UK dairy farmers finally covering costs on back of food price inflation

Tim Wallace

Prices are rising fast, and that makes Mike King a happy man. Butter is up 23pc in the last year. Cheese is also making the weekly shop more expensive.

Supermarkets are even hiking milk prices, conceding they cannot keep costs down forever.

But while the average shopper might be feeling the pinch, this is a great relief for King.

He is a dairy farmer. His family owns 550 pedigree Holsteins. For the past three years his farm and others like it have suffered from global milk prices falling below their cost of production.

“Losses have been in the region of 4p to 10p per litre depending on the times of the year. But in November and December most farmers have been making 2p to 3p per litre,” he says.

“It enables us to cover our costs and start making investments in the infrastructure and equipment we need on the farm.”

That means feeders for cows, yard-cleaning equipment and any other tools that need replacing on his South Gloucestershire farm.

“Most people haven’t done any of that [due to low milk prices], just welding it together and keeping it going,” says King, who also chairs the Royal Association of British Dairy Farmers. It means farms can hire some helping hands, too.

Get the latest news from the Farming Independent team 3 times a week.

“Family staff will have been working extremely long hours, 80 to 100 hours a week when prices were really low,” he says.

“Conditions are starting to ease a bit now. It enables people to work more realistic hours, to spread the workload more widely.”

Beyond dairy, food prices globally rose steeply at the start of the year which has slowly fed through to the supermarkets. That has combined with a fall in sterling which pushes up import costs. For families other than King’s, it has been painful. Inflation hit 3.1pc over the past 12 months, the highest level in more than five years.

Air fares dropped by less than normal at this time of year. Olive oil costs are soaring. Fresh fish prices jumped 15pc on the year. Pay growth remains weak at 2.5pc.

When inflation started rising, the expectation was that the sterling effect would pass through and the pace of rises would fall off again. But now oil prices are joining food prices in rising steeply. Energy bills could jump as a crunch in European gas supply and North Sea pipelines push up market prices. The services sector is raising prices too, and there are hints of wage growth picking up.

Inflation could be here to stay.George Buckley, economist at Nomura, notes the very broad-based nature of inflation.

His analysis shows that 68pc of items on the consumer price index, weighted by contribution to the index, rose in price by more than 2pc in the past 12 months, the highest proportion since early 2012. Just 6pc of the CPI’s components are in deflation, the lowest proportion in the 16 years for which he has data.

There is room for this squeeze to worsen if energy prices stay high and utilities firms pass on the rises. But he hopes inflation will fade to 2.5pc by the middle of next year, while wage growth will recover to 3pc on a sustainable basis by the end of 2018.

David Page at AXA fears changes in commodities prices, too. “If gas stays at these levels we may see a hike in utilities prices into early spring,” he says. “Another specific concern is that we may be moving into a La Niña year which makes western Europe colder.”

Page thinks inflation may edge a touch higher before falling slowly next year, averaging 2.6pc over the first half of 2018.

Lucy O’Carroll, Aberdeen Standard’s chief economist, points to IHS Markit’s PMI surveys as evidence services firms are hiking prices, too. “If they feel confident to continue to alleviate cost pressures by raising prices, we could see more upward inflationary momentum around January or February,” she says, noting this is a different set of costs from those which drove up inflation in recent months.

In the longer-term, companies’ low levels of investment as well as falling migration could reduce growth in the economy’s productive capacity, meaning inflation will be higher for any given level of output.

This depends on the Brexit process. “It makes sense for companies to look at the most likely outcome and that – with a lot of uncertainty around it – would seem to be a reasonably smooth transition period,” says Ms O’Carroll. “It should limit the supply-side effects and so the inflation upside. But inflation forecasts can be very wrong.”

And that is not the kind of inflation which benefits farmers, or anyone else.

Online Editors

For Stories Like This and More
Download the Free Farming Independent App