Tesco milk price increase is welcomed, but will others follow suit?

Following hot on the heels of its half-year profits announcement earlier today (30 September), Tesco has said it is to increase its base milk price by 0.75p/litre.

From 1 October, through to 31 March 2009, the base price for farmers signed up to the Promar Farm Business Account (FBA) costings will rise to 28.75p/litre, while those not signed up will receive 28.25p/litre.

The decision was broadly welcomed by industry representatives who were now waiting to see whether other major retailers would follow suit.

“The increase does help improve the tone of the market place,” NFU Scotland milk committee chairman, Willie Lamont said. “Several other companies have been sitting on their hands waiting for the Tesco announcement and they now need to react in a similarly positive vein.”

Quota broker Ian Potter said that many farmers might have hoped for a 1p/litre rise, but given that 0.5p/litre was on the table at first, Tesco had probably done the right thing given the pressure on markets and the wider economy at present.

“It means there is now a liquid premium again, after years of the cheese market underpinning liquid.”

But this latest price move would be difficult for cheese processors to match, or even consider in the current market, he added. “If given the option, I think some would like to put a [price] drop in – it’s no secret that cheaper milk is available from Ireland.”

He was unsure whether the farmgate price rise would mean a retail price increase. “With almost one billion litres of milk contracted to Tesco, the 0.75p/litre increase could amount to £7.5m. If Arla and Wiseman have negotiated a similar increase on their costs, the total Tesco invoice could be heading for £15m and it is unlikely Tesco will take this amount off its bottom line.”

Mr Lamont said the main “sting in the tail” of the latest Tesco offer was that those suppliers who had not agreed to carry out their business accounts with Promar would only receive a 0.25ppl rise.

“NFU Scotland has voiced its concern at this requirement several times. The vast majority of dairy farmers will have business information compatible with the Promar model, but have their farm accounts supplied by another company. To force producers to sign up with one specific company or suffer what is in effect a price cut seems heavy-handed and unnecessary.”