Liquid Milk Margins

Published 1 October 13

In 2012, industry consolidation within the dairy sector resulted in DairyCo no longer being able to obtain sufficient or reliable data on processor selling prices for liquid milk, making the estimation of gross margins at the processor level impossible.  As a result, the Supply Chain Margins report for 2013 covered mild and mature Cheddar margins only.  To download this report click here.

 
Liquid Milk Margins - 2011/12

Key findings:

  • The average UK farmgate price for the 2011/12 milk year increased for the second year in a row, up 11.6% on the previous year to 28.1ppl. However, it should be noted that on-farm input costs have been rising at the same time.
  • Average retail prices dropped to their lowest levels in over seven years, down to 55.5ppl and 4.6% lower than in the previous year.
  • Liquid milk processor gross margins are unlikely to have increased during the year given the combination of continued high levels of competition in the retail market, pressure from retailers to keep wholesale prices down and the increase in average farmgate prices.

The Dairy Supply Chain Margins 2011/12 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 2011/12

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.

 Key movements-liquid milk

UK farmgate prices increased for the second year in a row on the back of the continued strength in world dairy commodity markets and increased competition for raw milk supplies by domestic processors. The average Defra farmgate price for 2011/12 was 28.1ppl, 11.6% higher than in the previous year.

At the processing level, this had an impact on milk procurement costs for all segments of the dairy market. Historically, increases in processor costs have been matched with rising retail prices. One of the key characteristics of the liquid milk market during 2011/12 has been the absence of such an increase in retail prices.

Given the strategic importance that retailers have placed on milk and its use to help bring consumers into stores, retailers have resisted any increases in processor selling prices. Average retail prices dropped to their lowest levels in over seven years, down to 55.5ppl and 4.6% lower than the 2010/11 milk year.

While it was not possible to estimate processor selling prices for liquid milk for the 2011/12 milk year, it seems unlikely that processor gross margins would have increased. This is based on the continued high levels of competition in the retail market, pressure from retailers to keep wholesale prices down and the increase in average farmgate prices.

In the absence of any significant change in the structure of the liquid milk market which would change the balance of power, it would be expected that gross margins at the processor level will remain under pressure. 

Processor liquid milk gross margins from 2001/02 to 2010/11

 Processor margins- liquid milk

For historic details on liquid margins click here