DairyCo breaks down changes in share of dairy pie

By Guy Montague-Jones

- Last updated on GMT

Supermarkets in the UK are taking a bigger and bigger share of profits from the dairy sector according to a DairyCo report on the margins of farmers, processors and retailers.

Despite the volatility in the sector over the past year, DairyCo found that at a retailer level only minor changes were recorded in prices for liquid milk and mild Cheddar between 2008/9 and 2009/10.

Retailers widen margins

There was a fall of 2.9 pence per litre (ppl) to 64.9ppl in mature Cheddar prices but the report said that retailers have managed to increase their margins overall. For example, in 2009/10 retailers had a gross margin of 34 per cent on liquid milk, up from 29 per cent in 2008/09 and 20 per cent ten years ago.

As retailers have seen their share of the retail price go up, DairyCo said farmers have seen their share go down over the past year.

Explaining the decrease, DairyCo senior analyst Patty Clayton said: “This appears to be due to two main factors; an increase in the retailers’ gross margin and a lower farmgate price. Despite a recovery in commodity markets, the farmgate price remains at a low level.”

Price transmission concerns

The DairyCo report found that the gap between the APME, which measures average returns from commodity markets, and farmgate prices are at the highest level for three years. Clayton expressed concern that the prices farmers receive may not be rising rapidly enough to match increases in milk prices.

“It takes time for the farmgate price to reflect the ups and downs in the commodity market, but we need to watch the time it takes for the farmgate price to adjust and whether it will attain a level which will provide dairy farmers with a sustainable return.”

For this reason, DairyCo plans to commission a report on price transmission that will investigate how well the markets are working. In particular, the report, which is expected to be finished by the end of the 2010/2011 financial year, will look at how quickly and fully changes in dairy market prices affect farmgate prices.

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