Butterfat payments slip behind market

Published 13 January 17

According to AHDB’s Milk Price Calculator, farm prices in the UK are not currently reflecting the true market value of cream in payments for butterfat. Milk buyers tend to follow one of two approaches when milk prices are adjusted; either the butterfat and protein payments are both changed in line with historically set ratios, or the base price is adjusted. Neither approach is currently giving the full market signal to farmers about the value of butterfat.

Between April and December 2016, all dairy commodity markets rose, but it was the butterfat side that showed the biggest increase. During this period, cream values in the UK rose from £800 per tonne to £1,800 per tonne. In gross* terms, this is equivalent to fat values rising from 2p per % butterfat in April to 4.5p per % butterfat by the end of the year, a 125% uplift.

Despite this, a number of farmgate prices continue to have the same payment for butterfat in December as they had April. Those that have seen an increase in butterfat payments, have seen movement that maintains the historically set ratio between butterfat and protein payments. The chart below plots the average payment rates to farmers based on the AHDB Milk Price Calculator, compared with the gross* value of butterfat sold as cream or butter.

 Butterfat Chart

As explained in a previous article, the overall value of butterfat to individual milk processors will be dependent on their product mix and how much of their fat is sold on the open market. There is also a risk of changing farmgate payment structures too often, to reflect short-term market movements, because it can send mixed messages on what is valuable to the processor. For example, cream values could swing dramatically from one month to the next and, if butterfat payments to farmers matched those swings, it would be extremely difficult for a farmer to alter milk composition so quickly to react to such a rapidly changing value.

That said, the risk of not passing the true value on over an extended period of time can be even greater. If farmers are unable to react to the market because the signals are being ‘muffled’ by the supply chain, inefficiencies are likely to arise. Also, prices could become more volatile because the market has to move even further before there is a supply-end reaction. As always, the key is to find the right balance between consistency of message and reflecting market reality.

* Gross market value converts cream and butter wholesale prices into butterfat equivalent, assuming cream is 40% fat, butter is 82% fat and before taking into consideration processing costs