Global dairy prices may have recovered over the past year but that does not mean that dairy producers and processors in the UK are creaming off high profits.
DairyCo, a dairy farming organisation, said market conditions in the liquid milk market have become increasingly competitive over the past 12 months.
The three main supermarket suppliers have been competing strongly but their efforts to push up sales have put downward pressure on operating margins. DairyCo warned that if sustained, this situation is likely to limit the potential for farmgate price increases.
Meanwhile, in the branded Cheddar cheese market, competition is even fiercer. Over the past couple of years, processors have pursued similar strategies for their Cheddar brands.
Making market share the top priority, they have pursued discounting and sacrificed profit margins in order to attract and retain customers. This makes it increasingly difficult to pass on higher operating costs to retail or wholesale buyers.
Shift to commodities?
With the dairy commodity markets recovering strongly, milk buyers could in theory shift milk into commodities to improve their margins.
But DairyCo said there is a lack of interest in this strategy. The co-operatives Milk Link and First Milk have the flexibility to move into commodities but have not done so in any significant way.
Patty Clayton, a DairyCo analyst, suggested that their hesitancy is due to concern about damaging relationships with long term customers.
They may end up restricting returns in the short term but the strategy may pay off in the future. The report noted that: “It is important to acknowledge that while a conservative approach to commodities limits the upside when markets are rising, it should also limit the downside when markets fall.”
From the point of view of farmers, Clayton expressed concern that price signals in the dairy market lack clarity and transparency.
“Pricing signals to farmers are obscured as buyers do not provide detail on the balance of market forces which have created the need for a price change.
“While it is often the case that a variety of factors will contribute to the overall change in the milk price, the lack of transparency creates uncertainty for producers and, at times, can lead to false expectations.”
To read the full report, which contains in-depth reviews of the strategy and performance of UK milk processors, please click here.