Market Report: Tesco swipes milk producers’ margins

Milk producers should be able to sell some of their milk on a fixed-price, fixed-supply contract, with the remainder available for the open market, according to Nick Holt-Martyn, director of The Dairy Group.

“Last week’s news of Tesco’s 0.47p/litre cut for its direct milk suppliers, due to production cost deflation, comes at a time of improving market returns and raises an interesting question – how much influence on farmgate price should production costs have? Effectively, Tesco has taken any improved margin from falling production costs into its own pot.”

Dairy Group figures show that milk sales over purchased feed fell by 1.13p/litre in the six months to December 2009.

“Declines in milk prices have been greater than the decline in total feed costs. Meanwhile, market returns have shown a recovery of 1.68p/litre since March 2009. The divergence between market returns and farmer prices goes against the buoyant trading statements from dairy companies. The widening gap with market returns should deliver a milk price increase soon.”