Farmgate prices should be moving up

Published 10 August 16

AHDB analysis shows that historically there has been a close relationship between AMPE* and average farmgate milk prices (excluding aligned)#. Farmgate prices tend to move with the quarterly rolling average AMPE, but with a 3 month delay. Given this historic correlation, and with the quarterly average AMPE increasing since May, the majority of farmers should have seen increases in their farmgate prices by the start of August.

However, the analysis shows a stark difference in the timing and scale of impact dependent on whether the markets are rising or falling. The correlation between AMPE and farmgate prices is extremely strong when markets have fallen. When markets have risen, however, the timing and scale of those rises have been much less clear.

The relevance of AMPE on an individual farmer's milk price will be dependent on a number of factors, including, who their milk buyer is, which markets they operate in, and whether they have a market formula pricing scheme in place that uses butter and/or SMP prices. There will be some farm prices that show little impact as a result of changes in AMPE, while others will be moving much more significantly. In the past we’ve seen that, on average, 50-55% of the movement in AMPE flows through into average farmgate prices. In other words, if the quarterly rolling AMPE falls by 1ppl, average farmgate prices tend to fall by 0.5-0.55ppl some 3 months later.

AMPE v farmgate prices Aug16 

Only a small proportion of milk in the country is actually turned into butter and SMP, and it is because of the relationship between dairy products that AMPE impacts on farmgate prices. We see that when butter and SMP prices move, other dairy product prices also move. This includes spot milk prices, cream and cheese prices. This is because a proportion of milk can be diverted from one product to another, depending on the relative values of those products. For example, if AMPE gives a better return than mild cheddar, then processors may divert milk from cheese into butter and SMP. Despite the relationship, there is often a delay in when prices move, particularly for cheese, due to the storage times involved – hence the 3 month delay in the correlation between AMPE and average farmgate prices.

* AMPE is the Actual Milk Price Equivalent of butter and skimmed milk powder, converted into pence per litre.

# average farmgate milk prices are based on the AHDB Milk Price Calculator average price, excluding retailer aligned contracts and seasonality payments.