Retailers have come under fire this week after a DairyCo report revealed they continued to increase margins from dairy products, while farmers absorbed volatile commodity prices.

Dairy Supply Chain Margins 2009/10 says retailer margins from fresh milk, mild cheddar and mature cheddar all increased in the year to March 2010, despite only small changes in retail prices.

For milk, the retailer margin increased from 18.8p/litre in 2008/09 to 22.4p/litre, yet the average retail price went up just 0.2p/litre. This resulted in margins for processors and farmers being squeezed, with farmers receiving an average of just under 24p/litre in 2009/10, down 2p from the previous season.

Market indicator AMPE, which measures average returns from commodity markets, was lower over the same period, averaging 21.3p/litre. “This reflects the situation that the farmgate price in the UK market is supported by the premiums paid in the liquid market and the presence of retailer aligned supply contracts,” DairyCo said.

“However, even with the premiums paid for liquid milk, the current farmgate price (as at July 2010) is well below the value of AMPE. What should now be monitored is the time it takes for the farmgate price to adjust to improving market conditions, and whether it will attain a level which will provide dairy farmers with a sustainable return.”

But with the report coming in the same week that Tesco announced interim pre-tax profits were up 14% and Sainsubury’s also announced strong growth, farming unions were quick to accuse retailers of profiting from dairy products at farmers’ expense.

“There is no defensible position for retailers over the long term damage they are currently wreaking on the dairy sector,” NFU Scotland vice-president Allan Bowie said.

“In a very short chain like fresh liquid milk, many farmers will be losing 2p to 3p per litre on every litre they produce and a liquid milk processor will be making a modest margin of between 1.5p and 2.5p on every litre they bottle. By comparison, a retailer will be making anywhere between 15p and 18p on every litre that they sell.”