Milk margins put under scrutiny

SUPERMARKET MARGINS on liquid milk and dairy products have increased by 8-10p/litre over the past 10 years, according to the Milk Development Council.

An MDC report called Dairy Supply Chain Margins 2003/4: Who made what in the dairy industry and how it has changed found that retailers‘ margins have risen significantly.

But over the same period, farmgate prices have fallen by about 6p/litre, reducing farmers‘ margins and profitability.

The report said the main reason for the drop in farmgate prices was falling intervention prices, which had moved downwards because of the strength of sterling over the period.

But it added that an additional part of the reason for the drop in farmgate prices was due to pressure and competition from other parts of the supply chain.

Retailers had benefited from the fall in the price paid to farmers because they had not moved retail prices in line with the farmgate price, said the report.

This meant margins for mature cheddar had improved by about 15p/litre to 34p/litre over the 10 years. Liquid milk margins had improved by about 11ppl, it said.

MDC chief executive Kevin Bellamy said the report confirmed weak commodity markets and processor competition have meant that retailers, not farmers, had benefited from improved liquid milk retail prices.

“As a result, the 6p/litre fall in the farmgate milk price between 1994 and 2003 has generally increased retailer margins.”

Mr Bellamy said the UK was a significant producer of commodity products such as mild cheddar, skim milk powder and butter which were all sensitive to exchange rate changes.

“It would be fair to say that supermarkets haven‘t been responsible for causing the low prices.

“But the report shows they have taken advantage of the situation caused by strengthening sterling to increase their margins.”

David Homer, farmer and MDC council member, said that processors engaging in price competition with each other for big retail contracts put further pressure on farm prices.

“We‘re dealing with a strange economic model at the moment, where having relatively few buyers at retail level leads to greater competition at wholesale level to supply contracts.

“This in turn leads to downward pressure on farmgate prices.”