DairyCo

Mild Cheddar Margins

Published 6 January 12

Mild 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 mild 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 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 of mild Cheddar has remained relatively stable over the last three years. At 56.4ppl, the average retail price of mild Cheddar in the first half of 2011/12 was just 1% above both the three-year average of 55.3ppl and the average price of 55.5ppl during the second half of 2010/11.

Average wholesale prices for mild Cheddar, however, have been increasing since the first half of 2009/10 when they averaged 26.6ppl. At 31.4pl, the average wholesale price for the first half of 2011/12 was 1.6ppl (5%) higher than the previous six months, and 2.0ppl (7%) higher year on year.

The impact of the price changes on gross margins for mild cheddar are summarised in Table 2. The retail gross margin fell in the first half of 2011/12 compared with both the previous six months and year on year. The retail gross margin for mild cheddar fell to 44% as the increase in average wholesale prices more than exceeded the rise in retail price. It appears that in the current economic climate, retailers are reluctant to increase mild Cheddar prices in order to maintain consumer spend. As such, faced with higher average wholesale prices, retailers have experienced a fall in gross margins.

Processor gross margins recorded a small increase over the last six month period to 14%, as processors were able to pass on some of the sustained strength in dairy commodity markets to the retailer. Processor gross margins were, however, down four percentage points year on year as the relatively larger increase in farmgate prices over the period had a dampening effect.

Retailer gross margins for mild Cheddar fell slightly as retail price increases did not fully cover higher average wholesale prices.

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 mild Cheddar market, retail prices remained stable between 2009/10 and 2010/11, which combined with increased selling prices by processors, served to reduce retail gross margins from 51% (2009/10) to 47% in 2010/11.  Although farmgate prices for milk increased during the year by approximately 5%, processor gross margins improved as strong commodity markets and limited availability of cheddar imports allowed manufacturers to achieve higher selling prices.

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

For more details on mild 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.

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. Income from whey is ignored in this calculation - in reality this will increase the margin - for further details see Mild Cheddar Value Equivalent (MCVE).

Mild cheddar retailer gross margins* are based on the difference between the retail price and wholesale price of mild cheddar. The retail price is an average weighted price for mild cheddar from Kantar data.