How exposed to commodity markets is your milk price?

Published 13 October 16

In the aftermath of possibly the longest and most severe downturns in dairy markets, the performance of milk buyers, and the contracts they offer, is under review. While we are now entering the upward phase of the market, it is inevitable that volatility will remain a challenge to managing dairy farm businesses. The ability to switch milk buyers to reduce price volatility may not always be an option, but understanding the markets a milk buyer operates in, and the potential for price volatility, can help farmers better prepare for the future.

One of the main factors which will affect how quickly buyers adjust the price paid for milk supplies, and therefore the price volatility faced by farmers, will be how quickly they realise improved returns from end markets. This in turn will depend on the volumes traded on long-term deals compared to spot markets and their ability to direct milk to different markets.

It would be expected that prices paid by milk buyers who sell a large proportion of their product on spot markets, or on short-term deals, would track AMPE/MCVE more closely than those who are less active in these markets. Changes in market values should therefore affect sales revenues, and flow through to farmgate prices, relatively quickly. On the other hand, those milk buyers who sell most of their product through forward contracts may take longer to realise improved returns, and therefore may take longer to increase farmgate prices.

To a large extent this seems to hold. The table below groups contracts1 by how closely prices follow short-term market movements. This is measured by how much a 1ppl change in AMPE/MCVE has been reflected in changes to farmgate prices. A large number means short-term changes in wholesale values have had a large influence on farmgate prices and vice versa.

The influence of AMPE or MCVE is then compared to how much prices have changed over two periods. The first period looks at the price change during the downturn and the second looks at how much prices have changed since markets turned this summer.

 Contracts table

Source: AHDB Dairy

Those contracts most heavily influenced by short-term movements in commodity markets are predominately manufacturing contracts. They have tended to have the most volatile prices as well, with the largest drops in prices during the downturn and the quickest recovery since markets turned in June. Prices paid on contracts for liquid milk are less impacted by AMPE or MCVE, especially those aligned to retailers, with the exceptions of First Milk and Arla.

The First Milk liquid contract is likely to be more heavily influenced by butter and powder markets as this milk does not have a dedicated use or end market. On the Arla contract, the higher than average impact of AMPE is likely due to the nature of Arla’s price setting mechanism, and its link with global market values.


1Based on the AHDB standard litre and including seasonal adjustments

2AMPE is used for all contracts except cheese contracts which are compared to MCVE.

3A&B pricing from June 2015