An environmental re-set - reducing milk production when demand is growing - added to the well-documented increasing inflationary pressure on dairy farmers, and a turbulent time may be in store for the milk market in Great Britain (GB), according to dairy consultancy agency, Kite Consulting.

“Commodity dairy production relies on increasing productivity at a local and global level to dilute inflation,” said John Allen from Kite Consulting.

“This has led to the real terms reduction in costs relative to other parts of the economy over the last 30 years, and globalisation in the 21st century accelerated this process.

"In the UK, the effect on a two-litre carton of milk means it is more than 25% cheaper than it was in 2000.”

Demand for dairy world-wide has been growing by 2.1% per annum for the past 10 years, according to Kite, and is set to continue, especially in developing economies.

However, we are now seeing supply slowed, or stunted, and the imposition of new compliance measures in key exporting nations, according to the agency.

Government policies in New Zealand and the EU - both major dairy production areas - are already imposing direct restrictions on the ability of dairy farmers to increase productivity, the agency said.

“In New Zealand, no new land can be converted to dairy; nitrogen applications are restricted to 190kg/ha; and a carbon tax is promised within five years,” said Allen.

“The Netherlands is a key example of the direction of travel in the EU, with €24 billion allocated to paying farmers to leave the livestock sector. Dutch milk production is already down by 4% in the current year.

If New Zealand and other exporting nations cannot produce new product to satisfy the increasing global demand then inevitably this will lead to rising prices for dairy alongside the rising costs," he said.

The world milk price indicator, IFCN, is already indicating world prices are over $51 per 100kg - 39p/L energy-corrected milk (ECM) - and commentators are expecting this could be exceeded.

"Our latest analysis shows cost inflation of 24% in the break-even milk price over the two years to March 2023. With figures like these, and competition for product, relationships along the supply chain will be tested,” Allen added.

Retailers will not want to pass on increases to consumers this spring but need to be careful about their relationships with processors. Export markets are strong and far better prices can be secured; there will be stiff competition for milk so processors supplying retailers will be competing for milk supply which could migrate away from those supply chains.

“Some will judge this to be a short-term blip in market prices so expect service as normal to resume later this year or in 2023. But, given the environmental cost re-set, then it does not appear we will go back to past price levels for dairy.

“There will be some stress along dairy supply chains, especially where liquid milk has been used as a loss-leader for a generation. Perhaps the real value of having fresh milk every day of the year will have to be re-assessed?” he added.