The Price of Breakfast                 March 2023

Millions of people in the UK start the day with cereals and milk. However, the price of this common breakfast has increased substantially over the last year. Official UK figures show that the retail inflation rate for milk, for example, reached about 30% in the past 12 months, the fastest annual rise since comparable records began in 1989. This is due to a combination of factors, most but not all indirectly related to Russia’s invasion of Ukraine.  Farmers blame high inflationary costs associated with milk production and collection. These include: 

1. Animal feed: an average dairy cow eats about 50 kg a day of mixed ration cattle feed, which contains a blend of ingredients including grass, maize, soya and wheat.  All these ingredients increased significantly in price and, due to the UK drought in 2022 which reduced grass growth in the fields, dairy farmers began feeding mixed ration cattle feed far earlier in Autumn 2022.   
2. Fuel and energy: the collection of milk is relatively energy intensive.  We all know how much energy costs have risen domestically.  This increase is many times higher for commercial enterprises which have been less sheltered from price rises than residential homes, most of which have received financial support from the Government and a cap on their gas bills. 
3. Fertiliser: grass is a vital element of a cow’s diet.  Fertiliser is needed to help maximise yields of this and other important crops.  Since fertiliser production is energy intensive, its price has risen substantially.  Quotes for ammonium nitrate fertiliser prices reached as high as £1,000 a tonne in 2022 compared to £280 a tonne in 2021.
4. Labour: almost two-thirds of dairy farmers reported in a recent survey that it was more difficult to recruit workers than in 2019.  Higher wages have only partly mitigated this issue but added to the higher costs of milk production. 
5. Debts: many dairy farm businesses are funded to different degrees with short term loans, long term loans, and mortgages because of the substantial outlay for a dairy farm.  The cost of servicing some of these debts has doubled, perhaps tripled, in some cases in the last year, substantially increasing the interest expenses for dairy farms. 

The time lag between farmers suffering these staggering high inflationary costs rises and receiving a higher wholesale price for milk meant most farmers sold their milk at a substantial loss in 2022.  Some dairy farmers opted to move out of dairy; others reduced the size of their herds.  UK milk volumes fell in 2022.  They are picking up in 2023 due to a combination of farmers receiving a higher price for milk, and some of the costs, for example, fuel and fertiliser dropping from 2022 highs.  Nonetheless the profit, the difference between overall revenues and costs, is still under intense pressure in this industry.  It is a common theme in many different industries.  It is unlikely the price of a breakfast will fall any time soon.  

The Management Accounting Team 

Department of Finance, Accounting and Economics