28 February 1997

Wide gap likely to narrow

Price differentials are widening between top and bottom payers, but as our Milk Price Review explains, its only a matter of time before direct buyers narrow the gap

MILK cheques for Jan 1997 deliveries see the first payments under Milk Marques much-heralded Volume Related Pricing (VRP).

With a flat charge of £13.50/day, irrespective of volumes delivered, larger farmers now pay a relatively lower transport fee than their smaller fellow co-operative members.

Our standard litre farmer supplying 31,031 litres/month (1001 litres/day) now pays a transport charge equivalent to 1.35p/litre.

For a farmer supplying 10% more milk, the transport charge falls to 1.23p/litre. For a 10% smaller farmer, the transport charge increases to 1.50p/litre.

While Milk Marques up-front approach to VRP has been the focus of much debate, several companies have been differentiating between different-sized producers for some time.

Northern Foods, MD Foods and ACC all offer scaled bonuses to farmers, which increase with the volume of milk supplied.

Milk Marque has tried to sweeten the pill to smaller members by making a payment of £5.50/day for those supplying milk every other day. To reflect this, our Milk Price Review now shows a price for Milk Marque every other day collection (EODC).

Devil in detail

As always, however, the devil is in the detail. Milk Marque EODC has a £5.50/day repayment against the £13.50 standard charge, effectively taking it to £8/day. However, this is levied for every day in the month, rather than for half of the days that EODC might suggest.

Milk Marque is not alone in encouraging farmers into EODC. Unigate is notable in its support for the practice, halving its tanker stop charge to £2 a visit and reducing the litre collection charge to 0.25p/litre.

But, even with EODC, collections still have to fit into company logistics, plans and routes. They are usually made via large tankers and require farmers to have adequate silo storage capacity.

Milk quality must also be maintained if any gain from a reduced transport fee is not to be lost in hygiene penalties. The idea that farmers will be better off by switching to EODC needs to be carefully worked through.

In addition to price differentiation between different sized farmers, milk prices, in general, are declining at a pace. January deliveries saw Nestlé reduce its constituent price for butterfat from 2.75p a % to 2.708p a % and for protein from 4.543p a % to 4.472p a %.

Golden Vale and MD Foods have also cut their constituent values, while Woodgate Farms is proposing to lower its flat liquid price from 25.7p/litre to 23.8p/litre with effect from next May.

Such large reductions over the months ahead mean that the price range shown in our table (currently over 3p/litre between the top and bottom) will narrow as dairy companies respond to the strengthening of sterling and the green £ revaluation in January. (A further revaluation is possible in March.)

In addition, Milk Marques Jan/Feb 1997 selling process has seen prices on all contracts fall by between 5% and 9% since last summer. This leaves current dairy processor prices for milk supplies bought direct from farmers disproportionately high.

Another interesting price trend is the introduction of a capping clause for protein payments.

At present, Northern Foods caps its price for protein at 3.3%. MD Foods will cap its protein from February deliveries at 3.35% and more companies are likely to follow when many contracts are revised around the end of the milk year.n