Opinion: More than your average dairy price?

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In brief...

A recent letter to suppliers from Müller prompted a flurry of phone calls to the NFU dairy team. Here, Rohit Kaushish and Sian Davies look at pricing in the sector1.

Last month, following the announcement of a milk price hold and the subsequent NFU pressure, Müller wrote to its suppliers seeking to provide reassurance that their milk pricing strategy is both fair and competitive. The letter included a table of average milk prices which clearly showed the Müller price above the industry average.

This has triggered a flurry of phone calls to the NFU dairy team. Sian Davies, our chief dairy adviser and Rohit Kaushish, NFU economist, share some of the questions they’ve had from members in the last few days.


Q. Should we expect prices to move as one?

In theory milk price changes should be impacted by the end markets to which your milk is supplied. To that end it’s vital for farmers to know which markets their milk buyers are involved in. This has become more complicated as a number of our larger buyers are involved in various markets, moving milk to different end uses depending on the market value.

To help things AHDB Dairy publishes three market indicators – AMPE, MCVE and FMPE. AMPE is an actual milk price equivalent based on butter and powder returns, MCVE the Milk for Cheese Equivalent delivering expected returns from the cheese market. The latest figures for July show both these indicators moving by upwards of 20% in a month. The newest kid on the block is FMPE, launched last week which compares current market prices and prices traded on futures contracts. These are important providers of market sentiment and should provide clear signs to farmers as to what is happening on UK dairy markets. There is a time lag though, and this will be different depending on the product mix from each processor.


Q. What do you think about Müller’s approach of writing to their farmer suppliers?

One of the NFU Dairy Board’s main priorities is to improve supply chain relationships so we welcome the fact that Müller has sought to explain their price moves (or lack of in this case) and some of the drivers behind their pricing strategy. We have long called for greater transparency across the supply chain and this is a positive step to building stronger relationships through more open communication. This also raises the importance of having strong, independent producer representation so that suppliers don’t feel threatened in asking difficult questions of their milk buyer – be that on price, milk contracts or strategy. 


Q: Do you agree with Muller’s price comparison?

Müller’s use of longer term averages is an interesting approach which can help demonstrate longer term returns to farmers. We’ve also used the same published data source (www.milkprices.com 2) to investigate how the average Müller non-aligned price holds up over different timespans.

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Q. How do their prices compare over the past two years?

Looking specifically at five major dairy processors Arla, Müller, First Milk - Cumbria, Meadow Foods and Yew Tree Dairy, Müller’s retail supplemented price has yielded the highest average over the last two years (July 2014 - June 2016). Müller’s pricing strategy has benefited significantly from the minimum farmgate pricing model brought in by a number of retailers (yielding a supplement 0f 2.894ppl for July 2016) in August 2015 whilst its standard price has consistently tracked average industry prices.

Adding the retail premium to the Müller base price allowed the processor to bring its 2015 prices in line with the most competitive operator in the pack, Arla. Only with the retail premium has Müller, in the first half of 2016, overtaken its competitors on price.

For these five processors it appears to be a story of almost two halves with Arla, Müller and Yew Tree Dairy maintaining their two year average price close to 25ppl whilst Meadow Foods and First Milk - Cumbria have delivered closer to 22ppl.

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Q. How about during the first half of this year?

More recently, in the first half of 2016 we have seen greater divergence in industry pricing strategies with Müller’s retail premium allowing it to pull away from the rest in terms of average milk price. That said its standard price has fallen significantly below fellow leaders Yew Tree Dairy and Arla. With an average price of 23ppl, this places Müller at a 1ppl premium to Yew Tree and 2ppl premium to Arla. At the bottom end we find First Milk - Cumbria and Meadow Foods who have averaged close to 18ppl, a significant 3-5ppl behind the leading averages of Arla, Müller and Yew Tree Dairy.

It’s important to bear in mind however that some of these processors have an A and a B pricing model in place, so not all milk is paid at these prices, and farmers need to be confident that they are receiving a fair ‘B’ price. It’s also worth noting that the gap between the top and the bottom has continued to widen over the years with the removal of quotas sparking an industry wide adjustment in prices paid.

Averages, as used in this case can be useful to show longer term trends. This in turn allows us to move away from reacting to short term price moves and enables us to take a longer term look at where processors are heading.  With evidence of tighter supplies in the second half of 2016, we expect to see processors pricing strategies align more closely with one another as they lose their ability to shop around and are forced to compete for less milk.


Q. How do other processors compare?

Looking beyond the five major processors above, and ignoring those on aligned retail contracts, the highest average prices on offer have consistently been provided by Davidstow and Crediton. Both have offered a 2 year average price at a premium of 2ppl when compared to Müller (including retail supplement). In 2014, Davidstow and Crediton offered an average premium of 1ppl and 2ppl respectively, followed by 2ppl in 2015 whilst average prices are within 1ppl of each other in 2016 as the retail premium paid to Müller has increased. The level of disparity in milk prices across the industry is striking and it does seem to be the case that the best place to be at the moment is supplying milk into the No1 cheddar brand in the UK (sold mainly on promotion at retail) or into UHT production, for both milk and flavoured drinks.

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[1] Report looks at milk pricing over last two years at Arla, Muller, First Milk (Cumbria), Dairy Crest, Davidstow, Yew Tree Dairies, Crediton, Wyke, Freshways, Dale Farm, Meadow Foods and Glanbia.

[2] All prices based on the Milk Prices.com standard litre of 4% b/f & 3.3% prot


Last edited on: 23:08:2016

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