Decisions4Dairy: Optimising your milk contract – compositional quality

Published 19 July 16

In the second of a series of articles under the #Decisions4Dairy – Optimising Revenue theme, AHDB looks at the value of compositional quality to milk buyers and some key facts that farmers should bear in mind when looking to optimise their revenue.

Value to milk buyer

When considering their approach to butterfat and protein, farmers are advised to consider two key questions:

-          What is their milk buyer encouraging them to produce?

-          What can their milk buyer actually get value from themselves?

In the short to medium term, farmers should look at the incentives in their current contract and compare the value of extra butterfat or protein with the cost of delivering that extra value. Longer term, however, farmers should also consider where their milk is likely to end up in the future, and the true value of butterfat and protein in that market place.

Ideally, the answer to both questions will be the same but analysis carried out by AHDB on data from the Milk Price Calculator suggests that is not always the case. There are some milk buyers who currently have a mismatch between what they incentivise through their farm contracts and what they can actually get value for in the market place.

The chart below shows the average payment rates (in pence per percentage) for butterfat and protein, for aligned, liquid and manufacturing milk buyers for April 2016.

Comp 1 

The chart shows that, in general, farmers supplying manufacturing processors receive a higher incentive for butterfat than those on liquid contracts and those on aligned contracts. While, initially, this may appear logical, actually the value of butterfat to virtually all processors should be very similar.

Whether your milk buyer is turning milk into bottle milk, cheese or yoghurt, they can standardise the level of butterfat in the end product, by either adding or removing fat through the process. This means that, regardless of what end product is being manufactured, the value of butterfat in the milk is equivalent to the value of cream. This is because extra butterfat in the milk will either mean more cream as a by-product that can be sold, or less cream needed to be bought in to boost fat levels.

As an example, when cream prices are at £800 per tonne (as they were in April 2016), this equates to a maximum butterfat value of £2 per kg of fat. In milk payment terms, that would be 2.1p per percentage butterfat. The reason this is the maximum value is because the cost of processing still needs to be deducted to get a price that can be sustainably paid to farmers for the milk.

The same level of consistency will not be true for protein. Up until quite recently, there were legal restrictions preventing liquid processors from standardising the protein level in bottled milk. Although this legal restriction has now been lifted, liquid processors in Britain still do not standardise the protein in milk. As a result, the protein that arrives from the farm is the protein that ends up in the final product. The processor will not gain any additional income by supplying milk with a higher protein level, therefore any additional protein delivered that is above the legal minimum, is actually a waste.

For cheese makers, protein is critically important, and should be the largest element of the payment to farmers. In fact, it is the casein protein that is important to cheese makers, as this is the protein that ends up in the cheese. The non-casein protein will effectively end up in the whey stream, albeit still adding value.

Some cheese makers have attempted to link butterfat payments to protein levels. The theory being that the amount of butterfat that can be retained in cheese is determined by the level of protein in the milk. It is therefore protein, or more specifically, casein, which determines how much milk is required to make a tonne of cheese.

Optimising returns

Compositional quality will be highly variable, both from farm to farm, and also from month to month. As a result, overall averages can only ever be used as a guide. It can almost seem a foregone conclusion that compositional quality will be managed to achieve the best return possible. However, analysis of Genus data for milk delivered in the latest full year suggests that some farmers may not be achieving maximum payments for their milk.

The butterfat chart shows the wide range of butterfat levels being delivered by farmers, despite the fact that butterfat is universally valuable to milk processors. Protein results show a similar trend. What is more concerning is that, when we dig into the numbers, there is very little difference in the spread of protein results for farmers supplying liquid processors compared with those supplying cheese processors. This means that farmers do not appear to be focusing their milk production on their customers’ needs as well as they should, and this is where the AHDB Milk Price Calculator can assist.

Comp 2

Comp 3 

Optimising returns is all about the comparison of the additional value versus the additional cost to achieve the improvement. The AHDB milk price calculator is a useful tool for farmers to assess the benefit of further improving their compositional quality. The results should be assessed against the cost of driving the improvement on farm, but always being mindful of the long-term sustainability of their milk buyers’ payment incentives.