NFUS: milk pricing plans better reflect markets

Bold plans to reform farmgate milk pricing were recently unveiled by NFU Scotland, which says they could fundamentally improve the UK milk market.

The proposal, announced at the NFU milk summit last month, is based on a transparent, market-related pricing formula, to be incorporated as a baseline into producer contracts.

It has been discussed with farmers and the NFU dairy board this week and if adopted, it could break the cycle of market failure in the dairy supply chain and allow all producers, irrespective of their supply relationship, to move forward with improved confidence and greater certainty.

If the formula had already been in place, producers would have been receiving around 32p/litre – a price based on true market fundamentals rather than taking a price determined by other parts of a dysfunctional supply chain.

If you are a dairy farmer who believes the milk market is working well for you and that you are receiving a fair price for your milk, then change is not for you. If however, you believe the status quo is neither sustainable nor acceptable, then please consider the proposal.

Developing the plan

The process started last September and involved 24 dairy producers who represented every type of milk supply relationship in Scotland. Some were co-op members, some supplied big processors, and others had direct contracts with supermarkets.

From that meeting and months of subsequent work, a new proposal has emerged that we believe will result in milk being properly valued. It is a transparent, market-related pricing formula that will track the domestic, European and global markets for dairy produce and deliver a price to the farmgate which reflects the true market, not the dysfunctional UK market.

It will be built on existing figures that are transparent and not subject to manipulation by large players in the industry. The formula proposed is based on MCVE (Milk for Cheese Value Equivalent) and AMPE (Actual Milk Price Equivalent) – current key indicators of wholesale prices paid for mild cheddar, butter and skimmed milk powder.

With the help of DairyCo, we have analysed many different pricing formulas. The one opted for is based on an 80:20 ratio of MCVE to AMPE. This formula would have, in the past month, properly recognised where the real market for milk and dairy products is and delivered a farmgate price of around 32p/litre.

The chart below compares the average UK milk price with the price produced by the market-tracking formula over a five-year period.

Some have already suggested the formula will make prices more volatile. That is likely to be true. However, over the five-year period, the price delivered by the formula would have been consistently higher than the price paid to the majority of UK farmers.

We accept that before any such formula is adopted into contracts, work will need to be done to ensure figures collected to calculate MCVE and AMPE are robust, independently verifiable and truly reflective of the market. There is other detail to be debated, but now is the time to focus on principles and galvanise momentum for change.

For those content with their milk price and their contract arrangements, congratulations. You are likely to be among the 15% of producers involved in a direct supply agreement that may already include a milk price formula. We see our proposal dovetailing with such existing contracts, with our formula providing the necessary baseline price and premiums bolted on for those supplying premium markets or contracts.

Even for those on direct contracts receiving a price that is near the top-end of the UK price league, I would ask them to compare their “premium” price to the 32p/litre average the rest of Europe is being paid. After that, ask yourself what our formula might deliver for you.

Over time, we have become a nation of dairy farmers who tend to be happy with our position, so long as it is a little higher than our neighbour over the wall. When you examine your position, is it really all it could or should be?

We are at a crossroads. The long-term prospects for the milk market are good. We are an island nation of incredibly efficient producers. Momentum in Europe has grown, calling for exactly what we propose now – strong contracts with transparent pricing mechanisms. We believe this proposal will help do that.