Dairy Crest to pay its farmers more for milk amid supply shortage

Dairy Crest is increasing the price it pays its farmers for milk amid a sharp upturn in global dairy markets, its chief executive has said. By Julia Bradshaw
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«Prices started moving up over the last few months and that is simply a factor of on-farm production being down and demand for the product starting to increase, across all dairy categories both globally and here in the UK,” said Mark Allen, chief executive of Dairy Crest.
As a result, Mr Allen expects Diary Crest will pay its farmers 24.22p per litre of milk by the end of November, up from 20.78p at the beginning of the summer.
Milk values are soaring because of a global shortage, triggered by two years of steep decline in the dairy industry. That supply gap is particularly acute in the UK, where years of rock-bottom prices forced many farmers to buy lower quality feed for their cows, while others chose not to replace their herds, leading to less production.
Higher prices will, therefore, come as welcome relief to farmers, many of whom were pushed of the dairy business altogether.
Rising milk values are also beneficial for Dairy Crest’s core cheese business. The company’s cheddar is matured for at least a year, so if milk prices go up in the meantime, Dairy Crest books a tastier profit because it sells the cheese at the higher, current price.
“It’s a timing benefit because of the maturity profile of the cheese,” explained Charles Hall, an analyst at Peel Hunt.
“Generally, Dairy Crest does better when there is a rising cheese price environment because that puts pressure on some of the smaller players in the market who don’t have an integrated system that is as effective as Dairy Crest’s,» said Mr Hall.
“Dairy Crest has its own milk fields in Devon and Cornwall, so getting a supply isn’t an issue. But for some other smaller producers, they might be sourcing milk from a number of different locations and might struggle to get hold of supply. When there is a lot of milk around it’s not an issue, but when it’s in short supply, it is.”
Sterling’s depreciation since the EU referendum has also boosted prices, because dairy commodities are internationally traded.
Rising dairy prices are, however, unhelpful for Dairy Crest’s butter business, at least in the short-term. Cream, which is the main ingredient in butter, has soared in price, doubling over a very short space of time. But unlike cheese, butter doesn’t need to mature. That means Dairy Crest will need to push through a significant price increase to consumers to offset the higher cost of the raw goods.
“This sudden cost inflation is likely to have an impact on butter volumes and margins in the second half,” said Dairy Crest boss Mr Allen.
«Gentle inflation is good for Dairy Crest, as getting higher prices for our products is generally speaking good news, but hugely volatile inflation, as we’ve seen in cream, is a short term shock to the system.»
Meanwhile, Dairy Crest’s demineralised whey operation – a new joint venture with New Zealand’s dairy giant Fonterra, which turns whey, a bio-product of its cheese-making, into a high quality ingredient for the infant formula market – is widening its customer base and improving operational efficiency.
The lion’s share of the end product will be sold through Fonterra into China, and rising milk prices bode well for the fledgling business.
A weaker pound here is also good news for Dairy Crest’s whey exports, as they will be priced more competitively in the market.
“It is early days but the rise in world sweet whey prices should benefit Dairy Crest in due course as the price of demineralised whey for infant formula follows the more standard commodity price,» said Clive Black, head of research at Shore Capital.
«We would expect this to be a tailwind to feature in the 2018 financial year.»
The buoyant dairy market, combined with good progress with the demineralised whey business, puts Dairy Crest on track to meet its full-year profit targets, while earnings in the first half will be ahead of market expectations, said Mr Allen.
 
Source: Telegraph
Link: http://www.telegraph.co.uk/business/2016/09/19/dairy-crest-to-increase-milk-prices-to-farmers-amid-supply-short/

Mirá También

Así lo expresó Domingo Possetto, secretario de la seccional Rafaela, quien además, afirmó que a los productores «habitualmente los ignoran los gobiernos». Además, reconoció la labor de los empresarios de las firmas locales y aseguró que están «esperanzados» con la negociación entre SanCor y Adecoagro.

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