DairyCo

Delays in farmgate price rises cost industry up to £575 million

Published 15 September 08

Delays in farmgate price rises cost industry up to £575 million

Farmgate prices may have increased by 2.9ppl to an average of 20.9ppl in 2007, but according to figures published today (15 September 2008) in DairyCo's Dairy supply chain margins the time lag between the rises in dairy commodity prices and the slower rises in farmgate prices cost British dairy farmers up to £575 million between March and November 2007.

Huw Thomas, head of market intelligence at DairyCo, says: "We would always expect a time lag between the global markets rising and the farmer seeing the gains but in 2007 this appears particularly excessive.  It cost a dairy farmer producing one million litres of milk up to £51,000 - a huge sum of money to miss out on.

"If milk purchasing agreements between farmers and milk buyers were more transparent, and price fixing periods were better aligned with notice periods, it is likely the market would have operated more efficiently and dairy farmers could have seen more of this money in their milk cheques.  This report once again adds weight to the call for better contracts between farmers and milk buyers."

Dairy supply chain margins also looks at the changes in retail price and retail gross margin during 2007 for liquid milk, mild cheddar and mature cheddar.

Liquid milk and mild cheddar retail prices increased between 2006 and 2007, by 8% and 11% respectively, while the average retail price of mature cheddar fell slightly.  Retail gross margins on liquid milk increased, in pence per litre terms compared with 2006, but fell for both mild and mature cheddar.

During 2007 processors increased their gross margins on liquid milk and both mild and mature cheddar, partly to cover increased operating costs.

Mr Thomas says: "Examination of the financial results of the major milk buyers suggests, in general, this increase in gross margin also translated into an increase in processor profitability with a number of them reporting an increase in profits for the 2007/8 financial year.

"For example, processor gross margin for mild cheddar manufacturers increased by 70%, from an average of 2.9ppl in 2006 to 4.9ppl in 2007.  This is due to a worldwide shortage of supply which meant UK mild cheddar manufacturers were less likely to have their wholesale prices undercut by manufacturers from abroad."

He finishes: "The pressures on dairy farming continues with a sharp increase in farm input costs.  In many cases this will have cancelled out the benefit of any higher milk prices suggesting long term profitability for British dairy farmers is still at risk."

To download a copy of Dairy supply chain margins visit www.dairyco.org.uk or for more information contact DairyCo on 01285 646500.

Ends

15 September 2008

For further information:
N:    Philippa Stagg
T:    01285 646519
E:    philippa.stagg@dairyco.org.uk

Notes for Editors:

DairyCo's current focus is on improving the profitability of dairy farming by focusing on four specific areas:
•    The provision of a world-class information service
•    Helping dairy farmers increase their profits while meeting regulatory and environmental requirements - through better business management.
•    Helping promote the positive perception of dairy products and dairy farming with the general public
•    The development of DairyCo towards a self-sustaining model.

DairyCo is funded entirely by milk producers, via a statutory levy on all milk sold off-farm, at the rate of 0.06p per litre.  This provides an annual income of around £7m.

DairyCo co-funds the industry's nutritional and issues management resource - The Dairy Council - with the processors' trade body Dairy UK.

DairyCo Limited was set up in April 2008 following a fundamental review of agricultural levy boards by Defra. The five existing levy boards (including the Milk Development Council) were replaced by one statutory levy board, the Agriculture and Horticulture Development Board (AHDB).

Reporting in to AHDB are six sector companies - DairyCo covers the milk sector.