Working with A&B milk pricing

Published 15 March 16

More and more milk buyers are implementing A&B pricing models as supply and demand in dairy markets remain out of kilter. The model allows milk buyers to use an ‘artificial’ quota to match milk purchases to their core market needs. This reduces or eliminates the uncertainty over market returns for any excess volumes (‘B’ litres) for the milk buyer by passing that uncertainty back to the farmer. This is achieved by either setting the ‘B’ price after the product has been sold, or by using a forward price indicator such as AMPE or UK Milk Futures Equivalent.

A&B pricing models change what farmers need to consider when making decisions on how much milk to produce, both in the short term and longer term. Short term decisions will relate primarily to looking at whether the current market can return enough to justify producing ‘B’ litres.

In the longer term, farmers should be mindful of the impact changes to current volumes will have on their future ‘A’ allocations. This will depend on whether ‘A’ allocations are based on a fixed reference period or on a rolling basis. With a fixed reference period, assuming the base period is not changed without consultation, adjusting production to minimise unprofitable litres will not compromise future ‘A’ allocations. When core litres are determined on a ‘rolling’ basis however, changes to production levels may affect a farmer’s future allocation of ‘A’ litres.

We have already seen signs of A&B pricing having an impact on milk production. Indications suggest that those milk buyers who have been operating with A&B pricing over the last year have seen a smaller overall expansion rate from their suppliers than those without A&B.

The key for A&B pricing models to be successful is communication between buyers and sellers. This is essential not only to better match supply to market demand, but also to ensure there is a mechanism in place for adjusting core volumes in a way which is not detrimental to the farmer