How cream and butter prices impact on farmgate prices

Published 30 August 16

The value of fat has increased rapidly over the last few months, with cream and butter prices improving by around 75% to 80% between April and August. These price increases will give a direct benefit to any manufacturer who has cream/butter as a by-product, although the level of benefit will be determined by how much of their excess fat they sell on the open market.

Some manufacturers will have sold ahead at fixed prices while markets were falling, although returns can quickly look poor once markets start to improve. We also know some retailers include cream adjusters in the price they pay for liquid milk or cheese. This offers some protection against volatility to the processor when cream prices fall, but also means the retailer will gain most of the benefit when the fat market goes up.

The theoretical gains achievable for cheese manufacturers, skimmed milk powder producers and liquid processors are shown in the chart below, assuming all excess fat is sold on the open market:

How cream and butter impact

 

The improvement for those producing skimmed milk powder and butter is nearly 7ppl since April. Cheese processors have also gained, but the improvement from the value of fat alone will have been small at less than 1ppl.

For liquid processors, the increased returns from fat as a by-product are around 4ppl since April. At the moment, the improvement in cream returns is not fully flowing through into farmgate prices for those supplying the liquid milk market, although Arla has recently announced a price increase for September.