Unaligned liquid prices as sensitive to commodity markets as cheese

Published 13 February 17

Unaligned liquid prices as sensitive to commodity markets as cheese

In a series of articles, AHDB is looking at how farmgate prices across Europe respond to movements in European wholesale commodity prices. The first two articles concluded:

Even when markets are falling, overall the UK still sits in the second tier of exposure to European commodities. For every €1/100kg drop in European AMPE, UK farmgate prices move, on average, €0.5. This means, overall UK farmgate prices have been less responsive to commodity markets than some of the other main EU milk producing nations. Part of the relative stability in the UK comes from product mix and, in particular, the UK’s large liquid milk market.

In this final article, AHDB looks at how the responsiveness to markets differs depending on the end market for the milk.

 GB milk prices versus EU commodities Feb17

Source: DG Agri, AHDB, Defra

The analysis shows that the differential between rising and falling markets exists in the UK for all areas except those aligned to retailers. For milk assigned to cheese, other manufacturing or non-aligned liquid contracts, the responsiveness on falling markets has been more than twice that recorded when markets are rising.

The analysis confirms that those on aligned contracts have had very little exposure to the European commodity markets. Many of the prices on those contracts will be moving to reflect changes in cost of production instead.

Due to the markets operated in, milk supplied into manufacturing and cheese processors was expected to show a relatively high sensitivity to European commodity markets. However, analysis of the figures demonstrates non-aligned liquid contracts have shown as much sensitivity to those commodity prices as those supplying into cheese.

Understanding the markets in which a milk buyer operates, and the potential for price volatility, will help farmers understand the impact on their business and better prepare for the future.

 

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 table uses information from the AHDB Milk Price Calculator to compare responsiveness to European commodity prices for different milk contract types. The table also includes the results for key milk producing nations of the EU.

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.