Retail price wars in supermarkets contributed to the liquid milk pricing gap between commodity prices and farmgate prices in 2010/11, according to DairyCo.
DairyCo’s annual Supply Chain Margins report analyses the gross margins made by farmers, processors and retailers on the sale of liquid milk and mild and mature Cheddar.
Patty Clayton DairyCo analyst said the prices farmers received for their milk increased by five per cent over 2010/11 compared to the previous year.
In comparison, the market indicator AMPE reflects returns from butter and powder commodity markets, showed a 31 per cent rise, she said.
“With the expectation that farm input costs will continue to rise in the short to medium term, the fact farmgate milk prices have not responded to the same degree as commodity markets has caused great concern in the industry,” said the analyst.
A year of two halves
The liquid milk market was a year of two distinct halves, said DiaryCo, with the first half of the year seeing prices and margins remain essentially unchanged from 2009/10.
However, in the second half of the year, the retail price war dramatically reduced wholesale selling prices, contributing to the price gap as farmgate prices also increased, Clayton told DairyReporter.com.
She said retailers were unlikely to welcome prices increases as they were also engaged in price competition.
Processors are not getting the high prices that they need to pass down to the farmgate, the analyst added.
In Cheddar markets, processors were able to increase gross margins in the second half of the year as a result of the combination of strong commodity markets and strong demand for Cheddar, while retailer margins fell.
The competitive pressures faced by liquid milk processors to secure retail supply contracts kept the wholesale price down, allowing retailers to maintain their gross margin at around 34 per cent, said DairyCo.
With the expectation that farm input costs will continue to rise in the short to medium-term, the fact that farm-gate milk prices have not responded to the same degree as commodity markets has caused great concern in the industry, said DairyCo.
“For a sustainable dairy farming industry to exist, conditions within the supply chain must ensure that farmers are not disadvantaged over the long term.”
The organisation said it had commissioned research to examine how prices along the supply chain adjust to changes and how this may impact on farm revenues.
Findings from this report are to be published by the end of this week.