MCVE Help Sheet

In recent years, DairyCo has noted how some processing costs (notably energy) have increased which may mean the indicators are no longer accurate. DairyCo, therefore, decided to instigate an independent review of the method of calculation. The review aimed to establish how UK processor costs and yields have changed and can be downloaded here.

 
What is MCVE and what's its purpose?

The purpose of the MCVE page is to provide a benchmark for the value returned from milk used for mild cheddar. The Milk for Cheese Value Equivalent, or MCVE, provides an indication of the value returned by processing milk into mild cheddar and its associated by-products, allowing farmers supplying cheese-makers to track changes in the market. It is based on the mild cheddar wholesale price and is hence calculates the returns from the bottom of the cheese market.

How does MCVE work ?

MCVE works in a similar way to current measures - Actual Milk Price Equivalent (AMPE) and Intervention Milk Price Equivalent (IMPE). But rather than calculating the returns on butter and skimmed milk powder, it takes the income from mild cheddar, whey powder and whey butter. The processing costs and profit margins are then removed to calculate the returns from milk when it arrives at the cheese processor's factory gate. MCVE is a useful way for farmers to track how returns from the products their milk goes into are changing, even though the milk price paid will also depend on factors such as milk supply, returns for mature cheddar and competitor prices.

How is MCVE calculated ?

It takes the value of mild cheddar, whey butter, and whey powder from public sources, removes typical processing costs and a profit margin and, by dividing all these figures by the appropriate yields, you are left with the equivalent value of the milk at the factory gate.

Income - Costs - Profits = Potential value of milk

MCVE calculates the value of milk at the 'factory gate'. What is this, and Why?

MCVE is calculated as a 'factory gate' value, meaning the value on arrival at the cheese processor's factory gate as there are significant variations in transport costs from farms to processing factories. These costs can vary between 1ppl for a tight ex-farm milk field to more typically 1.5ppl for directs and can increase further if the milk has to be re-loaded or shipped long distances. IMPE and AMPE use similar formulas for butter and skimmed milk powder, which are also factory gate prices, so in this way they are more comparable.

Is MCVE exactly correct?

MCVE is never going to be exactly correct for every mild cheddar processor due to the different costs, utilisations, and efficiencies and product ranges of every factory. In addition, cheese yields will vary from factory to factory on both a geographic basis and seasonal basis. But we believe it to be as accurate and representative as possible.

Is MCVE the price processors should pay for milk?

No. MCVE calculates the value of the milk on the basis of the value various product markets are returning at any point in time, but does not say what should be paid for raw milk. For a start, most factories are making significant amounts of mature cheddar as well as mild cheddar, giving higher returns and allowing processors to pay more than MCVE. The price for raw milk will also be affected by more than just the change in the value of the products it is made in to, e.g. milk supply, processor efficiency & profitability, and competitor prices will all play a significant role in establishing the actual milk price paid to farmers. In addition, not all companies can dry their whey and therefore may not directly benefit or lose from changes in the whey powder price.

What is of real importance is not the absolute level of MCVE, but the amount by which it rises and falls, as this will be very accurate. Therefore if MCVE increases or decreases by one pence per litre (1ppl), this will be an accurate representation of the change in value a mild cheddar processor will be able to realise from the market.

What are the yields and cost used in the formula?

The following yield and cost factors:

PRODUCT

Processing Cost £/t

Yield (Litres per t)

Cheddar

250

9,400

Whey Butter

320

130,000

Whey Powder

215

17,000

Profit Margin of 0.75ppl - roughly 3% return on sales as finance costs are included in the formula and mild cheddar is a commodity product.

Price of Whey butter: Standard butter price - £300/t

How accurate are the yields and costs used in this calculation?

We are confident these yields and costs are typical achievable by for the UK cheddar processing sector although there will be processors turning out both better and worse production costs and yields. Yields and costs will also also vary from plant to plant, as they will also do through the year due to differing milk composition. We have consulted the industry and independent experts and, generally speaking, the figures have been confirmed as realistic, although there is a significant shortage of information in the public domain. We will naturally review these figures if any further information is received.

What about time lags/maturation periods of cheese?

There is a time lag between milk being made into cheese and the cheese being sold, as it needs time to mature. This cost is included in the formula. However what is not included in the formula is any time lag effect to try and equate when milk is bought and when it is sold. Including this effect could have made the formula overly complex. The time lag issue is why mature cheddar is not included in the equation and hence why MCVE is based on mild cheddar at the bottom of the cheese market. Including mature cheddar would be difficult because of the six month maturation period.

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