July 22, 2011

DairyCo report confirms UK dairy price margins

UK not-for-profit dairy information organisation DairyCo has published its Supply Chains Margins report, confirming that the UK average farmgate price is the lowest of all 27 EU member states.

While farmgate milk prices increased by an average 5% during the 2010/11 milk year, the commodity markets indicator, Actual Milk Price Equivalent (AMPE), showed a 31% rise.

"With the expectation that farm input costs will continue to rise in the short to medium term, the fact that farmgate milk prices have not responded to the same degree as commodity markets has caused great concern in the industry," said DairyCo analyst Patty Clayton.

DairyCo said in April the weighted EU average farmgate price stood at 30.03 pence per litre (ppl), 3.77ppl higher than the UK. Other European countries have been better at passing on rising commodity prices.

The latest supply chain margins report looks at the events of 2010/11 within the liquid and cheese markets and how these have affected gross margins along the supply chain for the year.

While the retailers' percentage share remained on a par with the previous year at 34%, and the farmgate share increased 6% to 43%, processors' share declined by 6% to 23%.

Clayton said it could certainly be concluded that were it not for retail price wars, processors might have been able to reflect more of the improvement in commodity markets in the price they were able to pay farmers.

"The liquid milk market was a year of two distinct halves, with the first half of the year seeing prices and margins remain essentially unchanged from 2009/10," she said. "In the second half of the year, the retail price war led to events which dramatically reduced wholesale selling prices, leaving processors squeezed when farmgate prices increased."

She added that in cheddar markets, processors were able to increase gross margins as a result of the combination of strong commodity markets and strong demand for cheddar, while retailer margins fell.

"For a sustainable dairy farming industry to exist, the key issue is that conditions within the supply chain do not disadvantage farmers in the long-term," Clayton said. "Our Price Transmission report, coming out at the end of the month, examines this issue in more detail."