UK farming group DairyCo is calling on dairy farmers and the industry to keep a close eye on farmgate prices after retailers increased their margins on liquid milk and Cheddar cheese.

A DairyCo study – Dairy Supply Chain Margins 2009/10 – that analysed margins from April 2009 to March 2010, noted that at retail level, there were only “minimal” changes in prices for liquid milk and mild Cheddar between 2008/09 and 2009/10 while mature Cheddar prices fell by 2.9p per litre (ppl) to 64.9ppl.

The report, published Tuesday (5 October), found that retailers have managed to increase their gross margins on all three products. On liquid milk, retailers had a gross margin of 34% in 2009/10, up from 29% in 2008/09 and from 20% ten years ago.

However, the study claimed processors saw their gross margins for liquid milk fall during 2009/10, while the farmgate price – the price that farmers receive for their milk – was also down.

“Despite a recovery in commodity markets, the farmgate price remains at a low level,” DairyCo senior analyst Patty Clayton said.

“We need to keep an eye on AMPE (Actual Milk Price Equivalent) which is currently above farmgate prices. As AMPE measures returns to milk processors from turning milk into butter and powders, it gives an indication of the direction of the dairy markets but should, on average, be lower than the UK farmgate price given the importance of the liquid milk sector in the UK,” Clayton said.

AMPE remained below the farmgate price for much of the last milk year, according to DairyCo, but with the recovery of the commodity markets, moved ahead of the farmgate price in April. 

“It takes time for the farmgate price to reflect the ups and downs in the commodity market, but we need to watch the time it takes for the farmgate price to adjust and whether it will attain a level which will provide dairy farmers with a sustainable return,” Clayton added.

The report noted that recent milk price cuts at retail level have raised questions on what could happen to producer prices. It is likely that retailers are currently funding the price cuts out of previously increase margins, although they are unlikely to do this indefinitely, DairyCo said.

“Whether it leads to a reduction in producer prices will depend on whether retailers choose to increase the price to consumers again or push for wholesale price reductions from their suppliers, which may in turn be passed onto dairy farmers,” the report stated.

To view the full report, click here.