Dairy farmers’ concerns that they are not receiving a fair milk price have been reinforced by a new report that highlights the disconnection between commodity markets and farmgate prices.

DairyCo‘s annual Supply Chain Margins report said the 2010/11 milk year had been characterised by strong commodity markets, but this was not fully reflected in farmgate prices. The Actual Milk Price Equivalent, which reflects returns from butter and powder markets, increased 31% on the previous year, yet farmgate prices only rose 5% to an average of 25.1p/litre.

Supermarket discounting was largely to blame for the limited farmgate increases, as it had dramatically reduced wholesale selling prices in liquid markets, leaving processors squeezed. Price promotions and discounting caused the average retail milk price to fall by 9% over the year, from 65p/litre to 58.9p/litre, the report said.

While supermarkets managed to retain their 34% gross margin despite the lower selling price, processor gross margins fell by 5.3p/litre (28%) in 2010/11 to 13.6p/litre. “Adding to the pressures on processor margins, prices for milk also increased in the second half of the year as cheese manufacturers began to pass on improved returns in the form of milk price increases,” the report said.

But farmers remained squeezed by high fuel and energy costs.

Mild Cheddar prices showed small but steady increases throughout 2010/11, rising to £2,900/t, a 9% increase on the previous year. The UK mature Cheddar price was more stable, with only two increases during the year, bringing the average price up 8% to £3,200/t. Retail Cheddar prices remained stable between 2009/10 and 2010/11, although retailer margins were reduced as processors’ selling prices increased.

“The report highlights that there was some short-term disconnection between price movements on commodity markets and at the farmgate in 2010/11,” said DairyCo analyst Patty Clayton. “For a sustainable dairy farming industry to exist, the key issue is that conditions within the supply chain do not disadvantage farmers in the long term.”

The rate at which prices along the dairy supply chain adjust to change and how this affects farm revenues is the subject of another DairyCo report due to be published next week.