Milk processors feel the squeeze from retailers

Supermarkets have been criticised for using their power in the supply chain to increase margins on liquid milk by putting pressure on processors.

A DairyCo report says the average retail price for liquid milk in multiple retailers increased to 56.6p/litre in the first half of the 2011/12 milk year (April to September 2011), up from 56p/litre in the preceding six-month period, mainly due to fewer multi-buy promotions.

But the average processor selling price fell over the same period, from an average of 37.3p/litre in the second half of 2010/11, to 37.1p/litre for the first half of 2011/12, the dairy supply chain margins analysis showed (see table). Average processor selling prices have fallen steadily since peaking at 47p/litre in the second half of 2008/09.

With processors unable to pass on higher raw material costs, farmers will fear that they could be forced to foot the bill.

“The system of setting milk prices between processors and suppliers that we have in the UK means that when processors are squeezed it’s often the producers that get hit,” NFU dairy board chairman Mansel Raymond said.

“Retailers have got to be responsible and look at their own margins first. Do not squeeze a supply base that has been under pressure for several years, at a time when there are signs of optimism returning.”

He said the UK was still towards the bottom of the European milk price league table and average farmgate prices also still lagged behind the market indicator AMPE, which stood at 29.9p/litre last month.

[X-head] Cheese margins improve

While margins on liquid milk fell, processors increased returns from mature and mild cheddar slightly in the first half of the 2011/12 milk year, as average selling prices increased. However, margins were still lower year-on-year.

“The ability of processors to achieve price increases for mature Cheddar is likely due to the sustained strength of worldwide commodity markets, combined with the prevalence of brands in this market segment,” DairyCo said.

Retailers maintained margins on mature Cheddar close to the five-year average of 50%, as a higher average retail price was offset by increased wholesale prices.

Average prices