Poor crop prospects

    Dairy markets


    We have observed in the past that milk price is determined by the cheese price as illustrated in graph 1.

    The reasons are:

    • There is a global market in cheese
    • Cheese processors tend to pay the lowest price for milk
    • Liquid milk demand is relatively price insensitive

    UK milk and wholesale mild cheddar price

    View graph 1

    UK Milk price delayed 1 month against wholesale mild cheddar price

    View graph 2

    The graphs present the same data in two different ways.  Graph 1 shows how the two commodities change over time and graph 2 how the price of the two commodities change relative to each other.  The best fit with the data suggests that there is only one month’s delay between a change in the mild cheddar price and a response in the liquid milk market.

    The standard industry calculation of the relationship between milk and its products is known as AMPE (Actual Milk Price Equivalent).  This calculation is based on the actual wholesale price for butter (representing the fat proportion) and wholesale price of SMP (skimmed milk powder) representing the other components less an estimate of processing margin.  The other measure used is IMPE (Intervention Milk Price Equivalent) which estimates the milk price from the butter and SMP intervention prices.  As dairy prices have risen, and intervention has become less important, this relationship has become less significant.

    The liquid milk price does not necessarily follow IMPE or AMPE since it is marketed in its own right without reference to the components with very little competition from exports.  Liquid milk buyers are more concerned with the price needed to secure supply rather than whether they are priced out of the market by importers.  However, according to DairyCo AMPE is effective at predicting the direction of movement of the milk price despite the element of obsolescence.  At present, AMPE  indicates a rise in the price of milk.

    The other important issue for the dairy industry is the consolidation of manufacturing capacity largely by European processors, including farmer owned businesses, that have prospered in regions of Europe, where the liquid market has been much smaller and competition has always been with imports.  If the UK remains in surplus for liquid milk the additional muscle and ability to share margin with the processor looks a good deal for farmers. However, there is always the nagging doubt that unless there is genuine synergy between producer and processor, the best investment will be in the most profitable business whether that is processing or farming.


    Key contacts

    Andrew Wraith

    Andrew Wraith

    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973