Milk prices: why you could pay 50% more this year

Much of the problem is the rising price of dairy products. The costs of milk, cheese and eggs – commodities from the supermarket – increased by 9.5% in the 12 months to April. The price of whole milk rose by more than 12%, while skimmed milk rose by 16%.

More pain could be coming, according to a recent analysis by Kite Consulting, which specializes in the UK dairy industry.

Between 2020 and 2021, a standard four pint carton of milk will cost between £1.10 ($1.36) and £1.20 ($1.49). This year it could hit £1.70 ($2.11), the consultancy said. That would represent an increase of more than 50% from the lower end of the range.

Why the dramatic peak? It partly comes down to supply and demand. Covid-19 drove up the price of many goods as lockdowns disrupted global supply chains. This weighed on milk production, as farmers had to deal with more expensive fertilizers and feed and new environmental regulations. Meanwhile, demand for dairy products, especially in developing countries, grew during the recovery.

Then came the invasion of Ukraine, which further deteriorated access to products such as wheat, fertilizer and fuel, and again increased costs for dairy farmers.

“The war is the thing causing the biggest problem right now,” said John Allen, managing partner of Kite Consulting.

The price of fertilizer

One of the biggest problems is the high price of nitrogen-based fertilizers, which are essential for dairy farming.

“If you look at April 2022 compared to April 2021, you see fertilizer prices almost four times higher than before,” said Robert Craig, who runs three dairy farms in northern England with some 1,500 cows.

If farmers cut back on how much fertilizer they use, they won’t be able to grow enough grass to feed their cows while they graze. A recent lack of rain in England makes the problem worse.

Jessica Langton, who helps run a family farm in Derbyshire with 100 cattle, is concerned.

“We get most of our income from milk, so we have to produce a large amount of grass to feed [cows] through summer and winter,” she said. Milk from her family’s farm is used to make cheddar cheese.

Langton noted that many other farms also rely on fertilizers to grow wheat, corn and barley to feed their cows. If they cannot produce enough, they may be forced to sell part of the herd, either for slaughter or to other dairy farmers.

Fertilizer prices rose before the invasion of Ukraine due to a spike in natural gas prices last year. Nitrogen fertilizers such as urea and ammonium nitrate are produced from natural gas.

The invasion of Ukraine made matters worse. Russia and its ally Belarus are major fertilizer exporters, but few buyers want to touch their supply now. According to the Independent Commodity Intelligence Services, an estimated 18% of UK urea comes from Russia and 7% of ammonium nitrate.

“Russia is such a big exporter of fertilizers and there are so many sanctions,” said ICIS analyst Deepika Thapliyal. “That will keep the supply very tight.”

The price of fuel and animal feed

Energy prices are not only a factor in fertilizer production. Fuel is also essential to running a farm, where tractors and other machinery can run between 16 and 20 hours a day.

Langton estimates that the cost of the diesel her family uses has more than doubled from last year.

Heifers feed in a barn on a farm in Ashford, Kent.

The price of animal feed for cows, which supplements their diet, has also risen. The British National Farmers’ Union estimates that feed prices have risen by 70% in the past two years.

Before the war, Russia and Ukraine accounted for more than a quarter of global wheat exports. But the disruption caused by Russian blockades in Ukrainian ports pushed prices to record highs in March. They have fallen slightly since then, but they remain extremely high and are rising again in recent days when India banned exports.

Wheat, along with corn and soy, serves as a benchmark for feed prices, said Allen of Kite Consulting.

Craig, the farmer, said Ukraine produces the “vast majority” of feed for organic dairy cows in the UK. Now that product is practically inaccessible.

How it shakes out?

It is not a given that supermarkets will increase milk and other dairy prices in line with dramatic forecasts. Shops are wary of raising the price of essential items too much, so as not to scare off customers.

“Some retailers will be willing to take a much lower margin, if not small losses. [to] to make [sure] people come through the door,” said Tom Holder, a spokesperson for the British Retail Consortium. “Nobody wants to go to the supermarket that has the expensive milk.”

But farmers like Langton and Craig worry that the dynamism that’s hurting their businesses isn’t going away. Many are also dealing with rising labor and transportation costs.

“There’s literally no one to hire. You’re advertising jobs and there’s very little response,” Craig said. Two of his farms produce milk for cheese. Milk from the third farm is dried and processed into a cappuccino mix made by nest NSRGY

Kite Consulting estimates that total production costs for dairy farmers will increase by 29% between 2021 and early 2023. Government subsidies are declining, making it even more difficult to break even.

“If we don’t see milk prices rise alongside hyperinflation, we could see many dairies leaving the industry in the UK,” Langton said, referring to the price at which her family can sell her milk to processors.

Rising food costs will hit poorer households hardest. About a quarter of Britons have already skipped meals in response to the cost of living crisis, according to a survey published this week by Ipsos. For people with a lower income, that number rises to one in three.
David Beasley, head of the United Nations World Food Programme, has warned that rising food prices will cause social unrest in some parts of the world.

As prices are pushed higher to help farmers stay in business, demand is expected to begin to decline, allowing the market to rebalance itself. But when that moment will come, a terrifying unknown remains.

“I don’t think it’s too expensive yet,” says Allen of Kite Consulting.

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