DairyCo

Liquid Milk Margins

Published 5 January 12

• Farmgate prices increased on average by 3.4% in the first six months of the 2011/12 milk year, although year-on-year they are up by 11.6% as commodity markets remained strong throughout the period. However, it should be noted that on-farm input costs have been rising at the same time.
• Liquid milk processors faced continued pressure on gross margins both due to upward pressure on farmgate prices and the inability to pass on cost increases to retailers.

For the purposes of this report, gross margins are calculated as unit gross margins, measuring the unit selling price less the unit cost price (in pence per litre terms). The margins do not account for other sales or production costs and are therefore not indicative of profit levels. However, the gross margins are representative of the value obtained at that level of the supply chain and analysis of how the margins have changed over time provides important insight into how market events have impacted on the distribution of the value within the supply chain. 

The average retail price for liquid milk in multiple retailers* increased to 56.6ppl in the first half of the 2011/12 milk year (Apr to Sep 11), up from an average 56.0ppl in the preceding six month period. The increase was largely due to the reduction in multi-buy promotions, resulting in a rise in the average unit milk price.

Nevertheless, the average retail price for liquid milk prices remains low compared to averages over the last four years as a result of 'price wars' among top retailers that started in the second half of the 2010/11 milk year. Compared with the corresponding period last year, the average retail milk price over the six month period of Apr to Sep 11 was down by more than 8%.

Average processor selling prices also fell over the six month period, from an average 37.3ppl in the second half of 2010/11 to 37.1ppl for the first half of 2011/12. Average processor selling prices have fallen steadily since peaking at 47.0ppl in the second half of 2008/09.

Processor gross margins were heavily impacted during the first half of the 2011/12 milk year as a result of the reduction in average selling prices to customers and upward pressure on farmgate prices paid for milk supplies. At 27.0ppl, the average Defra farmgate price was approximately 4% higher compared to the second half of 2010/11, and 12% higher year on year.

The dual impact of higher farmgate milk prices and reduced selling prices resulted in a fall in processor gross margins, from an average of 30% in the second half of 2010/11 to 27% in the first six months of 2011/12. The change is more significant year on year. In the first half of 2010/11, average wholesale gross margins were at 40%.

The recent fall in processor gross margins reflects in part the inability of processors to pass on higher input costs to retailers, who are faced with maintaining their competitiveness during the economic downturn. Also impacting on processor gross margins was the upward pressure on raw milk prices arising from strong commodity markets.

Retail gross margins recorded a slight increase in the first half of the 2011/12 milk year, up two percentage points on the second half of 2010/11 to 35%, benefitting from the reduced processor selling price and the small increase in the average retail price.

The Dairy Supply Chain Margins 2010/11  report presents evidence on the gross margins* made by farmers, processors and retailers on the sale of liquid milk, mild and mature cheddar. This year's report provides evidence on how average gross margins along the dairy supply chain have been affected by market events during 2010/11. For the liquid milk market, the report also compares average gross margins for the two six-month periods ending September 2010 and March 2011.

The liquid milk market experienced a year of two halves, with a relatively uneventful first half, followed by a second half characterised by intense competition at both the retail and the processor level.  The impact of this competition was to reduce the selling price of milk at both the retail and the wholesale level, resulting in retail gross margins remaining at 34% of the selling price and processor margins declining.  The 5% increase in the farmgate price over the year further impacted on processor gross margins, which fell from 44% in 2009/10 to 35% in 2010/11.

The gross margin calculations are based on the difference between the selling price and buying price of milk at each stage in the supply chain, and do not take account of any costs of production.

At the farmgate, it must be noted that while the average Defra farmgate price rose by approximately 5%, the main dairy farm input costs of feed, fertiliser and fuel are estimated to have risen by around 7% in 2010 according to Defra's provisional estimates of farm incomes.

Cream income to liquid processors is also ignored from gross margin calculations, which due to the strong performance of cream on commodity markets during the 2010/11 milk year, will have helped to counteract the impact of rising input costs at the processor level.

For more details on liquid margins click here, or see Dairy Supply Chain Margins 2010/11.

 
*The gross margin equals the difference between the selling price and buying price for milk.

 The DEFRA farmgate price is an average of all farmgate prices and will lead to small discrepancies in the absolute level of the margin. However, discrepancies should remain relatively constant year on year therefore the change in margins over the past 10 years should be accurate. In addition, cream income is ignored from the calculation - this will increase the processor margin. To view the range of farmgate prices currently being paid please click here.

Retail Liquid milk gross margins are based on the difference between the wholesale price of liquid milk (as estimated by DairyCo Datum) and the average supermarket retail price of liquid milk (fully weighted from Kantar data).