milk powder (WMP) was up $300 (€191) to $4,500 (€2,874) according to DIN's figures. While the total SMP price had fallen compared to March last year by $100 (€63) per tonne, WMP prices increased by $1,100 (€702) during the twelve-month period.


The price hikes experienced last month are the first wholesale increases seen in 2008, the Milk Development Council (MDC) added that the significant difference between the 2007 rates highlighted supply issues, particularly after a late season drought in New Zealand. Butter prices were driven up by increased demand for the product and butteroil coming from the EU, which has ceased being a major player in the segment following a decision in June to remove export subsidies in the bloc, the findings stated.


However, the SMP market was an exception to the overall increases, with last year' demand and supply imbalance being offset by a higher supply of the product from the US, according to the findings. Over the last year, Danone, Kraft and New Zealand-based dairy group Fonterra all stressed concerns that the unprecedented lull in milk production is forcing them to review their operating and sourcing strategies for the future.


UK supply difficulties Despite the price hikes, some dairy farmers have recently claimed that the rates remain insufficient to ensure sustainable supply of dairy ingredients in the long term.


According to a report from UK cooperative First Milk, which was compiled by Promar International, studies of a number of farms in Scotland, England and Wales found that the average cost of producing milk for farmers was less then what they were being paid. In the twelve months up to 31 March 2007, the average price paid to farmers for their milk was 17.4p (€0.22) per litre, while the cost of production was 22.08p (€0.28) per litre, said Promar.


By these estimates, an average sized farm within the country with an annual capacity of 800,000 litres of milk, would result in a loss of £37,000 (€48,315) during the year, the report added. Peter Humphreys, chief executive of First Milk, said that despite recent rises in the price paid by processors and consumers for milk, costs has risen sharply in the last ten years to a level that has bought UK dairy farming to "the brink of collapse."