A big part of the problem is soaring dairy prices. The cost of milk, cheese and eggs – supermarket staples – soared 9.5% in the 12 months to April. The price of whole milk has increased by more than 12%.
There could be more pain to come, 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 costs between £1.10 ($1.36) and £1.20 ($1.49). This year it could reach £1.70 ($2.11), the consultancy said. This would mark an increase of more than 50% from the low end of the range.
Why the dramatic spike? It depends partly on supply and demand. Covid-19 has driven up the price of many goods as lockdowns have distorted global supply chains. This has weighed on dairy production as farmers have had to contend with more expensive fertilizers and animal feed as well as new environmental rules. Meanwhile, the appetite for dairy products, especially in developing countries, has increased during the recovery.
Then came the invasion of Ukraine, which further scrambled access to products like wheat, fertilizer and fuel, again increasing costs for dairy farmers.
“War is the cause of the major problem right now,” said John Allen, managing partner of Kite Consulting.
The price of fertilizer
One of the biggest problems is soaring prices for nitrogen fertilizers, essential for dairy farming.
“If you look at April 2022 compared to April 2021, you see fertilizer prices almost four times higher than they were before,” said Robert Craig, who runs three dairy farms in the north of England with around 1,500 cows.
If farmers reduce the amount of fertilizer they use, they cannot grow enough grass to feed their cows as they graze. A recent lack of rain in England further aggravates the problem.
Jessica Langton, who helps run a family farm in Derbyshire with 100 cattle, is worried.
“We get the majority of our income from milk, so we have to produce a lot of grass to feed [cows] summer and winter,” she says. Milk from the family farm is used to make cheddar cheese.
Langton noted that many other farms also rely on fertilizer to grow wheat, corn and barley to feed their cows. If they cannot produce enough, they could be forced to sell part of the herd, either to the slaughterhouse or to other dairy producers.
Fertilizer prices were rising before the invasion of Ukraine due to a spike in natural gas prices last year. Nitrogen fertilizers like urea and ammonium nitrate are produced from natural gas.
The invasion of Ukraine made matters worse. Russia and its ally Belarus are big fertilizer exporters, but few buyers want to touch their supply now. An estimated 18% of the UK’s urea comes from Russia and 7% of its ammonium nitrate, according to Independent Commodity Intelligence Services.
“Russia is such a big fertilizer exporter, and they have so many sanctions,” said ICIS analyst Deepika Thapliyal. “That’s going to keep the supply very tight.”
The price of fuel and animal feed
Energy prices are not just a factor in fertilizer production. Fuel is also essential to run a farm, where tractors and other machinery can run between 16 and 20 hours a day.
Langton estimates that the cost of diesel used by his family has more than doubled from last year.
The price of animal feed for cows, which supplements their diet, has also increased. The UK’s National Farmers’ Union estimates that feed prices have risen 70% in the past two years.
Wheat, along with corn and soybeans, serves as the benchmark for feed prices, said Allen of Kite Consulting.
Craig, the farmer, said Ukraine produces the “vast majority” of organic dairy cow feed in the UK. Now this product is practically inaccessible.
how it shakes
It is uncertain whether grocery stores will raise the prices of milk and other dairy products in line with the dramatic predictions. Stores are reluctant to raise the price of essential items too much for fear of scaring off customers.
“Some retailers will be willing to take a much lower margin, or even small potential losses, [to] Craft [sure] people walk through the door,” said Tom Holder, spokesman for the British Retail Consortium. “No one wants to go to the supermarket that has high priced milk.
But farmers like Langton and Craig worry that the momentum hurting their businesses is waning. Many also have to contend with rising labor and transportation costs.
Kite Consulting estimates that total production costs for dairy farmers will increase by 29% between 2021 and early 2023. Government subsidies, meanwhile, are declining, making it even harder to break even.
“If we don’t see the price of milk rising alongside hyperinflation, we could see many dairy farms exit the industry across the UK,” Langton said, referring to the price at which his family can sell their milk to processors.
As prices are pushed higher to help farmers stay in business, demand is expected to start to fall, allowing the market to rebalance. But when that moment will arrive remains an anxiety-provoking unknown.
“I don’t think it’s too expensive yet,” said Allen of Kite Consulting.