DairyCo

AMPE v IMPE

Published 27 July 10

UK Actual Milk Price Equivalent

Current Monthly Values

• AMPE fell by 2.3% (0.7ppl) between June and July.
• IMPE increased slightly as the Euro strengthened against Sterling.

The Euro strengthened slightly against Sterling over the past month and this had the effect of increasing the IMPE by about 0.2ppl in the first 23 days of July, to 18.0ppl.

In the market place, butter and SMP prices eased and the AMPE fell by 0.7ppl to 30.0ppl, some 10.7ppl more than a year ago.  The gap between the AMPE and the IMPE narrowed to 12.0ppl.

For further information on UK Wholesale Prices please click here.

Comparison of AMPE with IMPE

The graph below shows movements of the IMPE and the AMPE from 2003 to 2010.

Movements in the IMPE over the period are due to two factors.

The first is variations in the value of Sterling against the Euro. Intervention prices are fixed in Euros. If Sterling strengthens against the Euro, intervention prices measured in Sterling fall, and so the IMPE falls. When Sterling falls against the Euro, the IMPE rises.

The IMPE has risen during six periods of weakness for Sterling against the Euro in the first half of 2003, the second half of 2004, the second half of 2007, the beginning and the end of 2008 and the autumn of 2009. For most of the remainder of the time, Sterling has strengthened against the Euro.

The second reason for movements in the IMPE is a change in the value of intervention, measured in Euros. There were intervention price cuts in July 2004, 2005 and 2006 for butter and SMP; and in July 2007 for butter only under the Mid-Term Review. A further cut in the intervention price for SMP was made in September 2008. In 2009, the introduction of a tender system for sales of butter and SMP to intervention further weakened intervention prices.  The tender system finished at the end of February 2010.

The AMPE measures market prices for butter and SMP. These market prices are often affected by changes in currency and the AMPE frequently tracks trend movements in the IMPE. The graph above shows two periods - the second halves of 2004 and 2005 - when market prices did not follow support price cuts under the Mid-Term Review until some six or so months after the cuts took place. On both occasions, there was a fine balance of supply and demand especially for SMP, and market prices only fell when supplies outstripped demand at the start and end of 2005. During 2006, the AMPE parted company significantly with the IMPE. The SMP market remained in a fine balance of supply and demand with no stocks in intervention available to balance market shortfalls: this led to rises in market prices in the second half of the year. A shortfall of supplies to meet world demand in the spring and summer of 2007 caused market prices for butter and SMP to rise strongly to unprecedented levels. The fine balance of supply and demand changed in late 2007 and prices fell from the autumn of that year until the late summer of 2009. At that time, a spike in prices occurred in dairy commodity markets and this is recurring in the spring and summer of 2010.

The delay in the fall in market prices in relation to intervention prices in 2004 and 2005 resulted in significant premiums opening up for the AMPE over the IMPE at these times. Over the past two years, there have been extraordinarily high premiums for the AMPE over the IMPE when market prices soared to unprecedented levels. Falling market prices and rising values for the IMPE have resulted in the IMPE and the AMPE coming much closer together for much of 2009, with the IMPE sometimes at a premium and sometimes at a discount.  The spike in market prices in the autumn of 2009 and again in the spring and summer of 2010 has once again opened up the premium of the AMPE over the IMPE.

Comparison of the adjusted AMPE with UK Milk Producer Prices

One of the measures sometimes used to see whether market place price movements are being reflected through to farm prices is to compare farm prices with the AMPE. In this case, farm prices are calculated from UK Milk Producer prices as published by DEFRA by taking out the effect of seasonality payments and variations in compositional quality through the year. The AMPE is a delivered to dairy price and so for this comparison, a transport deduction of 1.5ppl has been made to put it on a farm gate price basis. The graph shows changes to both factors for the period 2003 to 2010.

* The UK producer price is the DEFRA price adjusted to take out the price effects of seasonality additions and deductions and variations in milk quality.
Source: DIN

Because the AMPE has price correlations to the IMPE, it tends to pick up price changes due to currency that affect support prices and markets where imports in particular compete with domestic products (eg Cheddar cheese). It does not directly pick up changes in liquid milk prices although in the past, liquid dairy companies tended to adjust their farm gate prices to follow trends in changing support prices over time.

The correlation between the two measures is imperfect but even so, farm gate prices tend to track AMPE prices on a smoothed but time-lagged basis. This can be seen in recent years during 2007 and into 2008, when market prices were rising, and subsequently when they fell. From the autumn of 2008, farm gate prices started to weaken and there were more significant price falls in the first half of 2009. It should be noted that the May 2009 adjusted DEFRA price is distorted downwards by the effects of Dairy Farmers of Britain going into receivership. The fall in farm gate prices came to a halt in the autumn of 2009, no doubt helped by a spike in commodity prices (and hence the AMPE). 

Note: Further information on IMPE/AMPE can be found by clicking on IMPE/AMPE Guide