UK farmer-owned co-operative First Milk is the first UK dairy to trial a retailer-aligned formula cheese contract, offering producers the chance to lock into a price for three months at a time.

Hailed by the farming unions as an innovation, the contract could mark the beginning of a new era of retailer-aligned and formula-based cheese contracts.

In collaboration with Morrisons, First Milk is trialling a new pricing model with a pilot group of eight farmers supplying milk to its Haverfordwest plant.

Producers were given the option to sign up a proportion or all of their milk to the contract.

The formula tracks three commodity values over a three-month period – UK mild cheddar, the EU average price for whey and the EU bulk butter price – and sets the price Morrisons pays First Milk for mild cheddar for the following three-month period.

The co-op then sets the producer price through a solids payments schedule, whereby farmers are not paid on volume of milk produced, but are instead paid in £/kg for the weight of butterfat and protein produced.

First Milk already operates a solids payments schedule in some of its milk pools, with three-quarters of Lake District cheese producers opting to be paid in this way.

First Milk wouldn’t reveal the starting price, but said it was competitive. A spokesman for the company said after about six months of trialling, it was hoped the contract would be rolled out to more than 100 farmers in its west Wales milk pool.

Initially, the trial will focus on all Morrisons mild Cheddar, but the retailer hopes to supply all of its Cheddar through the process, if the trial is successful.

Farmers involved in the trial will have access to a budget, funded by Morrisons, to carry out on-farm sustainability research.

NFU Scotland milk policy manager George Jamieson described the trial as a positive step forward and said processors needed to move away from the “brutal tendering process” for retail cheese contracts.

“For too long farmers have carried the greatest burden of risk,” he said. “These more objective market-related formula contracts will share that risk across the board.”

The industry needed more sophisticated pricing mechanisms for cheese, he said.

NFU chief dairy adviser Rob Newbery said this new type of cheese contract would put more trust in the supply chain. Tesco was also looking at how to form better long-term short supply chains for cheese, he said.

“The future for cheese and a sustainable supply chain has to be about these long-term relationships.”

Strong commodity market sparks calls for price rises
A widening gap between average farmgate milk price and actual milk price equivalent (AMPE) has sparked calls for price rises in the coming months.

AMPE, which tracks UK butter and powder wholesale prices, has gone up 65% in the past year from 23.5p/litre in June 2012 to 38.8p/litre in June 2012, while average farmgate milk price only rose by 10.69% between May 2012 and May 2013, according to DairyCo figures.

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