EU farmgate prices more responsive to falling markets than rising

Published 14 December 16

AHDB recently published analysis showing how commodity markets have impacted farmgate milk prices for each milk buyer. One of the main factors which will affect how quickly buyers adjust the price paid for milk supplies, and therefore the price volatility faced by farmers, will be how quickly they realise improved returns from end markets. This in turn will depend on the volumes traded on long-term deals compared to spot markets and their ability to direct milk to different markets.

In a series of articles, we will apply the same approach to look at farmgate prices across the EU and compare them with a European AMPE*. In this first article, we will look at overall average prices.

On average, EU-28 farmgate prices were more responsive to European commodity prices during the recent period of falling markets, than they were when markets were rising. When markets rose, EU-28 farmgate prices rose by €0.4 for every €1 movement in AMPE. When markets fell, the impact increased to €0.6.

EU milk price v EU AMPE Dec16 

Of the 28 EU countries, 25 recorded more responsiveness to commodity markets when prices were falling, compared with when they were rising. In the most part, the additional responsiveness is relatively small, particularly for the main milk producing countries such as Netherlands, Germany, France and Ireland. In the UK, farmgate prices showed, on average, almost twice the level of responsiveness to European commodity markets when prices were falling compared with when they were moving up. The question is, how can that be?

One scenario might be where falling markets are associated with milk supply exceeding demand. In such circumstances, in the UK, the excess milk is usually turned into commodity-priced products such as butter, milk powder or curd in order to cope with the surplus. Conversely, when markets are rising and milk supply is short, there are limited opportunities for UK milk to take advantage of the high commodity prices because a large proportion of milk is already committed to domestic demand for liquid milk. As such, when there is excess milk there could be a significantly bigger proportion of milk traded as commodity products and suffering the falling commodity prices, than when there is a milk shortage.

Notes:

* European AMPE uses the published European commodity prices for butter and SMP in Euros per tonne, and converts them into a milk price equivalent in Euros per 100kg of milk.

The results are split between the impact on a rising market (May 2012 to Dec 2013) and the impact on a falling market (Jan 2014 to Jul 2016).

Due to the length of the recent downturn in commodity prices, it was possible to run the analysis for 33 months to assess the impact of a falling market. For the rising market, the time period is shorter, at 20 months, and older, finishing in December 2013. The UK milk market has moved on quite significantly since December 2013, and a number of farmgate prices will be calculated differently today than they were the last time the markets were rising. This includes a number of farmgate prices on formulae based calculation. As such, it is currently too early to determine whether the delay previously recorded on a rising market will continue through the current surge in commodity prices.