Who gets the biggest slice of the dairy pie has been the hot question in recent months. Gemma Mackenzie delves in to DairyCo's Dairy Supply Chain Margins report
Limited growth in dairy production and strong demand from Russia, India and China, resulted in a strong world dairy commodity market during the first half of the 2011-12 year. However, from July 2011 onwards, global commodity markets started to fall as supplies increased and demand slowed down.
Peaks included a record world wholesale butter price of US$5,137/t in June 2011, and a wholesale mild Cheddar price of £2,975/t in July 2011 and £3,200/t for mature Cheddar throughout the year.
During this period the average UK farmgate milk price increased by 12.6% from the 2010-11 period. The UK price was 2.7% higher than Northern Ireland due to a fall in commodity markets; NI production is predominantly for export trade of powders, butter and commodity cheese.
Liquid milk margins
In 2011-12 the average retail price for liquid milk was the lowest recorded in over seven years at 55.5p/litre - that's 2.6p/litre lower than the year before and 9.0p/litre lower than the 2009-10 year.
Factors impacting on a lower price included: constrained consumer budgets, competition for market share among retailers, overcapacity in processing capacity, and inability to pass on increased costs to retailers.
While, factors pushing for an increased price included: increased production costs for processors such as raw milk, plastics and fuel, increased competition for raw milk supplies, and strong wholesale dairy markets.
And over the 10-year period from 2001-02 to 2010-11, processors' gross margins, as a percentage of selling prices, averaged 45% but have been steadily reclining. The 2010-11 milk year saw the largest drop, with gross margins falling to 35% as a result of increasing farmgate prices and a drop in wholesale prices.
For the 2011-12 year, it seems unlikely processor liquid milk gross margins would have increased, due to continued competition in the retail market and pressure from retailers to keep wholesale prices down topped with an increase in average farmgate prices.
Mild cheddar margins
As a result of reduced imports and favourable exchange rates for exports, the UK mild Cheddar market has remained well-balanced with few price movements.
UK Cheddar exports rose by 8% in the 2011-12 year to just under 41,000t, and imports were down 20% at 103,000t; this resulted in an improvement in the UK's overall trade position of approximately 30,000t.
At a retail level, prices for mild Cheddar rose and by March 2012 the average retail price hit its highest level in the last decade at 65.0p/litre, up 17% (9.6p/litre) from the 2010-11 year. This is most likely due to a fall in the number of price promotions offered by the major retailers.
The average retail price of mild Cheddar during the 2011-12 year was 59.1p/litre, up 2.8p/litrte on the previous year; wholesale prices for mild Cheddar rose by 1.7p/litre to 31.3p/litre, and farmgate prices rose by 3p/litre to 28.1p/litre.
The smaller increase in wholesale prices compared with an increase in farmgate prices resulted in processor margins falling by 4.5p/litre in 2010-11 to 3.2p/litre in 2011-12. While the retail average gross margin was 1.1p/litre higher than the previous year at 26.7p/litre.
Mature Cheddar margins
The annual average wholesale price for mature Cheddar recorded a small year-on-year increase of 1.6p/litre to 34.0p/litre during the 2011-12 period.
Average retail prices were 2.3p/litre higher than the previous year at 66.2p/litre; this was down to a reduction in prime promotions and an increased wholesale price. In fact the mature Cheddar market was dominated by a higher level of sales of branded products - 58% of the mature Cheddar sold during this period was branded - at an average price of 69.5p/litre.
Similar to the mild Cheddar trade, processor margins reduced from 22% (7.3p/litre) to 17% (5.9p/litre). And due to the longer production period of this mature cheese, the lag between rising costs and rising wholesale prices is potentially longer than mild Cheddar.