Consumers must pay more for dairy, say costs analysts

The era of cheap food must come to an end to combat significant cost inflation at both dairy farm and processor levels, says Kite Consulting.

The call comes as part of a new report compiled by Kite and dairy market analyst Chris Walkland.

It states that price increases must be passed up the dairy chain to consumers to avoid a migration of milk supply to higher value export markets.

See also: Aligned milk contracts: The pros and cons for dairy farmers

Recent increases in the cost of feed, fuel, energy, labour and fertiliser at farm level have increased the cost of milk production.

According to Kite’s data, on-farm cost inflation will put the break-even milk price for 2022-23 at record highs of between 33p and 34p (at current costs) – more than 5p/litre above the long-term average.

While milk prices have risen significantly during 2021, for most farmers they remain below the cost of production.

Meanwhile, dairy processors are also seeing increased costs, for energy, transport, labour, packaging, warehousing and distribution.

Processor production costs have increased by between 15% and 70%, depending on exposure to the energy market and product mix, says the report.

Pass costs to consumers

Given the slim margins across the industry, and the wider context, this inflationary pressure can only be addressed by passing costs on to milk, cheese and butter consumers, according to Kite.

If, for example, inflationary pressure remains within current parameters, the “new normal” bulk butter price would need to be between £3,975/t and £4,200/t (rather than the current £3,200/t), and the milk cheddar bulk price would need to be between £3,425/t and £3,625/t (currently £3,000/t).

Liquid milk prices would need to be commensurate with these levels to maintain milk supply.

Otherwise, the risk is milk production falling and UK dairy production being increasingly diverted to serving export markets, where higher prices are possible, says the report.

John Allen, managing partner at Kite, said: “The analysis we’ve conducted demonstrates the scale and urgency of the inflationary cost pressure in the dairy sector.

“There must now be a reset of price levels across the whole dairy chain, with price increases being passed on to consumers. Farmers and processors simply cannot carry these costs.

“But this is about more than price. This inflationary trend comes at a time when supply chain relationships have never been more important.

“Retailers and processors need to work more closely than ever with farmers to address the challenges around sustainability, particularly the urgent need to mitigate climate change.”

AHDB metrics

Mr Allen also called for the AHDB to review the cost metrics within its AMPE and MCVE formulas, stating the indexes had not been reviewed since July 2020 and were no longer relevant.

However, the AHDB responded that the cost figures were last reviewed in July 2021, using data from the Office for National Statistics (ONS).

Lead dairy analyst Patty Clayton said: “In the story published on our website, we detailed that at that time the net impact of rising costs was minimal, reducing the indicators by 0.3ppl.

“Since the summer, energy prices have seen more significant increases, which will be reflected in the cost indexes for quarter three.

“AHDB will next be reviewing the numbers upon publication of the ONS cost indexes for the third quarter of this year in December and carrying out quarterly reviews while input costs continue to move quickly.”

British Retail Consortium response

In response to the Kite Consulting report, Andrew Opie, director of food and sustainability at the British Retail Consortium, told Farmers Weekly:

“The market is so competitive, with consumers more price-focused than ever. Therefore, no one should assume that passing on price increases to customers will be automatic or easy to achieve.

“However, retailers remain committed to UK sourcing and will do everything possible to ensure farmers and processors receive a sustainable price.”

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