First Milk has followed the rest of the dairy industry by cutting farm-gate prices, but more and more questions are being asked about whether the cuts can be justified.

Peter Humphris, the dairy co-op’s chief executive, said the 0.75p/litre drop, which took effect from 1 August, was unavoidable after downward moves of up to 1.25p/litre by its three largest customers – Robert Wiseman Dairies, Dairy Crest and cheese-maker Lactalis.

Because of its principal role as a milk broker, First Milk had little choice but to cut prices.

But other milk buyers who process milk have blamed weakening commodity markets and CAP reform for part of their reductions.

Falling cream values, for example, are often quoted as justification for price cuts, but they have actually strengthened by 0.2p/litre over the past month, according to Milk Development Council figures.

So far, processors are claiming this looks nothing more than a seasonal summer spike in demand.

But Pete Nicholson, procurement director at Wiseman, said the firm, which recently announced an August cut of 0.9p/litre, would review cream values in October and would look at increasing its price if there had been a significant rise.

More fundamentally, skimmed milk powder and butter values, which many predicted would follow July’s intervention cuts down, remain stronger than expected.

SMP is now worth 15% more than intervention levels.

MDC economist Ken Boyns said:

“There is now expectation that while butterfat values may decrease, they appear unlikely to fall to intervention price levels.”

This was due to falling EU milk supplies over the summer and the removal of a significant amount of excess butterfat through the EU export market, he added.

Mr Boyns said any processors selling butter who had factored the full 8% intervention price cut into their farm-gate reductions would be making an increased margin.

Independent consultant Mike Bessey said that, apart from mild Cheddar, cheese prices were firm and each processor would have a different product mix, so not all could claim to be affected significantly by CAP reform and the commodity markets.

“Individual dairy situations vary from virtually no loss to over a penny a litre.”

The good news, said Mr Bessey, was that milk buyers would soon no longer be able to use CAP reform as an excuse for cutting prices.

“The mid-term review cuts are equivalent to a 22% reduction in intervention over four years.

“We are three-quarters of the way through that process now and have already got about 20% of the fall under our belts.

Next year there will be no more SMP cuts and butter will be cut by 5% not 8%.

I’m beginning to suggest there is some light at the end of the tunnel.”

andrew.shirley@rbi.co.uk