1 December 1995

Navigating the maze

October milk cheques mark the end of the first 12 months since market deregulation. This months Milk Price Review examines how the milk price maze has unwound over the year

MILK pricing is a complicated business.

To try and make sense of it all, the Milk Price Review has made comparisons on the basis of a standard litre. This consists of 4.1% butterfat, 3.25% protein, 980 litres/day output, a TBC of less than 20,000 and a cell count below 250,000.

This approach does not necessarily reflect the actual price each company pays for its milk.

That depends on the profile of the dairys suppliers (herd size, yield, constituents, etc) – information which is not readily available.

But it does allow an exploration of the issues which lie at the heart of milk pricing.

There are three main approaches:

&#8226 Most are based on constituent value, where prices are paid according to the amount of fat and protein delivered.

&#8226 Some have made flat rate payments, subject to minimum quality standards.

&#8226 Others (particularly those in Scotland) have made base price payments which are adjusted up or down depending on constituent values.

The first of these is the most transparent, clearly showing farmers the value of each element of milk production.

Another important feature of milk pricing has been the "Milk Marque plus" factor. A number of buyers committed themselves to pay a premium over Milk Marque. These are split into three categories:

&#8226 Some have mirrored Milk Marque in all respects (constituent values, transport, hygiene, seasonality) and paid a fixed premium in addition.

&#8226 Others have linked themselves to Milk Marque through constituent values alone. Factors such as transport, hygiene and seasonality have all varied, leaving the actual premium above or below that originally pledged.

&#8226 The remainder adopt their own schedules, making lump sum payments to ensure their original guarantees are met.

These bonuses have done little to assist market transparency. The best approach in this respect is from companies who have simply adopted a market led pricing system, based on constituent values, without paying bonuses.

Nestlé, Lancashire Dairies, Golden Vale, Avonmore, Woodgate Farms, Midlands Co-op, Robert Wiseman Dairies and MD Foods, for example, have all taken this approach. "Payment directly through the milk price should be more resilient than the often politically-motivated bonus arrangements," says Stephen Bates of Wye College, University of London.

So what are the lessons to be learnt from the past 12 months?

&#8226 For farmers, it must be that deals are often more complex than they first seem. They should look behind the headline figures and try to view the offer in its entirety. Farmers who are able to produce high protein and/or butterfat should opt for a contract based on constituent values. Those who can obtain high yields but with lower constituent values should consider a flat rate contract. Smaller farmers at a distance from their buyer should pay particular attention to the transport element. Seasonality too makes a big difference and farmers need to see which schedule best fits their own supply profile.

&#8226 For the trade, the past year has shown that buying milk direct is no simple matter. After 60 years of having milk delivered to them, the dairy companies have had to adjust quickly. Some have coped well, a lot have simply managed and a few have clearly struggled. What is more, the increase in milk prices has had severe repercussions for the processing industry and the removal of excess capacity may well herald a price backlash some time in the future.

"Deregulation of the milk market should have unleashed competitive forces characterised by high efficiency and low product prices," observes Mr Bates. "But though the power of Milk Marque has enabled prices to rise, the difficulties experienced by processors in sourcing milk direct show the co-op is also providing a useful service through the collection and distribution of milk."