The impact of market movements on your milk price

Published 20 April 18

While GB average milk prices paid to farmers closely follow market movements, the degree to which prices respond differs across milk buyers.

At farm level, it is important to understand how sensitive your price is to market fluctuations. While planning should be done on the basis of longer term averages, ideally over the full business cycle, assessing cash flow risks needs an understanding of the sensitivity of your price to market movements.

Based on historical data, AHDB estimated the strength of the relationship between market values and milk prices and the impact market movements have had on prices paid. The results are summarised in the table below.

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Market Exposure Table

Unsurprisingly, the results show that changes in market prices (as measured by AMPE and MCVE[1]) had the biggest impact on prices paid on manufacturing contracts. Aligned contracts tend to be linked to cost rather than market movements. Of the remainder, prices paid on non-aligned liquid contracts were the least responsive to market fluctuations, although there was more variation between the different pricing schedules.

The degree to which milk prices are impacted by market movements will be largely the result of the pricing mechanism used by the buyer. Pricing schedules which incorporate a direct link to markets, perhaps through market based formulas, would be expected to show more fluctuation.

The more recent introduction of long-term or fixed price options can help to dampen some of the exposure to short term price volatility, for farmers who find the fluctuation is larger than they are comfortable with.

[1] Average of AMPE & MCVE in 20:80 ratio