2 January 1998

MM drops index link hint

By Philip Clarke

MILK Marque launches its January selling round for April deliveries next Monday (Jan 5), setting the tone for much of the year ahead.

Co-op executives have been giving little away in terms of what the revised package will offer the trade, though they have signalled that there will be more "index linking" of contracts to currency.

This should help appease buyers who complain that the selling system is not "market responsive", but will inevitably lead to more volatile swings in market returns.

The expectation is that Milk Marque will also try to extract a bit more cash from the trade, having witnessed first hand (through contract processing and the takeover of Aeron Valley Cheese) the better performance of UK dairy markets in recent months.

This should help counter arguments that the last selling round in July did not account for the Aug 21 green £ revaluation, which lowered the Milk Marque "floor price" by almost 1p/litre. Butter, in particular, seems to have broken the link with intervention, trading at a 15% premium. And Mature Cheddar prices have firmed by 7% in the past 12 months, despite the 14% rise in sterling.

After the savage drop in milk prices over the past 14 months, any rise in milk prices will be welcome, especially as farm minister, Jack Cunningham, shows no sign of applying for up to £446m in green money compensation.

The consequences of this years price drop are spelt out in the recently-published Farm Business Accounts from consultants Axient.

For the current milk year (ending Mar 1998) it predicts a 63% drop in profit, after depreciation, to just £11,442 for a "typical" costed farm with 118 cows.

Milk price is put at 21.16p/litre, compared with over 25p in 1996/ 97, leading to a 16% drop in gross margin to £734 a cow (despite a 19% cost saving on concentrates). But overhead charges are actually forecast to rise 1.8% this season, due mainly to higher interest rates and borrowings. The combined effect is the 63% drop in profits.

Only twice in the previous 22 years have milk prices dropped, notes Axient director, Tom Kelly, in the reports introduction, in both cases by less than 1%. This seasons 16% fall will wipe £29,000 off cash receipts to the typical Axient-costed farm, with the worst cash flow effects occurring in the next three months.

lDecembers Milk Price Review shows a number of important changes, with Lancashire Dairies cutting its base price 0.5p (to 20.36p/litre), and Waterford, Wiseman England and Wiseman Scotland all taking another 1p off their base payments.

Unigates revised contract also comes into play. It is assumed that, after receiving a base price of 10.07p/litre and 4.43p/litre and 5.72p/litre for butterfat and proteins, the average farmer also qualifies for another 1.9p in bonuses giving a total 20.68p/litre after transport and seasonality. &#42