Decline In Profitability For Dairy Farmers

SWEDEN - Imbalances in the dairy market have resulted in lower sales prices. With large differences in both milk income and feed costs, milk companies have had a profitability decrease over the last few months, shows the Swedish Dairy Milk Economy Report.

16 September 2011

2 minute read

Europe

Profitability varies greatly between dairy companies in the country.

Large differences exist in both the milk income and feed costs. Several dairy companies have a serious financial situation.

Of course it is worrying that the profitability of the country's dairy farmers goes back somewhat, says Agneta Hjellström, economy expert at the Swedish Dairy Association.

For a typical dairy company with conventional production, the net milk income, minus feed cost, is just 1.60 per pound, based on the average settlement price for the country. For a typical dairy company with organic production are calculated to be around 2.10 per pound.

The average settlement price, excluding seasonal payments, estimated to be approximately SEK 3.10 for conventional milk in September. Organic milk currently has an average settlement price of 4.15 kronor, according to preliminary calculations. But there are significant regional differences in the settlement price.

Milk firms' profitability also affect milk supply. As profitability becomes worse, dairy farmers can be forced to quit. This in turn leads to less milk from its dairy farms.

The current shortage of butter is an example of a clear consequence of that there is less milk in Sweden, says Agneta Hjellström.

In the next few months, dairy companies finances could deteriorate slightly alongside the large uncertainties associated with future developments. The market for feed materials are characterized primarily today by low opening stock and weather problems in parts of Sweden, Europe and USA. This means that feed costs are expected to remain at a relatively high level.

The financial turmoil in Europe and a reduction in imports in emerging markets like China and Russia is also putting pressure on the global and European dairy market.

At the same time milk production is now in countries like New Zealand and the US, making the imbalance in the dairy market grow. With increasing mismatch, there may be a risk that the settlement price will drop further and that the milk business, in the short term, will see a drop in profitability. But the long term trend in the dairy market is still positive.