29 August 1997

Seasonal adjustments mask the true picture

Dairy companies continue to fine-tune their direct supply contracts, paying different seasonality and constituent payments according to their requirements. This months Milk Price Review explores the differences.

GLANCING at this months Milk Price Review, one could be forgiven for thinking prices were back to the dizzy heights of a year ago, with top rates of over 27p/litre.

But the true picture is a much less comfortable one for UK dairy farmers.

From the table it can be seen that many of the quotes for July deliveries are inflated by considerable seasonal adjustments. On several contracts these now reach a peak of 3.5p/litre.

But the seasonality effect disguises the severe price falls which have occurred over the past 12 months. The extent of this can be seen by comparing the average price paid so far this year with that for the same period last year.

For all the companies listed, the drop is almost 3p/litre, with an average rate this season of just 22.19p/litre.

And while the values have dropped, the range of payments has got wider. Almost 6p/litre separates top from bottom this month, compared with nearer 4p/litre a year ago.

Similarly, constituent payments are increasingly divergent. The lowest butterfat value is 1.95p a % from Bodfari, compared with 2.96p a % from Avonmore. And the lowest protein value is 3.03p a % from MD Foods, compared with 3.93p a % from South Caernarvon Creameries.

These increasing differences reflect the continued trend to link milk price with specific company requirements and factory product mix, as well as with regional supply profiles.

But despite this fine-tuning, the greatest pressure on the industry has been the strength of the £ and the consequent green £ revaluations. These have meant that, while Continental dairy markets have been relatively firm for most of this year (with little use of intervention), UK manufacturers have struggled to remain competitive.

The result has been downward pressure on farm gate prices, with the latest wave of cuts hitting July deliveries.

Several companies reduced constituent values for those supplies. The Cheese Company Scotland made the biggest cut, dropping butterfat by 8.4% to 2.08p a % and protein by 5.6% to 3.84p a %. Nestlé Scotland, Bodfari and Northern Foods also lowered their constituent values, while flat-rate paying Lancashire Dairies cut its base price 1.2% to 23p/litre.

This downward trend is set to continue into the autumn. Typically dairy buyers are now setting prices on a quarterly basis, with the next tranche of reductions due in October. MD Foods has already warned its direct suppliers of a 1.5p/litre reduction, and Milk Marque has also hinted at 2p/litre to come off milk cheques.

But there are one or two glimmers of hope. In the short term, the outlook for dairy product markets is improving. "On the Continent, there seems to be nothing to stop (butter) prices edging upwards," says Provision Trade Federation dairy adviser, Mike Bessey. In particular, he cites:

&#8226 Lower seasonal output.

&#8226 Low intervention and private storage aid stocks.

&#8226 Good internal demand and strong export possibilities.

"If Russian buying becomes more than a trickle this side of 1998, then EU bulk butter prices could very well move up sharply," predicts Mr Bessey.

Significantly, the recent stabilisation and, indeed, slight weakening of sterling may allow UK dairy manufacturers to share in the upturn. "The UK bulk butter market between now and Christmas looks like being full of interest with potentially strong export demand pushing prices up quite significantly," he says.

But given the trades grip on the milk market, any improvement in butter returns is unlikely to have much bearing on milk cheques, not in the short term anyway. But if it is sustained, then some relief for milk producers could be forthcoming.

Relief could also come if the NFU is successful in its attempts to get government to apply for compensation from Brussels for the four green £ revaluations this year. But the lack of progress so far suggests farmers should not be relying on this.

"Looking further ahead, the recent release of the Agenda 2000 proposals for CAP reform may offer some hope," says Stephen Bates of Wye College, University of London. "Certainly the proposed cut in support prices of 10% is much less than for beef and cereals and should help maintain incomes. But that all depends on the proposed dairy cow premium." There is some concern that such a headage payment could be capped, to the disadvantage of the UKs larger dairy farmers.

"Some farmers might also welcome the commission plans to retain quotas to 2006 as a means of restricting milk output. This could help maintain prices and preserve the quota asset value," says Mr Bates.