United Kingdom Agribusiness Report Q4 2009

The UK's large livestock and dairy sector has been going through a tough time for the past couple of years. Producers struggled with rapidly rising input costs through 2007 and 2008 as the cost of feed and fuel soared. This was followed by a fall in demand as the UK economy fell into recession. In June of this year, Dairy Farmers of Britain (DFOB), one of the UK's largest dairy companies, went into receivership.

The co-operative at its peak produced around 10% of the UK's total milk output and had 1,800 members.

Through the first half of the year, DFOB lost around half its member farmers as its financial difficulties meant it was unable to pay its farmers a competitive price for their milk.

Even before the downfall of DFOB, many dairy farmers had been struggling. The number of UK dairy producers has been falling consistently this decade. From August 2008 to August 2009 alone, the number of dairy farms fell by 3.5%. The average size of farms has been increasing as smaller, less efficient players have left the business and larger farms have expanded. The average herd size grew by more than a third from 2000 to 2008 while the average area of dairy farms in England rose by almost 30%. Despite this, there has still been a large fall in the size of the UK's dairy herd this decade. Some of the fall in cattle numbers has been compensated for by increases in milk yield, but milk production has still fallen this decade.

The collapse of DFOB will have seen another wave of smaller producers leave the sector. Many DFOB farmers who could not immediately find a new buyer for their milk had to accept a milk price form the receivers which was less than half the prevailing average farmgate price for milk. For already indebted farmers, this will have made leaving the sector a more attractive option.

While there will be more hard times to come through the end of this year, in the longer term we expect the fortunes of Britain's dairy farmers to recover. The drawdown in dairy herds in major dairy producers such as the US in response to the collapse in world dairy prices should see production fall in the coming years. As the world's economy returns to growth, we expect to see demand for dairy products rise again, particularly in the emerging markets of Asia and the Middle East. This should boost prices for farmers.

Meat producers have also had a difficult time recently. Production of poultry, pork and beef all fell in 2008. The poultry sector is another industry which has seen consolidation this decade. The average margins on broiler production are as little as GBP0.019 per bird according to the Department for Environment, Food and Rural Affairs (DEFRA). This makes it very difficult for smaller producers to compete. The introduction of the EU Broiler Welfare Directive in 2010 will likely accelerate the rate at which smaller operators leave the sector as the capital investment needed to meet the new regulations is too much to be economical.

The directive, which sets out laws for the treatment of broiler chickens, has re-sparked debate over battery chicken production in the UK. Animal welfare charities such as the RSPCA are calling for DEFRA to impose tougher regulations than the EU directive mandates. Specifically, the RSPCA wants to see a lower maximum density for stocking broilers than the 42 kilograms per meter squared set down in the directive.

Predictably, UK poultry operators are strongly against this, claiming it will negatively affect their cost competitiveness relative to producers in the rest of the EU and will lead to no gain in the welfare of chickens. At the time of writing, DEFRA was still considering whether to set the maximum stocking level at 42kg/m2 or at the lower level of 39kg/m2. A decision is expected at some point in H209. Whatever DEFRA decides, other points in the directive such as the control of temperature and ventilation will leave less modern farms needing to invest in upgrading their facilities