For dairy farmers, price stability can drastically change, even if the market has been stable for a while. Volatility is no longer an exception to the rule, but the new normal; it’s important to know the driving factors behind the turbulence.
What is causing dairy price swings?
Since dairy supply and demand respond slowly, large price movements are often caused by the smallest of blows. It goes without saying that cows can’t exactly alter their milk production in line with these ebbs and flows either.
This year, a clear trend has emerged: global milk oversupply is putting sustained downward pressure
on prices.
The European Union, which produces nearly 48% of output among the world’s top six dairy exporters, has been a major driver of this surplus, intensifying margin pressures and prolonging market imbalance. This is reflected in the latest Global Dairy Trade (GDT) results, where the index posted its sixth consecutive decline, with cheddar prices falling 6.6% and butter dropping 4.3%.
To compound industry challenges further, production levels are also being undermined by UK labour shortages. Britain continues to feel the detrimental effects of Brexit and the pandemic, with five in six dairy farmers seeking staff receiving few or no applications from qualified workers. This prolonged challenge sits across the entire agricultural sector and continues to threaten the UK’s long-term food security and productivity.
It’s also important to consider feed and energy trends. This summer, the milk-to-feed ratio was much higher than usual, supporting a milk production push and favourable milk prices for the UK, but climbing energy prices are threatening farm profitability this winter, making cost budgets tight for many.
What are the impacts of changing dairy prices?
Whatever your position in the dairy industry, volatile price movements pose these impacts on your business:
- Margin compression when input costs and milk prices mismatch
- Difficulty in planning and investments
- Trouble scaling operations
- Indefinite financial stress
So, even when business is good, how can you prevent yourself from becoming exposed to volatile
price swings?
A great first step is to take a look at your pricing gap.
As a dairy farmer, you know that cash flow uncertainty isn’t just a potential risk, it’s an embedded reality of your business model. So, if your cost of production is less than what you are being paid, it might be beneficial for you to consider putting part of your monthly production into a fixed price.
Your deep understanding of the industry, and the way you work with buyers should indicate your pricing structure, rather than external factors you can’t control. Your internal expertise matters. The best way forward is a pre-emptive financial plan, rather than one that simply reacts to the market. After all, you never know what’s around the corner.
A hedging solution simply turns that knowledge into financial resilience, providing you with a stable baseline and business security. At the end of the day, trying to outguess the market only leads to more volatility. To run your business effectively and begin to think strategically about future growth, business leaders must instead mitigate risk sustainably.
For dairy producers and processors, hedging can translate to:
- Locking in a minimum future selling price
- Securing predictable cash flow
- Protecting margins even when feed or energy costs rise
- Building the confidence to invest long-term, regardless of price swings
Rather than being at the mercy of month-to-month pricing from processors like Arla, Müller, or First Milk, a swap allows you to mirror those dairy price movements and exchange them for a guaranteed fixed price. It creates a robust financial floor that shields you from market drops, giving you true power over your price for the first time in a generation.
In a world where volatility shows no sign of easing, this stability isn’t just a safety net; it’s a strategic
advantage.
The dairy sector is facing one of its most turbulent periods in recent years, but you don’t have to let the market dictate your future. With a strategy designed around your specific production realities, you can secure stability even when conditions remain challenging.
If you’re ready to build that resilience, speak to us or try our Explore Zone’s scenario calculator to see how a structured swap can protect your business from whatever is around the corner.
Take back control in an unpredictable market, one litre at a time.
