Growing level of volatility in UK markets

Published 20 November 17

Global dairy markets have tended to follow a three-year cycle of prices, but do UK prices show the same trends?

Analysis shows that UK commodity prices have historically achieved a premium over global prices as well as benefiting from a level of protection from global volatility. However, it seems the protection and premium have now disappeared, and UK commodity markets are on a par with international counterparts.

Since 2007, the long-term return* from world butter and SMP prices has averaged 40¢ per litre, but with prices varying by +/- 48%. That means prices have fluctuated from 21¢ per litre up to 59¢.

In the UK, until recently, AHDB’s AMPE was following a similar three-year cycle, with an average return of 27ppl. That cycle has been extended more recently, with a four-year gap between the peak prices in September 2013 and the most recent high seen in September 2017. The UK is also encountering an ever-increasing level of volatility. In 2007, AMPE prices swung by +/-36% but, since 2015, they have increased to match the world level of volatility at +/-48% or more.

 UK AMPE 3 year cycle Nov17

A key source of the increasing level of volatility in the UK has been exchange rates. If the UK AMPE is converted into US dollars, the cyclical pattern is similar, but with a more constant level of volatility at around +/-45%. However, in US dollar terms, the value of AMPE has been trending downward, and is now sitting in line with the world average return of 40¢ per litre. 

 UK AMPE 3 years in dollars Nov17

Comparing the two charts confirms the large impact recent devaluations in sterling have had in pushing UK market prices upward. It also shows that the UK has historically benefited from higher commodity prices (in US dollar terms) compare with the global marketplace. However, that premium has now all but disappeared, with the UK trading at global price levels.

 * World butter and SMP prices from USDA have been converted into a milk price equivalent in US cents (¢) per litre based on AHDB’s AMPE calculation. AHDB’s AMPE is an estimate of the actual milk price equivalent of butter and SMP prices, taking into consideration an estimate of production costs and product yields. For more information, see here.