DairyCo

Mature Cheddar Margins

Published 6 January 12

Mature Cheddar Margins - H1 2011/12 update

Key findings:

• 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.
• Processor gross margins for mature Cheddar increased from the second half of 2010/11 as increased selling prices to retailers helped to mitigate some of the downward pressure on margins arising from increasing farmgate prices, but were down year on year.
• For mature Cheddar, retailers were able to maintain gross margin levels as less prevalent discounting, resulting in higher average per unit selling prices, compensated for higher average wholesale prices.

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. 

Prices for mature Cheddar at the retail level reached an average of 66.2ppl in the first half of 2011/12, an increase of almost 4% (2.4ppl) compared to the preceding six months and over 3% (2.2ppl) higher year on year. Much of the increase can be attributed to the reduction in prevalence of price promotions in the mature Cheddar market, increasing the average unit price.

Wholesale prices for mature Cheddar also increased over the period, both in comparison to the preceding half year and year on year. The average selling price for mature Cheddar rose to 34.0ppl in the first half of 2011/12; up 4% from an average of 32.7ppl in the second half of 2010/11 and 6% (2.0ppl) higher than the price in the same period last year. 

Gross margins for mature Cheddar are summarised in Table 3. Retail gross margins have remained relatively unchanged, with retailers able to offset the increase in average processor selling prices with similar increases in average retail prices. The retail gross margin for mature Cheddar in percentage terms was 49% for the first half of 2011/12, remaining in line with the five-year average of 50%.

Processor gross margins in the first half of the 2011/12 milk year, at 7.0ppl (21%), were 11% lower year on year, but marginally up on the second half of 2010/11. While farmgate milk prices increased by over 3% in the first six months of 2011/12, the relatively larger increase in selling prices for mature Cheddar (up 4%) resulted in gross margins increasing by one percentage point. The ability of processors to achieve price increases for mature Cheddar is likely due to the sustained strength of worldwide commodity markets, combined with the prevalence of brands in this market segment.

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.

In the mature Cheddar market, retail prices fell by the equivalent of 1ppl (1.5%) between 2009/10 and 2010/11, reducing retail gross margins.  Processors' selling prices increased marginally on the back of sustained high prices for cheese on commodity markets, although with the increase in farmgate prices for milk during the year, processor gross margins were fell slightly.

The gross margin calculations are based on the difference between the selling price and buying price of mature cheddar/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.

Improved returns from whey will have helped cheese manufacturers to absorb the increased cost of milk during the year, which along with the increase in wholesale values contributed towards improved profits from cheese for the year, as evidenced by the improved operating profits reported by two both Dairy Crest and Milk Link, two of the largest Cheddar manufacturers in Britain.

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

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

Please note: Monthly retail prices have been used since April 2007, compared to annual average prices prior to April 2007.

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. Branded or niche mature cheddars will achieve higher wholesale prices and hence gross margins will be higher. Income from whey is ignored in this calculation - in reality this will increase the margin.

Mature Cheddar retailer gross margins are based on the difference between the wholesale price of standard mature cheddar and the weighted average retail price of supermarket label mature cheddar (Kantar data). Branded or niche mature cheddars will achieve higher wholesale prices and retail prices.